(Source: Merlea Macro Matters)

Summary

As the global monetary cycle shifts towards synchronised easing, September brings heightened market volatility, with the unwinding of the yen carry trade posing significant risks. Following the Bank of Japan’s interest rate hike in August, which triggered a strengthening yen and a major sell-off in global markets, analysts are warning of further turbulence. With the yen previously at the centre of one of the largest carry trades ever seen—estimated at up to $4 trillion—the continued unwinding threatens to drive further volatility, particularly as U.S. yields and the dollar remain on a downward trend.

In tandem, major central banks are moving towards rate reductions to support economic growth. The Eurozone is expected to cut borrowing costs for the second time this year, following recent moves by the Bank of Canada and ahead of the Federal Reserve’s anticipated rate cut later in September. Investors are closely watching to see if this marks the beginning of a deeper easing cycle, as inflation risks fade and economic headwinds grow stronger.

Meanwhile, developed economies are grappling with the challenges of immigration-driven growth models. Countries like Canada, Australia, and the U.K. have relied on migration to counter aging populations but housing shortages and declining per-capita income are straining their capacity to absorb new arrivals. Governments are now reevaluating policies to balance population growth with sustainable economic development.

Bonds

As the global economy grapples with slowing growth, falling tax revenues, and rising unemployment, the normalisation of the yield curve introduces new challenges. Typically seen as a signal of economic stability, yield curve normalisation—where long-term interest rates rise relative to short-term rates—presents distinct challenges in a sluggish economic environment.

Impact on Economic Growth

One of the most immediate consequences of yield curve normalisation has been the rise in borrowing costs. As long-term interest rates increase, businesses and consumers face more expensive credit, which can curtail investment in key sectors such as manufacturing, technology, and construction. With fewer new projects and expansions, overall economic growth could slow further. Additionally, rising interest rates tend to weaken consumer confidence, particularly in areas like home purchases and car sales, leading to reduced spending, which is critical to sustaining GDP growth.

Strain on Government Budgets and Revenues

As economic growth stalls, governments are likely to feel the strain on their budgets. Slower business activity and rising unemployment reduce tax revenues, making it harder to fund essential public services and infrastructure projects. Meanwhile, as interest rates rise, the cost of servicing government debt increases, further exacerbating budget deficits. This creates a challenging fiscal environment where balancing the need for financial stability with public spending becomes increasingly difficult.

Challenges in the Labour Market

Higher borrowing costs can also lead to a slowdown in business hiring and expansion. Companies may delay or scale back their growth plans, resulting in fewer new jobs or even layoffs. As unemployment rises, wage growth may stagnate, further reducing consumer spending and creating a cycle of economic weakness. This poses long-term risks to the health of the job market and overall economic recovery.

Opportunities in Fixed Income Market

Certain fixed income sectors may offer opportunities in this environment:

• Investment-Grade Corporate Bonds – High-quality corporate bonds tend to be more resilient during slowdowns, providing attractive yields and relatively lower risk.
• Semi Bond Market – Especially those tied to essential services, can be an appealing
• High-Quality High-Yield Bonds – For investors willing to take on slightly more risk, well-selected high-yield bonds offer the potential for higher returns.
• Inflation-Linked Bonds – These bonds, adjust based on inflation, offering protection against rising prices and preserving purchasing power.

Listed Property

Over the past two decades, A-REITs have demonstrated resilience in income generation, weathering various economic cycles. However, capital appreciation has generally been limited. In today’s high-inflation environment, there is potential for improvement, as rental income can be adjusted upward during inflationary periods. Despite this, A-REIT performance over the past three years has been lacklustre, primarily due to elevated interest rates implemented to control inflation, which have also led to weaker economic growth and a softening property market.

 

The performance of A-REITs over various time periods illustrates their historical returns and volatility. Historical data over the last 20 years illustrates the perceived resilience of A-REIT income generation through multiple economic cycles. However, as seen in the different periods, capital appreciation has generally been weak.

 As inflation begins to ease, there is growing anticipation that the Reserve Bank of Australia may reduce interest rates in the coming months, potentially providing a much-needed boost to A-REITs. Part of the reason REITs rally around the first-interest rate cut is investors begin seeking better yields in a potentially lower interest rate environment. This coupled with their relative attractiveness compared to equity markets near all-time highs, makes the sector worth a closer look.

