(Source: Merlea Macro Matters)

Summary

Global Political Shifts and Economic Uncertainty Fuel Market Volatility

The rising anti-EU sentiment in France, coupled with the uncertainty following Macron’s snap election, highlights societal divisions that will likely continue affecting risk markets. Similarly, the lead-up to the US election has already caused market anxiety, with participants recalling the volatility of Trump’s previous term after a lacklustre performance by Joe Biden.

This uncertainty is compounded by global interest rate tightening over recent years, which has led to anaemic growth across the G7, Australia, and New Zealand. Many countries are now relying heavily on migration to boost nominal GDP.

The US “exceptionalism” narrative from early 2024 is losing steam, with recent economic data coming in weaker than expected. This has raised concerns about whether the higher base rate from the Federal Reserve is starting to impact growth.

Business activity continues despite election-related excitement, with potential government changes in the US potentially stimulating business by reducing uncertainty. Historically, market activity tends to pick up after a brief slowdown post-election.

In the UK, a clear majority win in the recent election has set the stage for a more stable political landscape. Similar outcomes are expected in upcoming US Elections in November and Australian elections in 2025. This stability is beneficial for investors, fostering confidence and reducing volatility, with strong growth patterns likely to result in long-term capital growth.

Economic Outlook and Inflation

We anticipate a non-stimulatory global rate-cutting cycle throughout 2024, reflecting the victories from the peak inflation of 2022. Despite significant progress, achieving the final reduction in inflation has been challenging in both the US and Australia. In the US, a 23% drop in used car prices and a decline in owners’ equivalent rent (OER) are expected to aid in this process. Core personal consumption expenditure (PCE) inflation, the Fed’s preferred measure, is weakening, suggesting potential for rate cuts if growth data continues to soften.

Domestically, the Reserve Bank of Australia (RBA) faces a tougher battle against inflation. Despite acknowledging persistent inflation, the RBA adopts a dovish stance due to the fragile economy.

Global Economic Highlights

Globally, the European economy is expanding, with countries like Germany rebounding from mild recessions. China’s economic activity is stabilizing, and the global goods cycle is reviving. As US growth moderates and other regions improve, global growth should be well-supported.

Key Risks and Market Insights

Key risks include persistent inflation and a significant slowdown in economic activity. Despite early 2024 inflation upticks, recent data indicates a cooling trend, supported by strong labour markets. Growth moderation is crucial for economic rebalancing and further inflation reduction, presenting potential entry points for risk assets.

Regional and Sector Preferences

We have maintained our preference for cyclical regions from Japan to Europe. Emerging markets (EM) show promise, especially as China’s outlook brightens. Preferred sectors include telcos, tech, industrials, financials, and energy. Staples and some materials are becoming less favourable.

Credit Markets and Monetary Policy

The outlook for US high yield and investment-grade credit remains positive, with robust demand and healthy credit metrics. We expect the Federal Reserve to begin easing rates before year-end, anticipating modest mid-cycle cuts by mid-2025.

Global rate cuts present opportunities in sovereign bonds and currencies. Our preferred bond markets include peripheral Europe and the UK, with Japan being the least preferred due to expected rate hikes.

While markets have reacted strongly to various risks this year, a gradual cooling of nominal growth appears likely. This scenario supports a pro-risk stance but requires careful navigation of market volatility. We will be adjusting our Model Asset Allocation by reducing high-yield assets and increasing investments in government bonds and real estate, with a focus on European and emerging market assets.

Key concerns include the growth outlook, inflation persistence, timing of central bank easing, and potential election impacts. Our strategy involves a balanced approach, increasing defensive government bonds and real estate investments. Most central banks will continue cutting rates, with potential cuts by the Fed and Bank of England by mid-2025. Overall, we expect a weakening dollar, especially against the yen, which will benefit gold, commodities, and emerging market assets. Inflation trends vary, with stable US inflation, declining Eurozone and UK inflation, lower pressures in Japan, and near-zero inflation in China. Japan’s economy continues to perform well, though concerns over equity valuations and potential Bank of Japan tightening remain.

