Welcome to the sixth edition of the Aspirations Wealth (AW) Insights for 2023. AW constantly monitors the investment markets and aims to keep our valued clients regularly informed and updated.
In this Insights edition we cover:
- Market returns for the 2023 financial year
- Rik and Don chat about their outlook for next year
Market Returns for the 2023 financial year
The 2023 financial year presented a diverse range of market returns across various asset classes per the table below. This information aims to assist you in making informed decisions about your investments and setting realistic financial goals. Understanding these returns can provide you with a clearer perspective on how different asset classes have performed over 1 year. However, it is important to remember that past performance does not guarantee future results.
- Australian Shares: Australian shares performed strongly with a return of 14.8% for the 2023 financial year. This positive performance is a good recovery from the low points this time last year. However, it is really just continuing the longer-term sideways performance of the Australian market while we wait to see if the economy copes with restrictive interest rates.
- Global Shares (Unhedged): Global shares (hedged) performed well, and Global shares (unhedged) performed better, generating an impressive return of 20.4%. Thankfully more than half of our international investments are unhedged. [Unhedged funds are affected by foreign exchange rates and hedged funds are not affected]. The solid return also reflects improvements from low points this time last year and market confidence that inflation is hopefully decreasing which will lead to lower interest rates and a better time for the stock market soon.
- Global Listed Property (Hedged): Hedged global listed property investments faced challenges, resulting in a negative return of -5.9%. Increasing interest rates usually have a negative impact on commercial property funds because they usually carry larger debt levels and can be impacted by fear of economic downturns. We have been underweight in this area but are now looking to increase our weighting.
Outlook for Next year
Rik and Don recently had a chat about our market outlook while Mike is taking a well-earned break overseas. Here’s what we discussed:
Interest rates are increasing, recessions are looming. So why aren’t markets falling?
The first half of 2023 provided further evidence that investment markets have actually been building comfort around the ideas of persistent inflation and higher-for-longer interest rates. Global shares, led by the United States (US) and Europe, shrugged off the US regional banking turmoil to mostly move higher. The Global Share Market Index is up 16% this year, with close to half of those gains coming in during the June quarter.
A key driver of these strong returns has been the surprising toughness in global economic activity, consumer demand, and labour markets. This has been positive for the economy and shares in recent months. This resilience in the economy despite rising interest rates has pushed the potential recession further into the future.
Another aspect of the recent increase in shares has been the concentration in only a handful of mega-tech companies — the so-called ‘Magnificent Seven’ of Apple, Microsoft, Amazon, Alphabet, Meta, Nvidia and Tesla. These companies have benefited from the current artificial intelligence (AI) boom and have bounced back strongly following the large declines in the technology sector in 2022.
A mild US recession seems probable over the coming six to 12 months, and while Australia and Europe may avoid a recession, they will still likely face a significant slowdown.
Remembering that markets are forward-looking, is the current economic outlook already reflected in stock prices?
Historically, bear markets (a continuous period of downward trending share prices – around 20% decline) have occurred as an economy approaches a recession, providing opportunities to enter the market at attractive valuations or when an economy enters a recession. So, if we are six months out from a US recession, this would normally be a reasonable entry point if it was not for the fact that we have not seen a devaluation of shares yet. Investors appear to be pricing in a very ‘soft landing’ where is when a recession is avoided, or where no slowdown occurs at all.
While overall market valuations look expensive, we are seeing pockets of value emerge, like in global small and mid-sized sectors, banks, energy, and property. While some of these areas offer genuine buying opportunities, others are cheap simply because they are poor quality. An active approach when seeking these opportunities is therefore critical.
So, what is our outlook?
Despite our primary case being a favourable soft landing, stocks have already priced this in (hence the market going up recently). However, now that company earnings are under pressure, we see limited upside for shares in a soft-landing scenario.
In the other likely scenario (‘persistent inflation’) there could be a continued level of higher inflation that requires even higher interest rates to break the back of rising prices and wages. This will result in a deeper recession than expected. We simply need to wait to find out which scenario unfolds.
Until the picture of inflation and interest rates becomes clearer, we remain cautious about the outlook for investment markets. Regarding portfolio positioning, we continue to be defensive across and within asset classes. We are considering taking some profits from the megatech companies and reinvesting this into selective quality small and mid-cap stocks which are really good value currently. In fixed interest, we prefer government bonds over corporate bonds. While cautious, we are also mindful markets are very difficult to time. This is why retaining exposure to growth assets remains essential and why we believe only a slightly defensive weighting is appropriate in the current environment.
Any advice contained in this insight/update is general advice only and does not take into consideration the reader’s personal circumstances. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances. When considering a financial product please consider the Product Disclosure Statement. Aspirations Wealth Group is a Corporate Authorised Representative of Aspirations Private Wealth Pty Limited. ABN 57 622 182 076 – AFSL 503889.