When evaluating A-REITs, it’s important to understand their structure as trusts, not companies. Unlike companies that pay fully franked dividends, A-REITs distribute most of their profits, such as funds from operations (FFO). FFO, which excludes asset sales and depreciation, is a key measure of an A-REIT’s operational cash flow. For example, Vicinity Centres (ASX: VCX) saw its FFO dip slightly while its profit rose, thanks to the exclusion of previous asset sales.

Other critical metrics include net tangible asset value (NTA), which represents the value of a REIT’s properties minus liabilities, and gearing, or debt levels, which have come under scrutiny as rising interest rates increase borrowing costs. Weighted average lease expiry (WALE) provides insight into the stability of rental income, with longer commercial leases offering more predictability. Lastly, the capitalisation rate (cap rate) reflects the expected return from real estate investments, and recent cap rate expansion has been a key factor in A-REITs’ underperformance as rising interest rates have led investors to demand higher returns.

For those looking to invest, the S&P/ASX 300 A-REIT index serves as the main benchmark, though it’s concentrated in a handful of large players. Both passive and active strategies should be considered, with a focus on sectors offering the best opportunities amid growing divergence in property valuations and performance. As inflation eases, the Reserve Bank of Australia may lower interest rates, potentially boosting A-REITs.

While the S&P/ASX 300 A-REIT index is concentrated, with Goodman Group (GMG) dominating, opportunities exist beyond the index, particularly in sectors like data centres and alternative real estate assets. G-REITs offer broader diversification but come with added risks, such as currency and geopolitical factors.

As rates decrease, sentiment around A-REITs is expected to improve, providing compelling investment opportunities.

Australian Equities

The Australian economy has faced sluggish growth recently. Business investment, public sector spending, and international tourism have helped support demand, but household consumption remains weak due to high inflation, rising interest rates, and increased taxes. The labour market, though still tight, is showing early signs of easing.

 

Monthly CPI Indicator, Australia, Annual Movement (%)

Inflation remains persistently high, driven by companies quickly passing on cost increases but being slower to reduce prices when costs fall. Supply chain disruptions from the COVID-19 pandemic and the war in Ukraine also continue to elevate prices, while essential services like rent, healthcare, and education have seen sharp cost increases.

Interest rates are expected to stay elevated for some time. Major banks forecast rate cuts between late this year and mid-2024, while the federal treasury anticipates gradual easing from mid-2025. The Reserve Bank of Australia suggests rates may hold steady until mid-next year before starting to decrease.

A potential reduction in migration could significantly impact the economy, as migrants are key contributors to the workforce, consumption, and housing demand. A sharp decline in migration could slow growth and possibly edge Australia toward a recession. However, the government is working to attract more skilled migrants to mitigate these effects.

Cost of living pressures in Australia are expected to ease gradually. Inflation is projected to drop to 4.75% by next year and to just over 3% in 2024. In response, the government has introduced several measures. From July 2024, tax cuts will lower the 19% tax rate to 16% and the 32.5% rate to 30%. Additionally, a $3.5 billion energy bill relief package will provide rebates to households and small businesses, while a 10% increase in Commonwealth Rent Assistance will benefit nearly a million households. The government is also focusing on cheaper medicines, waiving $3 billion in student debt, and boosting support payments to ease financial strains. These efforts aim to balance immediate relief with controlling inflationary pressures.

In times of economic slowdown, certain sectors of the stock market tend to outperform. Consumer staples, utilities, and healthcare remain in demand due to their essential nature, offering stability. The real estate sector could benefit from future interest rate cuts that often accompany slower economic growth.

America

As we move into September 2024, the economic landscape is shaped by several key factors. The Federal Reserve is expected to cut interest rates by 25 basis points, bringing the target rate to 5%–5.25%. This shift follows months of rate hikes to combat inflation, which is now nearing the Fed’s 2% target. A potential rate cut could ease borrowing costs, benefiting both businesses and consumers. However, housing remains under pressure, with high mortgage rates slowing home sales and keeping prices elevated.

Inflation trends show positive movement, with the core Personal Consumption Expenditures (PCE) Index rising just 0.2% in July. While overall inflation is cooling, sectors like food and energy continue to see moderate price increases, impacting household budgets. The ongoing improvement in inflation is encouraging, but many consumers are still grappling with elevated costs in essential areas.