Bonds

Navigating the Bond Market Amid Economic and Political Uncertainty

Maintaining a diversified bond portfolio for the rest of 2024 could be a prudent strategy given the heightened macroeconomic uncertainty and ongoing geopolitical risks. The bond market has faced challenges this year, with stubborn inflation leading to losses and underperformance relative to global equities.

US Treasury bond yields have been inverted for almost two years, with short-term bonds yielding more than longer-term ones. Historically, an inverted yield curve predicted a recession, but this has not yet materialised. Larger economies like the United States have stayed on track, bolstered by government stimulus and a robust labour market. Recent interest rate cuts by Switzerland, Sweden, Canada, and the European Central Bank may signal more cuts ahead.

Impact of US Presidential Election on Yields

The upcoming US presidential election adds another layer of uncertainty. The first presidential debate between Joe Biden and Donald Trump led to a spike in yields, with the benchmark 10-year yield rising to 4.34%. Investors are betting on higher inflation under a potential second Trump term due to his trade policies, government spending, and lower tax revenues, which could increase fiscal deficits and US debt levels.

Federal Reserve and Bond Market Dynamics

Concerns about widening fiscal deficits and rising government debt could limit any bond market rally as the Federal Reserve nears the end of its aggressive rate-hiking cycle. Despite this, shorter-dated Treasuries might still rally if rate cuts occur. However, the outlook for longer-dated Treasuries has become more uncertain. These longer-term bonds reflect expectations for economic growth, inflation, and the fiscal outlook.

Australian Yield Curve and Credit Strategy

The Australian yield curve is currently seen as undervalued at certain points. There is a potential to increase positions if the economic outlook worsens. Our credit strategy favours high-quality, investment-grade issuers with resilient business models, strong earnings, and conservative balance sheets.

Credit spreads have tightened, but all-in yields for low-risk investment-grade credit remain attractive. We have been selectively taking advantage of these yields in highly rated corporate bonds and structured credit.

Inflation and Government Bonds

If inflation remains above the Reserve Bank of Australia’s target range for an extended period and interest rates are hiked further, government bonds are likely to face pressure. Conversely, if rate cuts are delayed, shorter-dated government bonds may underperform compared to longer-dated ones.

In summary, the bond market faces a volatile landscape due to economic uncertainty and geopolitical risks. A diversified and disciplined approach to investment will be essential to navigate these challenges and achieve portfolio goals.

Listed Property

REIT Sector Adjusts Expectations Amid Inflation Concerns

The real estate investment trust (REIT) sector entered 2024 with hopes for swift interest rate cuts. However, unexpectedly strong first-quarter inflation data has pushed these expectations further into the year. REITs are sensitive to interest rates; higher rates increase borrowing costs and decrease property values. Elevated rates also make the high dividend yields offered by REITs less attractive on a risk-reward basis. Despite this, the sector is seeing renewed tailwinds.

Recent economic data suggests a slowdown in the Australian economy, keeping the possibility of an interest rate cut on the table by year-end and largely ruling out further hikes. The federal budget could also benefit the listed property sector, with $6.2 billion allocated to housing supply initiatives, including increased rent assistance, a lower foreign investment fee for build-to-rent properties, and $2 billion in new infrastructure spending for Western Sydney.

Robust Tenant Demand Drives Growth

Tenant demand across the country remains strong as businesses seek to establish new premises or expand existing ones, marking a broader commercial rollout. Post-COVID, many companies are eager to resume operations, with a significant shift towards onshoring, where businesses house more products domestically rather than importing. The manufacturing, logistics, and distribution sectors are particularly robust, reflecting high demand patterns. This surge in demand is driving up rents, which in turn increases property values. However, persistent inflation remains a concern. While inflation is expected to gradually decrease, the strong demand is contributing to its stickiness. Current trends suggest inflation will stay higher for longer, although it is on a downward trajectory, as indicated by positive macroeconomic signals.

