October 2023 Market Update

Don’t panic! Markets (mostly) shrug when geopolitics shock the world

Events like the Israel-Palestine and Russia-Ukraine conflicts may shock the world, and they may even influence markets. But history tells us geopolitical risks are always present, mostly factored in, and should never predicate panic selling.

In October 2023, the financial landscape globally was marked by several pivotal movements, some arising out of decisions made by central banks, some influenced by global and domestic economic indicators, and others resulting from geopolitical situations. For our clients and prospects who are seeking clarity amidst the headlines, here's a concise wrap-up of recent events and our perspective on the path ahead.

Central Banks and Interest Rates:

The RBA held firm this month, maintaining its cash rate at 4.1% for the fourth consecutive time. While some may interpret this as a sign of waiting for clearer signals, others, including experts at Vanguard, suggest that the RBA might have another one or two quarter-point rate hikes up its sleeve.

Raising the cash rate can be used a tool to combat inflation and stabilise the currency. As this affects households with mortgages and typically dampens spending and inflation.

Three of Australia's four major banks – CBA, NAB, and ANZ – align with this anticipation, while Westpac currently retains its forecast, holding at 4.1%. But remember, these decisions are grounded in robust economic assessments and are intended to steer the nation through both short-term challenges and long-term prosperity.

Bonds – The Talk of the Town:

Bonds have been at the epicentre of much of the financial conversation lately. The reasons are threefold:

Resilience against recession fears backed by a buoyant labour market. The labour markets health indirectly impacts bond yields through its influence on economic outlook. Buoyant labour market = higher inflation = upward pressure bond yields.

· The US Federal Reserve's intention of persistent higher rates.

· Anticipation surrounding the US government's bond issuance.

September witnessed long-term bond yields rebound, a stark contrast to their decline in August. As a result:

· Australian 10-year bond yields rose by 0.46%, settling at 4.49%.

· The Bloomberg AusBond Composite Index recorded a yield increase of 0.34% to 4.53%, causing the index to retract by 1.5% and the OZBD’s index by 1.8%.

These higher bond yields indicate positive sentiment about the economy, higher yields can also attract more foreign investment.

Inflation – A Roller Coaster Ride:

Inflation figures, both in the US and Australia, came as a surprise to many. With global energy prices potentially being influenced by geopolitical tensions, it seems inflation's unpredictability is set to continue. But as history shows us, inflation is cyclical, and periods of highs are often followed by lows.

Recent data reveals:

From the high of 7.8% in December 2022, inflation had momentarily subsided, but as the ABS reports, it rose once more in September, despite RBA's numerous rate hikes.
Goods prices surged 1.2% over the September quarter and 4.9% annually, with notable spikes in food, furniture, and housing.
Services, often more inelastic, saw a 1% quarterly rise and an annual increment of 5.8%.

On the investment front, certain asset classes like equities and real estate might seem attractive as they historically offer a hedge against inflation.

Global Stocks – An Uneven Landscape:

Australian shares face downward pressure, which mirrors the global trend, where the S&P 500 experienced a 1.4% decline and Nasdaq Composite plummeted by 2.4% through September. These fluctuations serve as a reminder of the inherent volatility in global markets and the tech sector's susceptibility to broader shifts.

Equities and Defensive Assets – The Balance Game:

September saw some turbulence with global and Australian equities going down by 3.5% and 2.8% respectively. The listed property sector too faced its challenges. But it's essential to remember that financial markets are dynamic, and short-term fluctuations shouldn’t deter long-term vision.

Our Take & Assurance:

We understand the concerns that may arise when the financial landscape seems to shift unpredictably. Yet, it's in times like these that our commitment to diversification, portfolio management, and long-term vision stands out.

Ensure your financial plan is up to date and ready to take advantage when opportunities arise. For those long-term investors, come back to your long-term goals. Don’t be making long term financial decisions, based on short term metrics.

It will not feel like it at the time, however this uncertainty will pass.

What should I do if I’m concerned about my investments?

If you’re wondering about whether you should make changes to your investments, we recommend connecting with Matthew McCabe your Newcastle financial adviser to review your investment goals, identify any potential opportunities, and make changes if necessary.