The housing market continues to be a pain point. Americans now spend about 33.3% of their income on housing, driven by high mortgage rates and steep home prices. Despite demand, affordability challenges have led to fewer home purchases, pushing more people into the rental market and driving up rental costs. A cooling economy and rate cuts may offer some relief, but housing affordability remains a pressing issue for many.

On a brighter note, consumer spending has remained resilient, with retail sales rising by 1% in July. Strong consumer demand has been a key pillar of economic growth, although rising costs in housing and energy are straining household budgets. The potential Fed rate cut could support further spending, but affordability concerns may temper future growth.

Finally, with the U.S. presidential election approaching in November, market volatility is expected to rise. Historically, markets experience uncertainty in the lead-up to elections but tend to stabilise once results are clear. Investors will be closely watching policy implications, especially regarding taxation, regulation, and spending.

Overall, the U.S. economy continues to show resilience, but key challenges in housing and inflation require close monitoring. The

Federal Reserve’s decisions in the coming months will be crucial in shaping the economic outlook for the remainder of 2024.

As of September 2024, there are mixed opinions on whether the American stock market is overvalued. Some analysts believe the market is fully valued, with certain sectors and stocks trading at premiums. For instance, large-cap stocks are slightly above fair value, while small-cap stocks are considered undervalued.

Europe

The economic landscape has shifted since the turbulence in the markets last August, thanks to fresh data on economic growth and inflation. These factors are central to how central banks decide on future interest rate changes, which directly affects the stock markets this year.

In the second quarter of 2024, the UK economy grew by 0.6% and the Eurozone saw a 0.3% increase. While these aren’t huge gains, they are solid, especially considering the challenges both regions have faced. Last year, the UK was in a technical recession after two quarters of negative growth, and the Eurozone narrowly avoided the same outcome. Now, economists are forecasting around 1% growth for both the UK and the Eurozone for the year, marking clear progress.

 

Inflation also came into focus in August. After a slight uptick in July, inflation rates across Europe dropped again. Both the UK and the Eurozone reported a 2.2% year-on-year inflation rate, bringing it closer to the 2% target. This is a significant improvement from the near double-digit rates seen in 2022, helped largely by tighter monetary policies from the Bank of England and the European Central Bank (ECB).

On the markets, European stocks and government bonds remained steady after the ECB cut interest rates again—its second cut in three meetings. While no further cuts are expected from the Bank of England in September, economists are predicting two more before the year ends, likely in November and December. These reductions could boost growth even further across Europe, leading to a stronger stock market in 2024.

In terms of market performance, European equities started the month with sharp declines, mirroring global trends, but later recovered. Events like the unwinding of the yen carry trade—where cheap Japanese debt funded riskier global investments—and weak U.S. job data that raised recession fears impacted European markets. By month’s end, European stocks were up but still underperformed compared to the U.S., which had stronger support due to signals that the Federal Reserve may cut rates soon.

Strong corporate earnings also provided a lift to European markets. Softer inflation data from Germany and Spain have fuelled expectations that the ECB will cut rates further in the coming months. This optimism was supported by Eurozone inflation figures in August, which came in lower than expected at 2.2%. Additionally, business activity in the services sector, particularly in France, received a boost from the Paris Olympic Games, though manufacturing across the Eurozone continues to struggle.

The anticipated interest rate cuts from central banks, like the European Central Bank (ECB) and potentially the Bank of England (BoE), are generally supportive of stock markets. Lower rates reduce borrowing costs for businesses, potentially boosting corporate profits, and make stocks more attractive compared to bonds. If further rate cuts happen as expected in November and December, stocks could rally as growth prospects improve. Some sectors may benefit more than others. For example, consumer- driven industries might see a boost from stronger growth, while sectors like manufacturing could lag if challenges continue in that area.

United Kingdom

The UK economy showed mixed signals in recent months. After a 0.4% increase in May 2024, the nation’s GDP recorded no growth in June 2024. However, on a quarterly basis, the economy expanded by 0.6% in the three months leading up to June, largely driven by the resilient services sector. The latest Business Insights and Conditions Survey revealed that 77% of UK businesses reported stable hourly wages in July 2024, compared to the previous month. Meanwhile, 20% of businesses reported an increase in staffing costs over the past three months, reflecting continued pressures in labour markets.

Despite mixed economic growth, inflationary pressures remain a concern. Rising staffing costs reported by 20% of businesses, combined with ongoing supply chain issues, may contribute to upward pressure on prices. The Bank of England continues to monitor inflation closely, with rates still elevated but expected to gradually ease toward the end of 2024, provided energy prices and labour costs stabilise.