Despite inflation concerns, the outlook remains positive due to strong tenant demand and the anticipated easing of interest rates. As inflation decreases, interest rates are expected to follow, reducing the cost of debt and maintaining strong tenant demand. This environment presents opportunities to build new premises in a potentially lower interest-rate setting compared to the past year.

Investment Opportunities and Market Performance

The S&P/ASX 200 A-REIT index, which tracks the performance of Australian REITs and mortgage REITs, is up 8.50% year-to- date, compared to a 2.94% increase for the S&P/ASX 200. However, performance varies significantly across different property sub-sectors, such as office and industrial real estate stocks. Data centres are emerging as a significant theme among Australian- listed REITs, reflecting evolving market dynamics.

Listed property trusts on the ASX are trading at a discount, providing opportunities to acquire assets supported by a strong investor base. More assets suitable for portfolios are now available for sale than in recent years, indicating a return to a more balanced and stable economic pattern. In summary, while the real estate sector faces challenges from inflation and interest rate fluctuations, strong tenant demand and positive macroeconomic signals present opportunities for growth and investment. The outlook remains cautiously optimistic, with a focus on building resilience and capitalizing on emerging market trends.

Australian Equities

Australian consumers are feeling the pinch from rising interest rates. The RBA’s efforts to curb inflation by increasing the cash rate have led to higher variable mortgage rates, putting additional financial pressure on households. This has resulted in a noticeable decline in consumer spending, as individuals prioritize debt repayment over discretionary purchases.

Starting July 1, tax cuts are set to provide some relief to Australian consumers. While it is unlikely that all the increased disposable income will be spent, the tax cuts are expected to offer some support, particularly for lower-income consumers who may allocate the extra funds towards essential goods and services. This injection of disposable income could help mitigate some of the financial stress caused by higher interest rates.

An improvement in China’s economic activity is also anticipated to support the Australian economy. As one of Australia’s largest trading partners, a stronger Chinese economy can lead to increased demand for Australian exports, providing a boost to local industries and contributing to overall economic stability.

The inflation pulse in Australia lags the rest of the world by about six months due to the country’s later reopening from pandemic lockdowns. As a result, the RBA is expected to lag major central banks in reducing interest rates. While the current base case is for a rate cut in November, there is a growing risk that the RBA may stay on hold until early 2025.

This cautious approach reflects the need to balance inflation control with economic growth. In conclusion Australia’s economic outlook remains delicate as the country strives to avoid a recession. The combination of stressed consumers, rising interest rates, and slowing consumer spending poses significant challenges. However, the upcoming tax cuts and supportive economic activity from China offer some optimism. The RBA’s careful monitoring of inflation and interest rate adjustments will be crucial in navigating this narrow path and ensuring long-term economic stability.

 

Source: FactSet, Standard & Poor’s, J.P. Morgan Asset Management. Price-to-earnings is price divided by consensus analyst estimates of earnings per share for the next 12 months. Dividend yield is calculated as the next 12-month consensus dividend divided by most recent price. Price-to-book ratio is the price divided by book value per share. Price- to-cash flow is price divided by NTM cash flow. EY minus corporate bond yield is the forward earnings yield (consensus analyst estimates of EPS over the next 12 months divided by price) less the yield on the AusBond Credit (5-10y) Index.

As of July 2024, the sectors offering the best value in the Australian stock market are consumer staples, healthcare, decarbonisation materials and mining, energy, financials, REITs, and technology. These sectors are poised to benefit from increased consumer spending, global economic improvements, potential interest rate adjustments, and ongoing sector- specific growth trends. Investors should consider these sectors for potential value opportunities while keeping an eye on economic indicators and market conditions.

America

The first half of 2024 concluded on a strong note, driven by investor optimism for a potential “soft landing” which spurred a market rally, sending many global indices to new record highs. This positive trend was fuelled by encouraging signs of disinflation in the United States, which had stalled earlier in the year, but has recently resumed. This development has renewed hopes for a possible Federal Reserve rate cut later in the year.

