Oliver's Insights – Five reasons why the RBA cash rate is likely to peak (or should peak) with a 2 in front of it rather than a 3 (or more)

The attached note takes a look at the outlook for the RBA's cash rate following its latest rate hike. The key points are as follows:

  • The RBA has hiked the cash rate by another 0.5% taking it to 1.85% and signalling more rate hikes ahead.

  • Market & consensus expectations for the cash rate to rise above 3% are too hawkish as: global supply pressures on inflation appear to be easing; the RBA is already getting traction in terms of slowing demand and is starting to recognise this with downgrades to the outlook for economic growth; inflation expectations are still contained; & many households will experience significant financial stress with rising rates.

  • We see the pace of cash rate hikes ahead slowing down with the cash rate peaking around 2.6% either at the end of this year or early next year, which is at the low end of market and economists' expectations. Rates are likely to be falling in the second half of next year.

Advice Evolution News Update

Recession risk and the audacity of hope

With the recent discussion about the risk of a global recession, the below looks at the following points and examines them more closely.

• Only a few weeks ago there was a “hope trade” in markets that the Fed will back off the rate hikes in the September quarter. However, extremely high inflation, very low unemployment, and very late policy tightening means central banks are not in a position to pivot on policy and bail out markets like the Fed did in 2016 and 2018. This would only occur if they have made a mistake as evidenced by a sharp slowing of economic growth or the S&P 500 declining through 3,500. Neither of these are evident at present, and central banks need to continue moving rates higher to lessen the heat from very tight labour markets.

• Although fiscal and monetary stimulus is finally being wound back, a major misalignment persists between 40-yr highs in inflation, 40-yr lows in unemployment and real interest rates close to historic lows. Central banks are well behind the curve, but Morgan Stanley estimates that the tightening in US financial condition in the past six months is equivalent to 2.5% in Fed Funds equivalent terms, albeit from incredibly low levels. However, over the past 25 years financial condition at current levels have not sparked a material decline in inflation in the subsequent two years outside the severe recession which occurred during the 2008/09 GFC. This suggests that firstly rates need to go materially higher and, secondly that the Fed does not have the optionality to pause.

• The key for markets and investors moving forward is what happens to inflation, and there is no clear path here, but at present real cash rates are far too low to see core inflation back at 2% within the next few years. There is considerable cashflow pain ahead for households given higher energy and food prices, in addition to central banks having to tighten policy to get growth materially sub-trend. This is needed to have inflation within the realm of the typical 2% target by 2024, and rate hikes this year will weigh on activity in 2023 where recession risks seem much higher than what they are for the remainder of this year


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New from Colonial First State - Client Fact Sheets

Colonial First State’s Client Resources page has new client fact sheets to help you develop your financial knowledge. You may check out these topics below:

Tax tips and super strategies to help you prepare for the end of financial year

Contributing to your super

Boosting your super with the government co-contribution

Topping up your spouse’s super

What happens to your super when you die?

Warning: Scammers offering fake green bonds

  • ASIC is alerting investors of the existence of a number of fake green bonds.

  • In Australia, green bonds are not directly available to the general public or retail investors. Any website or entity claiming otherwise is a scam.

  • Scammers may represent themselves as well-known financial services firms and invite people to invest in fictitious environmentally sustainable green bonds.

ASIC is aware of the existence of a number of fake green bonds. Green bonds are bonds that are used to finance new and existing projects that offer climate change and environmental benefits. They can be purchased by superannuation funds, fund managers, insurance companies and other wholesale entities, but are not directly available to the public.

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Investing and tax - How income from your investments is taxed

Lower tax on your investments can help you reach your financial goals sooner. But don't choose an investment based on tax benefits alone.

You need to include investment income in your tax return. This includes what you earn in:

  • interest

  • dividends

  • rent

  • managed funds distributions

  • capital gains from property, shares and cryptocurrencies


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Thoughts on the Market: The Fog of War

2022 is not very old and already it has seen a stock market correction, a 50bp flattening of the US yield curve and a major geopolitical crisis in Europe. Investors are contemplating the potential consequences of the Russian invasion of Ukraine, and the direct economic impacts here are minor as the world’s trade and financial linkages with Eastern Europe are very low. However, the indirect impact through higher commodity prices (energy, metals, and food) to consumer’s purchasing power is far more significant and simply adds more impulse to already well-established upward trend in global inflation, as well as downside risks to growth.

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Memory loss, dementia and your money

Memory loss can make it difficult to stay in control of your money. Things like checking bank statements or investments, or paying bills may become challenging.

If you're starting to struggle, it's time to put some safeguards in place. A few simple steps will help you and your loved ones protect your money and prepare for the future.

  • Start planning

  • Appoint an enduring power of attorney

  • Update your will

  • Get your super in order

  • Sort out your important documents

  • Protect yourself from financial abuse


More details about the article here

Oliver's Insights – Investment outlook Q&A – inflation, interest rates, Russia & Ukraine, the risk of a share crash, house prices and other issues

The attached note covers the main questions investors commonly have regarding the investment outlook in a simple Q&A format. The key points are as follows:

  • Inflation will likely slow later this year but remain well above pre-pandemic levels over the medium term.

  • Wages growth is likely to pick up to 3% this year.

  • A Russian invasion of Ukraine risks a short term hit to shares followed by recovery over the next 3 to 12 months.

  • Australian home prices are likely to peak later this year followed by falls into 2024.

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Oliver's Insights – Corrections, gummy bears and grizzly bears

Given the rough start to the year in share markets, the attached note looks at past bear markets in Australian and US shares. The key points are as follows:

  • While share market corrections and even mild bear markets are common, long and deep bear markets invariably require a recession at least in the US.

  • Global and Australian shares have had a good rebound from their January lows but could still fall further in the short term as risks remain high around monetary tightening and geopolitical tensions.

  • However, a deep bear market is unlikely as a US, global and/or Australian recession are unlikely to be imminent.

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