The International Monetary Fund (IMF) predicts that the UK is heading toward a soft landing, with expectations of growth recovering in 2024 and further strengthening in 2025. However, we maintain a cautious view and suggest that growth is likely to remain flat over the next 12 to 18 months, with recession risks still elevated.

The outlook for the FTSE 100 for the rest of 2024 appears cautiously optimistic. Analysts predict that the index could fluctuate between 7,500 and 8,000 points, with some expecting it to surpass the 8,000 mark. Factors contributing to this positive outlook include strong investor sentiment, potential interest rate cuts, and steady earnings and dividend growth.

By December 2024, the FTSE 100 is expected to reach around 8,160 points, which, combined with an attractive dividend yield, suggests the potential for double-digit returns.

Japan

Japan’s real GDP growth remains modest. Projections indicate growth of 0.1% for 2024, with a more substantial increase of 1.6% expected in 2025. This outlook is driven by domestic demand, wage increases, and recoveries in key sectors such as motor vehicles and inbound tourism.

Inflation is projected to stabilize around 2% in 2024, influenced by continued wage hikes and businesses passing on costs to consumers. Core inflation, excluding fresh food and energy, is expected to decelerate from 4.2% in September to 1.8% by the end of the year, reflecting a potential cooling in underlying price pressures.

The Bank of Japan (BOJ) is likely to maintain its accommodative stance, with short-term real interest rates remaining in negative territory. However, gradual rate hikes could begin in early 2025 as inflation stabilizes and wage growth becomes more sustainable.

Key risks to Japan’s economic outlook include a global economic slowdown and the appreciation of the yen, which could reduce export competitiveness. The BOJ’s recent decision to remove its bond yield cap is expected to influence Japan’s economy in several ways due to rising long-term interest rates. The removal allows long-term interest rates to rise above 1%, signalling a gradual exit from ultra-loose monetary policy. Higher interest rates could strengthen the yen, potentially affecting Japan’s export competitiveness. While higher borrowing costs could be a challenge, rising interest rates may also reflect growing confidence in the economic recovery.

Japanese stocks are currently seen as offering good value compared to their past performance and other major global markets. Due to companies are expected to continue showing steady growth, thanks to strong management practices and a focus on rewarding shareholders. This includes higher dividends and share buybacks, which help boost investor confidence.

Analysts are optimistic about the future of Japan’s stock market. They anticipate increased consumer spending and steady economic growth. By the end of 2024, Japan’s main stock index, the Nikkei 225, is expected to rise to around 40,300 points.

China

As we assess the current state of China’s economy in September 2024, several significant challenges stand out, signalling a complex and uncertain path ahead.

Firstly, recent data reveals a slowdown in two key areas: factory output and retail sales. Manufacturing, once a pillar of growth, is facing headwinds. At the same time, consumer spending is not recovering at the pace we’d hoped. This is a clear indication that both the production and consumer sectors are struggling to maintain momentum.

Adding to these difficulties is the ongoing real estate crisis. China’s property market, once a key driver of economic expansion, is now in distress. Developers are facing financial hardships, many projects have stalled, and construction has come to a halt. This is dragging down economic growth, and recovery in this sector remains slow.

A further complicating factor is the high level of local government debt. Many local authorities are heavily indebted, which limits their ability to invest in infrastructure and other key projects that could stimulate economic activity. This debt burden restricts their capacity to contribute meaningfully to growth, compounding the overall economic strain.

Globally, China’s economy is also feeling the pressure from weak demand and ongoing trade tensions. Exports, which have long been a cornerstone of China’s growth, are now being hit by sluggish demand abroad, creating additional challenges.

In response to these issues, the Chinese government has taken steps to help state-owned enterprises (SOEs) manage the real estate sector’s overdevelopment and related financial challenges. Key strategies include encouraging mergers and acquisitions, enabling SOEs to acquire distressed private developers and ensuring that key projects are completed. SOEs have also been granted easier access to financing, easing borrowing restrictions, and allowing them to continue vital infrastructure projects.

These measures are stabilizing the sector, but progress remains slow.

To further support the economy, the government is pushing SOEs to shift focus toward affordable housing and urban redevelopment. This is aimed at addressing oversupply in the luxury market and meeting the demand for more affordable homes. By redirecting efforts to urban renewal, the government is hoping to revitalise the real estate sector without overbuilding.