Early 2024 saw little progress towards the Federal Reserve’s inflation goal, but recent economic and inflation data present a more promising outlook. Notably, the Federal Reserve’s preferred measure of underlying inflation, the core personal consumption expenditures (PCE) price index, decelerated in May.

The index rose just 0.1% month-over-month in May, marking the smallest increase in six months. Year-over-year, the index increased by 2.6% – the lowest since March 2021 and down from 2.8% the previous month. Additionally, home sales have slowed, delinquencies have risen, and consumer spending has moderated.

The labour market remains steady, despite showing some signs of moderating. A portion of the data shows that we’re starting to see the job market come into equilibrium, which should slow the pace of job growth. The overall unemployment rate ticked up to 4.1% in June, its highest level since 2020 and has increased in each of the last three months.

While Federal Reserve Chair Jerome Powell welcomed the recent data suggesting that inflation is on a downward trajectory, he emphasized the need for further evidence of this trend before considering a reduction in borrowing costs.

Analysts remain optimistic that the factors which propelled stocks higher in the first half will continue into the second half of the year. “The modest earnings acceleration is continuing, the economy and inflation appear to be moderating enough for the Fed to lower its benchmark rate, and the market tends to enjoy a year-end rally during presidential election years,” they note.

However, this optimistic outlook is not without risks. A more sustainable market rally will require broader participation, which has been lacking in recent months. The market has seen valuations climb, with a handful of mega-cap tech stocks driving the returns. This concentration of gains makes the market vulnerable to larger drawdowns if those stocks falter.

As we move into the latter half of the year, investors should remain cautious but optimistic, with an eye on Federal Reserve actions that could influence market dynamics.

Europe

In a surprising turn of events, the left-wing New Popular Front (Nouveau Front Populaire, or NFP) emerged victorious in France’s General Election. President Emmanuel Macron’s centrist Ensemble Alliance came in second, with Marine Le Pen’s far-right National Alliance party pushed into third place. None of the three main groups secured the 289 seats needed to control the 577- seat National Assembly, creating a fragmented and potentially volatile political landscape.

Investors are concerned that the NFP’s plans could undo many of Macron’s pro-market reforms. They also worry that political gridlock could stall efforts to reduce France’s debt, which stood at 110.6% of gross domestic product in 2023. The political wrangling is likely to result in a hung parliament, with negotiations potentially dragging on for weeks before an agreement is reached. This instability could persist until at least June 2025, as the president cannot call for new elections before then.

Volatility is expected to remain relatively high in European financial markets in the coming months, with the possibility of conditions worsening before they improve. Markets typically react negatively to uncertainty, and investors may have to wait until the autumn for the new French government to clarify its fiscal reform plans. By then, France, along with six other countries

targeted by the European Commission’s excessive deficit procedure, will need to provide detailed plans to bring public finances back in line with the stability and growth pact.

In the meantime, French and peripheral eurozone bond spreads could remain elevated, negatively impacting investor sentiment towards European financial markets. However, the improving economic backdrop and attractive valuations, along with EU institutional and ECB monetary backstops, could turn any election-related sell-off into a buying opportunity.

Further disinflation in the eurozone is unlikely to proceed smoothly, prompting the European Central Bank (ECB) to remain cautious about cutting rates. While inflation fell steadily to 2.4% in April 2024 from a peak of 10.6% in October 2023, it rebounded by 20 basis points in May 2024 to reach 2.6% in the headline index and 2.9% in the core index. This rebound was expected, mainly due to base effects from government support for domestic energy prices and public transport in some countries. However, May’s rebound illustrates the prolonged path to returning inflation to the 2% target.

Most of the base effects on energy and food prices that caused the fluctuations in inflation are now behind us. Second-round effects, such as wages, are now driving inflation. It will take a recovery in productivity and/or a narrowing of profit margins for inflation to recede further.

