RI Advice Monthly Market Update – August 2023

Investment Markets Continue to Rebound

A majority of investment markets and sectors, particularly in the US have generated positive returns over the past 12 months. Pleasingly July continued this trend.

Economic Data and Central Banks

In July, economic data surprised by being stronger than expected. Inflation figures, however, went the other way and surprised by coming in lower. This led to central banks in developed countries like the US and Europe reconsidering how much they need to tighten their monetary policies. Meanwhile, emerging economies began cutting interest rates to boost their growth.

Market Performance

Equity markets showed resilience in July. The MSCI World index, which tracks global stocks, increased by 2.9%. Emerging markets also did well, with the EM index rising by 5.4%. However, bond markets didn't fare as well, with the Bloomberg Global Aggregate Bond index only rising by 0.7% (total returns in local currency).

Disinflation Forces at Play

Inflation, which is the increase in prices over time, showed some interesting trends. Developed economies surprised us by reporting lower inflation rates. This can be partly attributed to falling prices of goods, even though services prices remained steady. Comparing to a year ago when inflation was at a higher rate also helped in making this comparison favorable. For example, inflation rates in June were 3.0% in the US, 5.5% in the eurozone, 7.9% in the UK, and 6.0% in Australia for the second quarter.

Central Bank Actions

Despite the mixed economic data and lower inflation, central banks like the US Federal Reserve and European Central Bank hiked rates, but their tone changed. They became more dependent on data, indicating a potential pause in September. The European Central Bank faces a challenge as inflation rates are higher and growth outlook is slightly weaker compared to the US.

Global Economic Divergence

Developed market economies showed differing growth patterns. In the eurozone, manufacturing activity fell significantly, especially in Germany. The US, on the other hand, saw a slight improvement in manufacturing. Service sectors are helping counterbalance manufacturing weaknesses.

China's Measures and Equity Markets

China's economic data disappointed, but officials are taking steps to stimulate growth. They're focusing on strengthening consumer spending, easing property sector restrictions, and supporting infrastructure projects. Equity markets showed strength, with the MSCI World index gaining 2.9% and the EM index rising 5.4%. However, caution is advised due to valuations being on the rise in 2023.

Australian Economic Highlights

Australia experienced a lower-than-expected inflation rate of 6.0% for the headline and 5.9% for the core figure. This downward trend suggests inflation might end the year around 4.0%. The Reserve Bank of Australia paused rate hikes due to softer growth and this will be a consideration for the new incoming Governor, Michelle Bullock. Australia's unemployment rate was 3.5%, and despite strong official labor market data, leading indicators suggest softer job growth. The housing market stabilized with house prices rising.

Equity and Fixed Income Markets

The ASX 200 gained 2.9% in July, with energy, financials, IT, real estate, and utilities sectors leading. However, healthcare and consumer staples sectors faced declines.

Bond markets experienced higher yields on 10-year bonds due to changed rate outlooks. Credit markets showed positive returns, with US high yield debt performing well due to a soft-landing narrative.

Commodities and Currencies

Economically sensitive commodities like oil, copper, nickel, and zinc rebounded. Gold prices rose, and the US dollar weakened against the Euro, Pound Sterling, and Japanese Yen. The Australian dollar gained strength against the US dollar.

In conclusion, July's economic landscape brought positive surprises in economic data and inflation trends. Central banks are adapting their policies, and equity markets showed resilience.

The information above, including tax, does not consider your personal circumstances and is general advice only. It has been prepared without taking into account any of your individual objectives, financial solutions or needs.

Before acting on this information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser.

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