Since the lows of October last year, Australian and most international share markets have rallied strongly. More than anything this has been due to increasing confidence that inflation in Australia and around the world is trending down towards Central bank targets of 2-3% without the need for further interest rate rises.

Indeed, the financial markets of Australia and the US are anticipating modest interest rate cuts later in 2024, although Central Banks keep stressing that they won’t hesitate to increase rates if inflation doesn’t continue to fall.

Even if interest rate cuts do come, it does seem highly unlikely that rates will revisit the lows of the COVID era.

The sense of optimism has continued into the new year, although economic growth is generally weak and there are numerous geopolitical risks such as the Palestinian/Israeli war, the Ukraine war and the upcoming US election.

Our research partners are unanimous in highlighting that we are now in a period of “sound money”, in that we finally have positive real interest rates (many bond and deposit interest rates are higher than current inflation). As such, bonds can provide attractive yields and play a genuinely defensive role in the event of an unexpected downturn.

Although company profit growth overall looks soft, Australian shares are generally seen as fairly valued, along with most overseas markets. The US share market looks stretched, partly through heady expectations from technology stocks, including AI.

Most other asset classes are seen as being in the fair value range, with emerging markets and smaller companies showing signs of being under-valued.

For long term investors, our current positioning is to be well diversified and close to full investment allocations, with modest tilts towards bonds, emerging markets and smaller companies.

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.