July 2023 Market Update
End of Financial Year Market Summary
Despite stubborn inflation and ongoing rate rises globally, markets finished the 2023 financial year in positive territory, a marked improvement vs the prior financial year. The ASX200 index finishing up +9.7% for the 12 months ended the 30 June, vs a loss of almost -10.2% in the 2022 financial year. The story was similar for global equities, which also rallied off their October lows to finish the year strongly.
Recent buoyancy in financial markets does not mean that the inflation fight is over. Central banks are still struggling to bring inflation under control globally, which remains above target bands across most regions. In Australia it’s unlikely that the RBA has finished its rate rises cycle. Strong wages and pent-up consumer demand are making Phil Lowe’s job harder than anticipated. This hasn’t been helped by an east coast housing rebound, resulting largely from a shortage of housing, which is creating a wealth effect amongst homeowners with more equity in their homes.
Given the prospect of further rate rises, we do see potential for an economic slowdown on the cards, both in Australia and overseas. This is likely to be reflected in weaker corporate earnings for the June half. We also see potential for some heighted volatility in the short term, as investors continue to digest the flow-on effects of the rising cost of capital. The impact of these higher rates is unlikely to be evenly spread, with certain asset classes more vulnerable than others. Our preference is to hold more liquid assets, and those with a good quality growth profile, rather than illiquid or highly leveraged investments with greater counterparty risk.
On a positive note, it’s always important to remember that markets are forward-looking, and tend to rally well before things start to improve in the broader economy. As soon as we see inflation start to come under control, we think some good buying opportunities will present themselves.
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