Outlook for investment markets

Shares remain at high risk of further falls in the months ahead as central banks continue to tighten to combat high inflation, the war in Ukraine continues and uncertainty about recession remains high. However, we see shares providing reasonable returns on a 12-month horizon as valuations have improved, global growth ultimately picks up again and inflationary pressures ease through next year allowing central banks to ease up on the monetary policy brakes.

The $A is likely to remain volatile in the short term as global uncertainties persist. However, a rising trend in the $A is likely over the medium term as commodity prices ultimately remain in a super cycle bull market.

Interest Rates

In Australia, the RBA on Tuesday is expected to raise the cash rate by another 0.5% taking it to 1.85%, as part of an ongoing effort “to do what is necessary” to return inflation to target by slowing demand and ensuring that long term inflation expectations don’t rise. Fortunately, the slightly slower than expected inflation rate for the June quarter of 6.1%yoy likely removed the need for a further step up in the size of rate hikes to 0.75%.

With bond yields looking like they have peaked for now short term bond returns should improve.

Australian home prices are expected to fall 15 to 20% into the second half of next year as poor affordability & rising mortgage rates impact. Sydney and Melbourne prices are already falling aggressively, and falls are spreading to other cities.