Despite these efforts, there are limits to the effectiveness of China’s stimulus measures. Much of the focus has been on infrastructure rather than consumer spending, while structural issues such as overcapacity in certain industries and an aging population continue to pose challenges. The government has also been cautious about introducing large-scale stimulus due to concerns about financial stability.

Looking ahead, China’s economy is expected to grow at a slower pace, with forecasts around 4.5% for 2024. Deflationary pressures remain a concern, making it difficult for stimulus measures to gain traction.

In conclusion, while the Chinese government is working to support the economy, deep-rooted challenges and a cautious approach to policy mean that robust growth may be elusive in the short term. However, with targeted measures and reforms, there is hope for steady progress.

Emerging Markets

As developed economies slow and begin reducing interest rates, emerging markets face a unique set of challenges and opportunities. These shifts in global economic conditions can significantly reshape the financial landscape of these regions, and it’s important to consider both sides of the equation.

Capital Flows: When developed nations lower interest rates, it can attract capital back to emerging markets, offering a boost to their financial systems. However, if slower growth in developed economies persists, investors may prefer safer, more stable assets, leading to capital outflows from riskier emerging markets. These outflows can create liquidity shortages, restricting the funds needed for investment and growth. This disruption can hinder economic development, as the availability of capital is a key driver of progress in emerging markets.

Currency Depreciation: With capital outflows, many emerging market currencies tend to weaken. A depreciated currency can make imported goods more expensive, driving up inflation. For countries that rely heavily on imports like energy, technology, or raw materials, this poses a significant challenge. Rising costs erode consumer purchasing power, inflate production expenses, and place pressure on businesses, further slowing economic growth.

Debt Servicing: Another consequence of currency depreciation is the increased cost of servicing foreign-denominated debt. As the value of local currencies falls, emerging market nations with large amounts of debt in foreign currencies—such as U.S. dollars—find it more expensive to repay these loans. This increase in debt burdens can lead to heightened financial stress, sometimes even threatening the overall stability of these economies.

Despite these challenges, there are emerging markets poised to benefit from the shifting landscape.

Commodity Exporters: Countries like Brazil and South Africa, which are rich in natural resources, may gain from higher global commodity prices. Slower growth in developed economies can lead to shifts in commodity demand, benefiting nations that specialize in exporting agricultural goods, minerals, and energy. The resulting revenue boost could help offset some of the challenges caused by global economic slowdowns.

Manufacturing Hubs: Nations such as Vietnam and India, with strong manufacturing sectors, may also thrive. These countries are well-positioned to meet the ongoing demand for manufactured goods, especially as global supply chains seek to diversify. Their diversified trade relationships and competitive manufacturing capabilities make them attractive in this environment.

Resilient Asian economies like South Korea, Singapore, and Taiwan have built strong fiscal policies and economic frameworks that reduce their exposure to global interest rate fluctuations.

South Korea: With a robust industrial base and diversified exports, South Korea maintains high foreign reserves and low foreign debt, helping it withstand global shocks, particularly in electronics and automobiles.

Singapore: Its well-regulated financial sector, low public debt, and strong reserves make Singapore one of Asia’s most resilient economies, well-positioned to handle global volatility as a financial hub.

Taiwan: Taiwan’s economy, driven by technology and semiconductors, benefits from conservative fiscal policies and low debt, ensuring steady growth and resilience against external pressures.

These markets present opportunities for investors looking for value and growth potential.

Gold

Gold has continued its impressive performance in 2024, with prices rising 18.5% year-to-date and reaching record highs. On August 2, gold closed at $2,443.29 per ounce, just below its all-time peak of $2,483.60 on July 17. According to the World Gold Council’s latest report, total gold demand hit 1,258.2 metric tons in Q2 2024, marking the highest demand ever recorded for this period and a 4% increase from 2023.

Recent data highlights potential challenges. The Over the Counter (OTC) market, dominated by institutional investors, saw a dramatic 53% year-on-year increase to 329.2 tons, driven by portfolio diversification. This surge could raise concerns about the sustainability of demand if investors shift away from gold once their portfolios are sufficiently diversified.

In contrast, consumer demand has weakened. Jewellery consumption fell 19% to 390.6 tons, and official coin demand dropped 38% to 52.7 tons. Significant declines in China and India—35% and 17% respectively—reflect a pullback due to high gold prices. China’s net imports from Hong Kong also fell by 18% in June.