Given the slow decline in wage growth, this alignment of factors is unlikely to occur before mid-2025. In the meantime, we expect inflation to hover around 2.5%. The unexpected victory of the New Popular Front in France’s General Election has introduced significant political and economic uncertainty. While the market’s initial reaction may be negative, the improving economic conditions and support from EU institutions could provide a silver lining. Investors should expect continued volatility but be prepared potential buying opportunities as the situation unfolds.

United Kingdom

The U.K.’s Labour Party has secured a significant victory in Thursday’s election, set to end the Conservatives’ 14-year rule. This political shift occurs amidst ongoing economic uncertainty in the country. Interest rates remain elevated as the Bank of England continues its battle against high inflation following the Covid-19 slowdown. The two main political parties campaigned on different economic and financial manifestos, each likely to impact the investing environment in distinct ways.

One of Labour’s key pledges to increase taxes on the compensation received by private equity fund managers has raised eyebrows and sparked questions about broader economic implications. Despite initial market stability following Labour’s win, analysts anticipate that U.K. assets will become more attractive moving forward. Despite concerns over the strong showing of the right-wing Reform UK Party, Labour’s victory is expected to present the U.K. as a relatively stable environment. This perception, combined with anticipated regulatory reforms, could enhance the attractiveness of U.K. assets.

Labour’s plans to increase fines for water companies might add pressure to the already burdened utilities sector. Conversely, the party’s pledge to boost the country’s defence budget could benefit U.K. aerospace stocks through increased spending on new technology and equipment. Additionally, Labour’s commitment to building new affordable homes is likely to positively impact the property and housing sectors.

As interest rates are projected to fall, mortgage rates are expected to follow suit, potentially stimulating the housing market by making buying or selling homes more accessible. This uptick in the housing market could also have positive knock-on effects for related businesses such as furniture and DIY shops. The Labour Party’s electoral success marks a significant shift in the U.K.’s political landscape. While the full economic implications are yet to unfold, the new government’s policies are set to influence various sectors differently.

Japan

Japan is in the early stages of inflation normalization, which is expected to lead to shifts in consumer purchasing behaviour and household asset allocation decisions. Companies are managing their balance sheets more effectively, likely resulting in higher returns and increased growth as capital is allocated more productively.

Wage gains are projected to persist into 2025, with real wages turning positive. Higher wages should compel companies to invest in productivity improvements, thereby accelerating economic growth. Wage increases are crucial as they drive domestic price rises. Core inflation, which includes all prices except fresh food but includes energy, has exceeded 2% year-on-year for the last two years, outpacing wage growth for much of that period. Given the relatively severe labour shortages in Japan, ongoing upward pressure on wages should translate into sustained, domestically driven inflation.

The Bank of Japan (BoJ) is likely to raise rates minimally by year-end to avoid undermining progress in combating deflation and low inflation, even if this, risks weakening the yen further.

Although the BoJ recently ended its negative interest rate policy, it is not expected to embark on a significant rate-hiking cycle that aligns Japanese rates with those of other developed markets. This approach should keep the yen relatively weak, maintaining the competitiveness of Japanese exports.

Valuations remain reasonably attractive despite the Nikkei 225 nearing its record high. Japanese stocks continue to trade at a low price-to-book value. However, international investors should consider how yen weakness relative to other currencies will impact the value of their returns.

Japan’s economic outlook is buoyed by inflation normalisation, wage growth, and prudent corporate balance sheet management. While the BoJ’s cautious approach to raising rates may result in a weaker yen, it supports the competitiveness of Japanese exports and attractive stock valuations.

China

Beijing remains dedicated to achieving its economic goals while minimizing spending and maintaining financial discipline, particularly concerning property developers and local governments that previously benefited from the property market boom. The authorities are keen to redirect resources from housing to manufacturing, indicating a reluctance to reignite the property market or inject significant fiscal support into it. This approach presents a challenging balancing act.

Consequently, rescue efforts have appeared modest and are expected to remain so. We foresee a gradual process where the authorities incrementally add resources to support the housing market. Combined with a continued reduction in housing supply, this could lead to market stabilization at a low equilibrium over the next six to twelve months.

