2023: The Year We Shook It Off
2023: THE YEAR IN REVIEW
As we wave goodbye to 2023, it's time to reflect on a year that's seen optimism return to investment markets around the globe.
With the official end of the COVID-19 pandemic and as the risk of a recession subsides, global markets have exceeded expectations in 2023, suggesting we may be Out of the Woods. This upturn is thanks in large part to the mega-cap technology stocks known as the Magnificent Seven, which have woven a Love Story with the markets. As we observe would might be the End Game of economic uncertainty, investor sentiment has shifted from “a recession is coming” to “a soft landing is around the corner”, a situation where everyone needs to be Ready for It.
The theme of 2023 remained inflation, with Governments and Central Banks playing the role of Masterminds in their strategy to control this Delicate situation and rein in inflation. Locally, the thirteen interest rate rises, echoing The Great War against economic downturn, caught many off-guard. This has contributed to a “cost of living crisis”, ongoing rental and housing stress, and a record number of Australians tightening their belts and reviewing their household budgets, making it feel like a Cruel Summer.
Adding to the year’s drama were the demise of three major US Banks and investment bank Credit Suisse, which had many saying ‘I knew you were trouble’. This, combined with the persistent Bad Blood in Ukraine and the Middle East, has contributed to a sense of urgency, as if in a Getaway Car, racing away from market turmoil.
Highlights of 2023
We have highlighted the biggest trends for 2023:
Bad News
Interest rates are set to stay higher for longer, feeling like they are Forever & Always (despite markets pricing in a few interest rate cuts next year).
Significant immigration into Australia that is putting further pressure on infrastructure, housing market and the job market, fuelling a Gold Rush of activity and competition.
Governments realising, they Did Something Bad by accumulating enormous debt during the pandemic - which they will look to reduce in the coming years through immigration and tax. It’s a moment filled with Would’ve, Could’ve, Should’ve sentiments.
Many experts expect monetary policy to become increasingly restrictive, signalling that we’re not quite Out of The Woods yet.
Changes to tax payable for superannuation funds with over $3m
While inflation has been decreasing, it remains stubbornly high, exacerbating cost of living issues, leading Australians to think, This is Why We Can’t Have Nice Things.
Good News
Inflation looks to have peaked.
Interest Rate rises in Australia looked to have peaked, with interest rate cuts starting to be priced into the markets, as if signalling to investors, You Need to Calm Down.
Investment markets performed surprisingly well in 2023 despite the uncertainty - supported by A.I. / Technology and the Magnificent Seven.
Term Deposit rates remain strong for those retired/ retiring.
Optimism returning to the markets, signalling it is time to Begin Again.
The Eras Tour coming to Australia
These trends suggest we may be heading towards a world where inflation & interest rates remain higher than they were before the pandemic, and economic growth is more restrained.
Interest Rate Dynamics and Inflation Trends
A major focal point for the Reserve Bank of Australia (RBA) this year has been the management of interest rates. Since May 2022, the RBA has increased rates 13 times, with a streak of 10 consecutive hikes. While the RBA's stance might be summarised as 'Don’t Blame Me,' many investors have been left saying 'You’re Not Sorry.'
The RBA halted these increases on December 5, 2023, maintaining the rate at 4.35%. This decision came as inflation slightly eased to 4.9%, lower than anticipated. This pause was a strategic move by the RBA, aiming to balance the need to control inflation without impeding economic growth, a Delicate act of Dancing with our Hands Tied.
Inflation, a previously dominant concern, showed signs of stabilising in 2023. While the downward trend in inflation rates is a focus of economic policy, other factors such as strong population growth and recent wage increases might still push prices upward, making it feel like Death by a Thousand Cuts for some.
Headline inflation decreased to 5.4% in the third quarter of 2023, down from a peak of 7.8% in the last quarter of 2022. However, this rate is still above the RBA’s target range of 2-3%, and we are All too Well aware of the challenges ahead. Services inflation remains stubbornly high.
To combat inflation, the RBA has consistently raised the cash rate, including a 0.25% hike in November. These increases are placing financial pressure on mortgage holders and household budgets, making many feel like they are caught in a Blank Space of financial uncertainty.
Additionally, the tight rental housing market has led to a sharp increase in rent inflation. Higher insurance premiums, partly due to increased weather-related claims, are also contributing to these inflationary pressures.
Many experts are predicting that higher interest rates are here to stay, and We are Never Getting Back Together with the rates of the past.. Even after policy rates receded from their peaks, in the decade ahead rates will settle at a higher level than we’ve grown accustomed to since the 2008 Global Financial Crisis, an era that now feels like our Wildest Dream.
This development ushers in a return to “normal”, and the implications will be profound. Borrowing and savings behaviour will be reset, capital will be allocated more judiciously and asset class return expectations will be recalibrated. Many experts believe that a higher interest rate environment will serve investors well in achieving their long term financial goals, but the transition may be bumpy as we navigate the Invisible Strings of the financial world. Adaptability and resilience will be key, reminding us that Everything has Changed.
Investments
The standout story for 2023 was the unexpected strength in global equity markets, after the bounce back from 2022.
Investment Insights for the Future:
Bonds are back
The global bond markets have repriced significantly over the last two years due to the transition to the new era of higher rates. We’ve witnessed a Love Story for bond enthusiasts, with many believing bond valuations are now close to fair value.
Higher rates leave equities overvalued
A higher rate environment depresses asset price valuations across the global markets while squeezing profit margins as corporations find it more expensive to issue and refinance debt.
Residential property continues to grow despite the headwinds from rate rises
Despite the Fearless 13 rate rises since May 2022 and the impending “fixed rate mortgage cliff” in 2023, the housing market not only stabilised but showed optimistic signs of growth, finishing the year with an average national increase of 7.6%.
Looking Ahead for 2024
For households and businesses, higher interest rates will limit borrowing, increase the cost of capital and encourage saving.
Residential property markets are expected to show varied performance across the country, with an overall trend towards further stabilisation which will urge investors to Stay Stay Stay patient.
For governments, higher rates will force a reassessment of fiscal outlooks. This is the Holy Ground of economic reform, where the vicious circle of rising deficits and higher interest rates will accelerate concerns about fiscal sustainability.
Inflation has reached its peak, without triggering a recession, making us all feel like we are The Lucky One.
Interest rates have peaked, with with market starting to price in cuts in 2024. However, rates are expected to remain higher for longer, that had many saying I Almost Do miss the old rates.
With the likelihood of a recession subsiding, optimism has return to the investment markets, with many investors starting to move their capital back into the markets.
Diversification and risk management remain crucial for investors navigating this uncertain landscape.
Implications for investors
With higher interest rates set to remain for a longer period of time, investors with a mortgage the question remains can you achieve a greater after tax return then holding your capital in an offset account?
At a mortgage rate of 6% you would need to achieve a return of 8% to account for tax.
Given valuations in the equity and residential property markets, diversification remains the key to continue to manage market volatility.
Looking Forward
As your financial planner, the team & I want to express our gratitude for your trust and partnership throughout this journey. It’s been a previlege to work together to naviagte the challenges and opportnutiies presented by the dynamic financial landscape.
Looking ahead, we remain committed to supporting you through the noise, with our focus continuing to be on your financial well-being and long term goals. If there are specific aspects of your financial plan that you would liek to discuss or if there are any new goals on the horizon, please do not hesitate to reach out.
Wishing you a Merry Christmas and a prosperous New Year.
Here’s to shaking off the past and embracing the opportunities that lie ahead.
Matt McCabe
Newcastle Advisors
*An enormous thank you to Rose for her contribution to this article.
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