India’s recent cut in import duty from 15% to 6% may boost demand temporarily, but this effect is expected to be short-lived. ETFs experienced a net outflow of 7.2 tons in Q2, following a large 113-ton drop in Q1. Central bank purchases decreased to 183.4 tons, down from 299.9 tons in Q1 but still 6% higher than last year. Despite these mixed signals, gold remains attractive due to expectations of U.S. monetary easing and geopolitical uncertainties, which may keep prices within a narrow range for the rest of the year.

Oil

West Texas Intermediate (WTI) oil prices have recently fallen from around $85 to below $75 per barrel. This decline is largely attributed to concerns over weaker demand from China and potential U.S. recession fears, which have dampened future demand projections. The oil market is also grappling with the prospect of an impending U.S. recession, increasing selling pressure.

Nevertheless, the drop in oil prices has been somewhat offset by uncertainties in crude oil supply, including losses from Libyan output and rising tensions in the Middle East. Additionally, a weaker U.S. dollar and expectations of a Federal Reserve rate cut have provided some support at lower price levels.

Looking forward, the short-term outlook for oil remains bearish, with further price weakness anticipated. A key factor to watch is OPEC+’s response. The organization had considered increasing production in October, but recent statements suggest this decision may be paused or adjusted based on market conditions. While geopolitical risks in the Middle East could drive prices higher, current demand concerns are overshadowing potential supply disruptions.

Agricultural Commodities

The Indian Ocean Dipole (IOD) continues to influence global weather patterns. A positive IOD typically causes increased rainfall and potential flooding in East Africa, stronger monsoon rains in India, and a higher risk of drought in Indonesia, while reducing rainfall and increasing temperatures in central and southern Australia.

Between June and August 2024, weather patterns show below-average rainfall for South America and South Africa, with most southern hemisphere crop-producing regions expecting average to above-average rainfall. In the northern hemisphere, the eastern United States is likely to receive average to above-average rainfall, while central and western regions may see below- average precipitation.

Canada, much of the EU, southern India, and China are expected to have average to above-average rainfall, whereas parts of the UK and Ukraine may experience drier conditions. This rainfall could help replenish soil moisture in western Russia.

There is also a high likelihood of a La Niña event developing, which usually leads to below-average rainfall in East Africa, Central and South Asia, southern South America, and parts of North America, while increasing rainfall in Australia, Southeast Asia, southern Africa, Central America, and northern South America.

Sector	12 Month Forecast	Economic and Political Predictions
AUD	65c-72c	Overall, the RBA is in no hurry to ease policy, expecting it will take some time before inflation is sustainably within the 2-3% target range. Moreover, the potential easing by the Fed, contrasted with the RBA’s likely prolonged restrictive stance, could support AUD/USD in the coming months.
Gold	Hold $US1800-/oz- $US2600/oz	Geopolitical tensions and political uncertainty, especially with a tight U.S. presidential election looming, are likely to keep gold attractive as a haven. These factors may result in gold prices stabilising within a relatively narrow range for the rest of the year.
Commodities	BUY   OIL HOLD	We are constructive on commodities as key markets such as oil and copper remain finely balanced and are supported by limited inventories, producer discipline and/or supply shortfalls, with demand potentially benefitting from a China recovery or stimulus.
Property	BUY .	Office REITs offer attractive discounts to NTA. Fall in occupancy rates has stabilised and net operating income has picked up. Retail REITs are fairly priced. Occupancy rates strong and net operating income has accelerated. Industrial REIT Goodman Groups forward PE is trading at the upper bound of its historical average. It could be vulnerable to a correction if double digit earnings growth is not maintained.
Australian Equities	Accumulate	Valuations are more attractive relative to the US and broader global equities. Australian equity price to 12 months forward earnings trading near its historical average. We favour exposures to defensive sectors, such as health care, staples, utilities, and technology.
Bonds	Begin to increase duration. 3-5yrs	As interest rates stand at or near peak for most economies and inflation is likely to decline, albeit gradually and with volatility, some central banks are likely to start cutting interest rates, a process which has already started already in parts of the developing world.
Cash Rates	RBA to hold rates at 4.35%	Cash has appeal as a means of diversification and as a complement to the potential attractions of fixed income markets, and we maintain a moderately constructive view currently.