The U.S.-China trade war and geopolitical tensions have been significant headwinds in recent years. Over the past five to six years, China’s share of total U.S. imports has notably declined. However, on a global scale, China’s market share of trade has held up well. While some manufacturing has shifted to Vietnam, Mexico, ASEAN, and other regions, China continues to supply many high-end components and technology-intensive products.

Despite parts of the global supply chain moving out of China in some sectors, the country has maintained and even strengthened its market share in higher value-added areas. Amid these challenges, positive changes are emerging in China, presenting new opportunities for investors. Many Chinese companies are exploring new growth drivers through innovation, enhancing their global competitiveness in high-end manufacturing.

Favourable shifts in supply and demand patterns are occurring in certain traditional industries. As every economic cycle sees market leaders change, investors must break free from path dependency, move beyond index-weighted stocks, and delve deeper into new investment opportunities in areas experiencing positive changes. Structural differentiation will likely continue, and investors who adapt to changing dynamics and make informed stock selections are more likely to achieve desirable returns.

Many traditional industries in China have experienced prolonged downward cycles over the past 10 to 15 years. As supply continues to contract, supply and demand rebalancing is gradually occurring in certain sectors. When demand recovers and supply bottlenecks emerge, relevant companies regain some of their bargaining power and are poised to enter a profit growth cycle lasting several years.

We can likely observe these favourable supply and demand dynamics in sectors such as shipbuilding, offshore oilfield services, aircraft leasing, and industrial metals (copper and aluminium). After experiencing a prolonged period of downturn, these traditional sectors have temporarily fallen off investors’ radar screens. Consequently, the market may not fully recognize the positive changes in their fundamentals. We believe that with accelerated growth in demand and improved profitability, the investment value of these sectors is likely to be reevaluated.

Emerging markets

Although China’s strict oversight of social media is a disadvantage in the current global AI race, leading Chinese internet companies like Tencent, Alibaba, and Douyin (TikTok) possess some of the best datasets globally for training their large language models. Their significant investments in AI position them well for future advancements, though their commercial plans remain uncertain.

Beyond AI, the outlook for emerging markets is overwhelmingly positive. For years, companies in these markets have excelled in critical sectors such as semiconductor manufacturing, led by Taiwan Semiconductor Manufacturing (TSMC). Recently, they have also become leaders in green energy sectors, including solar panels (Longi), batteries (Contemporary Amperex Technology (CATL) and LG Group), and electric vehicles, with China now the world’s largest auto exporter, spearheaded by BYD. Given the robust ecosystem across various industries in emerging markets, we foresee similar dominance in robotics and clean energy.

Challenges in emerging markets do exist. However, we believe the strategic investment opportunities remain compelling for the remainder of 2024. Despite the broad-based selling in several emerging markets, particularly in China, valuations appear attractive.

Emerging markets with strong trade ties to advanced Europe are benefiting from a modest recovery in household spending, positively impacting manufacturing production. In emerging Asia, manufacturing sectors exposed to the improving electronics trade cycle are also rebounding.

Continued strong demand from the U.S. is boosting manufacturing production in several Latin American economies. However, the expected slowdown in U.S. growth and the delayed effects of high interest rates in other advanced economies mean that the pace and duration of trade cycle improvements are uncertain. While the average outlook for emerging market economies (EMEs) is stronger than that for advanced economies, it remains weak by historical standards.

With project GDP growth to remain subdued at 3.9% this year and 4.0% in 2025. Many EMEs continue to face spending pressures due to ongoing geopolitical tensions (defence spending) and fiscal support to mitigate the negative effects of disruptions in international trade. We anticipate that emerging market companies will increasingly lead the “new economy” in the coming decades.

Gold

Gold has performed remarkably well in 2024, rising by 15% y-t-d and outpacing most major asset classes. Gold has thus far benefitted from continued central bank buying, Asian investment flows, resilient consumer demand, and geopolitical uncertainty.

