Author: Stephen Thaxter

 

 

It’s that time of year when the so-called experts line up with their predictions of investment returns for the year ahead.  But this year it’s more hot air than ever.  The US sets the tempo and hardly anyone expected its economy and share market in 2024 to do as well as it did.  And right now, no one knows if President Trump will follow through with his audacious agenda of tariffs, tax cuts, deportations and isolationism.  They say politics don’t influence financial markets much but we all agree it’s a very uncertain time.

 

What we do know is that the US continues to be the profit growth engine of the world, its consumers are spending and its share market is priced for perfection. Dig deeper and we see that the profit and share market growth has been quite narrow, with much of it coming from the ‘Magnificent Seven’: Apple, Microsoft, Amazon, Alphabet (Google) Tesla, Nvidia and Meta (Facebook).  Outside the technology sector, growth is hard to come by, as is productivity and GDP per capita around the world.  This is certainly the case in Australia where profits have been flat or declining for a couple of years.

 

So where to invest?  With short and long term interest rates quite elevated and inflation still moderating, fixed income and bonds are looking quite attractive.  This environment’s pretty good for shares too, but starting valuations are important.  Over the next 10 years Vanguard are expecting only very modest returns from the broad US share market.  As a result, their latest forecasts are showing quite similar return expectations from the traditional mixes of “Conservative”, “Balanced” and “Growth”.  They expect “Growth” to outperform over the next 10 years, but not by much.  This prompts an important conversation about how much extra reward we can expect from the portfolio risks we take.  These views are reflected in our preferred portfolios, which straddle all the main asset classes and are designed for maximum diversification benefit.

 

Reach out to us if you’d like more detail.

 

General Advice Warning: Any advice included in this article and associated links is general in nature and would not consider your particular objectives, financial situation or needs. If a product we recommend has a Product Disclosure Statement (PDS), you should read it before making a decision. Past performance is not a reliable indicator of future performance. Other than cash deposits falling under the Australian Government’s Financial Claims Scheme, any investment we recommend has the potential to deliver a loss to an investor. Nevertheless, we are of the view that for Australian investors it is reasonable to expect a skilfully managed diversified portfolio to deliver positive returns over the long term, over and above cash returns and the impact of inflation.

 

Returns have remained strong for most fully invested investors, with shares at all-time highs and bonds stable.  Investment markets are still much more interested in inflation and jobs numbers than politics, even though we’ve been witnessing seismic political shifts almost daily in the US, France and the UK.  We may see some volatility as we get closer to the US election.

The central narrative is that inflation is slowly returning to target levels in most countries, interest rates will be cut and recessions will mostly be avoided.  Importantly, financial markets are now convinced that US interest rates (currently 5-5.25%) will start to be managed down during quarter 3.  This would normally mean a tailwind to investment returns.  The UK and Europe are already reducing rates.  Australia is somewhat out of step though, at 4.35% its rate is already 1% lower than the US and conditions don’t look right for a rate cut yet.  In fact, a temporary interest rate hike in Australia should not be ruled out if the June quarter inflation number looks strong.  That statistic comes out on 31 July.

Our main investment focus at Grand Plan Wealth is the compounding of wealth for long term investors. Short term returns may be fascinating (at least to the finance types) but they are essentially a lottery. We can be much more confident in long term forecasts, because long term returns are mainly derived from the more predictable earnings that flow out of diversified investment portfolios – profits, dividends, interest payments, rents etc. On this note, Vanguard updated their long term forecasts in quarter 2. The numbers have softened a little, but with all the usual caveats they are still tipping worthwhile returns across traditional market portfolios over 10 and 30 years, even after the impact of inflation. And because interest rates are currently elevated, even conservative ‘bond heavy’ portfolios are expected to do relatively well.

Reach out to us if you’d like more detail.

 

General Advice Warning: Any advice included in this article and associated links is general in nature and would not consider your particular objectives, financial situation or needs. If a product we recommend has a Product Disclosure Statement (PDS), you should read it before making a decision. Past performance is not a reliable indicator of future performance. Other than cash deposits falling under the Australian Government’s Financial Claims Scheme, any investment we recommend has the potential to deliver a loss to an investor. Nevertheless, we are of the view that for Australian investors it is reasonable to expect a skilfully managed diversified portfolio to deliver positive returns over the long term, over and above cash returns and the impact of inflation.

 

Interest rates are the price of money and much of the time the movements in financial markets simply reflect changing expectations of future interest rates.

Central banks manage interest rates to maintain favourable economic environments, which includes keeping a lid on inflation. Policy mistakes are common and the surge in inflation post COVID has been a major headache, prompting massive interest rate hikes. Thankfully the wild inflation numbers of the last couple of years are now behind us.

Over this last quarter, the main unfolding story for investment markets has been the slow progress in finally getting inflation back inside the policy target of 2-3%. Inflation seems to be stuck 1-2% higher than target, meaning that hopes of interest rate cuts keep being pushed back. Which is not good for financial markets.

So, after a very strong start to the year, investment markets lost ground in April as the inflation data disappointed. A typical ‘balanced’ style strategy returned around 5% in the first quarter of 2024 but by early May had retraced a couple of percent.

Goods inflation is well under control. But services inflation has spiked up, pushed along by higher housing rents, a tight labour market and wage settlements.

It’s a delicate game and financial conditions from elevated interest rates are slowing the Australian economy. Consumer spending is already weak and loan delinquencies are on the rise. Nevertheless, predictions are for low but positive economic growth in Australia over the next year. Thankfully the consensus is for no recession in Australia or the US.

Markets are now expecting no rate cuts in Australia or the US until very late in the year, but hanging on to the belief that the next interest rate movement will be down, not up.

Our main investment focus at Grand Plan Wealth is the compounding of wealth for long term investors. Short term returns may be fascinating (at least to the finance types) but they are essentially a lottery. We can be much more confident in long term forecasts, because long term returns are mainly derived from the more predictable earnings that flow out of diversified investment portfolios – profits, dividends, interest payments, rents etc. On this note, Vanguard has updated their long term forecasts. With all the usual caveats they are tipping worthwhile returns across traditional market portfolios over 10 and 30 years, even after the impact of inflation. And because interest rates are currently elevated, even conservative ‘bond heavy’ portfolios are expected to do relatively well.

Reach out to us if you’d like more detail.

 

General Advice Warning: Any advice included in this article and associated links is general in nature and would not consider your particular objectives, financial situation or needs. If a product we recommend has a Product Disclosure Statement (PDS), you should read it before making a decision. Past performance is not a reliable indicator of future performance. Other than cash deposits falling under the Australian Government’s Financial Claims Scheme, any investment we recommend has the potential to deliver a loss to an investor. Nevertheless, we are of the view that for Australian investors it is reasonable to expect a skilfully managed diversified portfolio to deliver positive returns over the long term, over and above cash returns and the impact of inflation.