Overview As the third quarter of 2023 unfurls its array of financial intricacies, both the Australian and International economic landscapes and markets have displayed mixed behaviour. With developments ranging from Australia's inflationary trends to shifts in China's property market, the year has proven both dynamic and unpredictable. Rather than a cursory glance, I invite you to delve deeper into the intricate web of events that defined this period. Regardless of one's financial stance, the recent happenings warrant keen attention and documentation. Let's methodically unpack the nuances of Q3 2023.
Australian Economy The Land Down Under has experienced its economic hurdles this quarter. The primary concern remains the sluggish economic growth, further encumbered by high inflation rates that have taken a toll on disposable incomes and subsequently, household consumption. As per the Westpac Consumer Sentiment survey and the Westpac Card Tracker, we are arguably navigating through a consumer recession.
The monthly inflation rate stands at 4.9% yoy, while core inflation touches 5.6% yoy. Such persistent inflation rates not only erode consumers' purchasing power but also compel central banks to reassess their monetary policies.
On a brighter note, Australia’s population growth has surpassed 2%, owing to almost 40,000 net arrivals monthly. While this may add pressure on resources in the short term, it signals potential for future demand and growth.
China, being Australia's significant trading partner, poses both challenges and opportunities. Their declining exports and property market challenges can cause headwinds. However, China's shift towards a new economy can potentially amplify demand for Australian commodities. Despite the current stagnation, 2024 shines a beacon of hope. There's a plausible anticipation of economic improvement, with the Reserve Bank of Australia (RBA) hinting at offering interest rate relief. For the present, the RBA has held its ground, maintaining the cash rate at 4.1%. This decision stemmed from the bank's intent to ensure inflation returns to its targeted range "in a reasonable time frame."
Reflecting global dynamics, the Australian 10-year bond yield touched 4.2%, marking a rise of 100 basis points since mid-April, with its movements echoing the U.S. counterpart. The Australian dollar, in comparison, has maintained relative stability, hovering slightly below the 0.65 mark against the U.S. dollar.
Australian Market Shifting our lens to the Australian market, the S&P/ASX200 Index has seen growth, albeit modest, at 3.4% year to date and 6.4% annually. However, August was less favourable, witnessing a decline of 0.7% for the ASX 200 and a sharper 1.7% drop for the Small-cap index. Barring the consumer discretionary sector, which experienced growth, the remaining ten sectors, particularly utilities and consumer staples, recorded significant declines.
Corporate Australia also felt the heat, with company profits slumping by 8.6% in the June quarter, which is a dip of 6.8% from the previous year. Investors might derive some solace from the S&P/ASX200 Index's trailing P/E ratio of 17.3, which, when juxtaposed against its forward P/E of 15.3 and a dividend yield of 4.1%, presents an intriguing picture.
International Economy The international arena is not without its fair share of economic challenges. Bond yields globally have surged, largely driven by central banks' communication strategies and various fiscal stimuli. The Bloomberg Global Aggregate Total Return Index Value (unhedged USD) slipped by 0.8% year-to-date but managed to edge up by 0.5% compared to the previous year. The rise in global Treasury yields sparked debates over growth and inflationary pressures.
Real yields have experienced a surge, backed by bond supply concerns and the anticipated boost from AI-driven productivity growth. Notably, a drop in yields is foreseen by the year-end and further into 2024, a prediction backed by Morgan Stanley among others.
The U.S. has seen its core inflation rate relax to 4.3%, still substantially above the target. Such inflationary trends, coupled with soaring oil prices (from USD 70 to USD 90 per barrel), continue to dominate central bank policies and narratives.
China, an essential cog in the global economic machinery, faces its set of dilemmas. These range from a troubled property sector to its currency witnessing its lowest ebb against the U.S. dollar since 2007.
Despite the whirlwind of economic events, labour markets globally have shown commendable resilience. Central banks have been prudent, keeping a close eye on these markets, given the rising interest rates. In the U.S., for instance, the Fed Bank of Atlanta's GDPNow model anticipates a promising 4.94% GDP growth for Q3.
However, it's not all smooth sailing. Fitch's Global Economic Outlook hints at a faster economic pace for 2023 but tempers this optimism with concerns surrounding China's property market. Additionally, The New York Fed's U.S. recession probability index points to a looming cloud, with a 66% probability of a recession in the upcoming year.
International Markets On the international markets front, sentiments have skewed towards caution, influenced by rising real interest rates and China's weaker economic data. The MSCI World Index dipped by 1.7% in August, with its emerging-market counterpart seeing a sharper fall of 4.7%. The S&P 500's earnings growth slid by 4.1% in Q2, marking the third consecutive year-on-year decrease. However, this decline was still better than many had anticipated. Investors now face a conundrum. For stock market multiples to remain elevated, there would need to be a clear signal of growth reacceleration or a leniency in policies. Unfortunately, neither seems imminent.
Conclusion In looking ahead to the final stretch of this year, we should maintain clarity. The third quarter posed its challenges, yet the complexities of the present moment are not to be overlooked. The Reserve Bank's strategies remain less transparent, and China's economic trajectory is still evolving. 2023's conclusion seems set to be notable. The lessons of history tell us that trying circumstances often shape the most adept navigators. With a commitment to informed decision-making and a nod to traditional wisdom, we are poised to chart our course. Equipped with data and strategic insight, we proceed together. This next chapter presents both challenges and potential, and we stand prepared to meet them.
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