With a few exceptions, the global economy is showing wavering growth indicators – eager for rate cuts – amid lower but still uncomfortable inflation. And the market’s outlook is not too dissimilar. Analysis suggests that the gold price today broadly reflects consensus expectations for the second half of the year. However, things rarely go according to plan. And the global economy, as well as gold, seem to be waiting for a catalyst.

For gold, we believe the catalyst could come from falling rates in developed markets, that attract Western investment flows, as well as continued support from global investors looking to hedge bubbling risks amid a complacent equity market and persistent geopolitical tensions. Gold’s outlook is, of course, not without risks. A sizable drop in central bank demand or widespread profit- taking from Asian investors could curtail its performance. As it stands, however, global investors continue to benefit from gold’s role in robust asset allocation strategies.

WTIS

Organization of the Petroleum Exporting Countries has been firmly in the driver’s seat over the past few years, strategically cutting production to prop up prices. The group of oil producers and their allies, together known as OPEC+, however, agreed at a meeting earlier this month to start phasing out voluntary production cuts after the third quarter, while leaving other curbs in place.

For consumers, the OPEC+ decision to raise production limits could keep a lid on gasoline prices. For businesses, costs of oil- based input could also be held in check, contributing to easing inflationary pressures. With shifting expectations of when the Fed might cut rates, and potential output increases by OPEC+ in the fourth quarter, analysis have tempered their oil-price expectations for the second half of the year to $80-$85 per barrel.

Agriculture commodities

Food commodity prices declined by 4 percent in 2024Q1 (q/q), attributable to favourable supply conditions and robust exports from the Black Sea region. In contrast, unfavourable weather conditions, in part due to El Niño, pushed beverage prices— particularly cocoa and Robusta coffee—to record highs by the end of 2024Q1, a trend that continued in April. Food prices are expected to experience a marginal decline in 2024 and 2025, buoyed by favourable supplies and moderating El Niño.

However, the low-price levels could lead to periodic rallies for the following reasons:

• The weather over the Northern Hemisphere growing season is the most significant factor in determining prices’ path of

least resistance.

• Floods or droughts could reduce production, leading to higher prices this
• Ukraine and Russia are both leading exporters of wheat and other The ongoing war could impact production.
• Moreover, the Black Sea Port region is a critical export The war could cause delays or problems shipping

agricultural products from Europe’s breadbasket, leading to higher prices.

Inflation and global trade issues have increased fertilizer, equipment, and other production costs. Market prices must keep pace with rising input prices.

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	BUY $US1800-/oz- $US2200/oz	Optimism about US interest rate cuts as more economic data supports the case for a Federal Reserve pivot has also supported the outlook for gold this year. Lower borrowing costs are generally supportive of non-interest-bearing gold.
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. Falls in occupancy rates have 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 Group 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. .	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.

 

Global Markets
America	Underweight	We look for a U.S. mild recession to begin in 2024. Economic growth will slow. And so will inflation – but not enough. Equity returns will be lacklustre.
Europe       UK	Reduce       Accumulate	The surprise French elections caused material underperformance in French equities and bonds. We are likely to see ongoing volatility in European assets while this plays out. The presumption that UK interest rates will be reduced sooner and faster than in America has weakened the pound versus the dollar. That inflates the value of FTSE 100 company earnings translated back into pounds. Recent estimates suggest around four fifths of the FTSE 100’s revenues come from overseas.
Japan	Accumulate	The structural story in Japan remains intact, but the pace of change is slowing and lacks a short-term catalyst. Japanese mid-caps sit in a better place due to reforms & valuations.
Emerging markets	Start Buying	Election risk for key countries is now behind us. There are some early signs of China’s property market bottoming out, thanks to ongoing supportive policy measures. Though we’re cautious of the impact of slowing global growth
China	BUY	An unloved and underperforming equity market may be showing signs of a turnaround as China economic growth beats forecasts. The Chinese stock market has underperformed global financial markets for more than three years now, but there are signs the economic outlook may be improving.