Macro Matters October 2023

(Source: Merlea Macro Matters)


In September, global stock markets encountered challenges influenced by factors such as concerns about economic growth and expectations regarding interest rates. While the US experienced positive outcomes during its August earnings season, Europe did not witness the same level of positivity. Notably, the energy sector outperformed, but tech stocks faced setbacks. Government bond markets, particularly US Treasuries, encountered obstacles, and the US dollar strengthened in currency markets. Emerging market bonds were adversely affected by apprehensions about China’s economic growth. 

 We’re seeing an equity valuation crunch in the face of higher bond yields. While hopes of a ‘soft landing’ have improved, the inflation outlook is not yet good enough to justify the rate cuts the market had been anticipating in 2024. Higher oil prices – and the likely upward pressure on headline inflation in coming months – only add to the angst. Something had to give. 

Conflicting signals have created uncertainty for both bonds and equities. The Chinese economy’s challenges have unsettled markets, revealing persistently low domestic consumption due to a weakened property sector. Despite this, authorities have not provided sufficient stimulus to bolster growth. 

Concurrently, the resilience of the US economy has prompted a reconsideration of when the US Federal Reserve might begin to ease policy, leading to an increase in real interest rates that has, in turn, exerted downward pressure on equities. Investors anticipate that the Fed will maintain higher rates for an extended period, given unexpectedly robust data. However, we believe that economies are starting to feel the effects of tighter policy, resulting in a slowdown in growth to tepid levels. 

While US and European corporate earnings have remained robust, thanks to surprisingly resilient economic growth, there are doubts about the sustainability of this trend. Earnings growth is expected to decelerate, especially in Europe, as higher interest rates and escalating wages erode profit margins. Additionally, higher real yields are beginning to exert a downward impact on equity multiples. Moreover, labour market conditions are likely to play an increasingly significant role in equity markets, particularly in relation to returns relative to bonds, historically known for closely tracking each other. 


In the aftermath of the financial crisis, the debt landscape of numerous developed countries has witnessed a significant and persistent surge, sparking concerns that ripple through the financial waters. At the heart of this unease is the response of central banks, which are pushing up interest rates to counter mounting inflation—a move that could spell trouble for the bond market.  

In developed nations, the average ratio of debt to Gross Domestic Product (GDP) has climbed to approximately 100%, a marked increase from the pre-2008 crisis level of under 70%. Despite the escalating government borrowing, the bond market, the arena where these debts are traded, appears relatively unperturbed. However, factors traditionally influencing national debt—such as inflation, economic growth, and government spending—hint that the debt-to-GDP ratio may further rise in developed countries. As nations increase their borrowing, there looms a risk that interest rates could remain higher for an extended period, surpassing investor expectations. 

In major economies, notably the United States, there are no imminent plans to trim spending. With current fiscal strategies, it seems the ratio of debt to the size of the U.S. economy will continue its upward trajectory. Should interest rates fail to decrease again, this could compound economic costs through elevated interest rates. Europe appears to have a more disciplined fiscal policy. Many countries in the region are projecting a surplus in the future. However, the success of these plans hinges on variables like economic growth, energy cost containment, and public acceptance of reduced government spending. While progress is being made, the pace may not be rapid enough to significantly diminish the debt burden. We posit that there is an underappreciated risk, as the outlook does not reflect a particularly eager or aggressive stance from any government in reducing debt. 

It’s noteworthy that high government debt does not always instigate panic in the bond market. Japan stands as an example, boasting a debt-to-GDP ratio exceeding 200%, twice that of the United States. Japan’s stable bond market is sustained by unique factors—more money coming in than going out, low private debt levels, minimal inflation and economic growth, and robust demand for its bonds. Similar conditions were present in major Western economies after the financial crisis, featuring low or negative interest rates and sluggish economic growth. This created an era of extended low-interest rates and heightened demand for bonds. 

However, this scenario is not destined to endure indefinitely. If inflation resurfaces, as witnessed in the last two years, the landscape for fixed-return investments, such as bonds, will undergo a significant transformation. Investors will seek greater returns as high inflation can erode returns, especially when interest rates are low. The cessation of easy monetary policies by central banks brings consequences for maintaining high debt-to-GDP ratios—higher interest costs. If economic growth and inflation fail to keep pace over time, doubts emerge about who will be willing to purchase these bonds. 

In essence, this is not a fanciful narrative. In this economic cycle, we have witnessed how these market dynamics can precipitate a significant upswing in long-term interest rates. As we navigate these economic waters, it is crucial to be cognisant of the potential challenges posed by surging debt and the nuanced responses of global markets. 

Listed Property 

The detrimental effects of escalating interest rates are evident in the recent performance of Australian Real Estate Investment Trusts, impacting both capital and income associated with commercial properties. The initial setback occurred 18 months ago when property stocks experienced a sell-off, followed by a subsequent unwinding of valuations. The most recent setback is reflected in the bottom-line income and distributions. Although rental income, the top-line revenue, has remained resilient, especially in leases tied to CPI with consistent rental growth, these gains have been offset for most A-REITs by heightened finance costs. These costs have surged due to an “unprecedented” increase in interest rates, amplified borrowing, and escalating hedging expenses. 

Source: YCM, Macquarie Bank Research. Basket of passive A-REIT stocks: CQR, DXS, GPT, VCX, SCG. NTA’s at 31 Dec 2022. 

Consequently, the real estate sector has emerged as one of the weakest performers in the first half of the year due to the incremental rise in both interest rates and inflation. Moreover, the Australian government’s 10-year bond yield has surged by more than double, reaching 4.6 percent this year, adversely affecting A-REIT returns in comparison to the Australian benchmark S&P/ASX 200. Nevertheless, the outlook for A-REITs appears promising for three primary reasons. 

1) Improved Capitalisation Rates: Cap rates, denoting a property’s net operating income as a percentage of its asset value, have experienced a significant uptick due to the surge in interest rates. During the era of near-zero rates, various commercial property segments had cap rates as low as 3-4%, offering minimal reward for the associated risks. 

2) Restricted Supply: The escalation in interest rates has resulted in a contraction of credit to property developers, curbing property supply. This limitation is viewed positively for the sector, creating a bullish scenario. 

3) Healthy Balance Sheets: Commercial REITs boast robust balance sheets, having learned from the Global Financial Crisis (GFC). Unlike the past, when many struggled due to high leverage during an unprecedented economic downturn, most REITs refrained from accumulating more debt during the period of low rates. Currently, loan-to-value ratios stand at 30-35%, and debt duration has been extended, alleviating the pressure to repay loans in the short term. 

While the futures market predicts a potential rate rise, bringing the terminal cash rate to 4.35% in November, with the chance of some cuts in 2024, historical experience cautions against unwavering predictions. The market has previously underestimated the impact of higher rates on property and is likely to do the same for potential rate decreases in the upcoming year. 

In theory, REITs should benefit from declining rates, contingent on factors such as gearing and the management of interest rate books. However, as history has shown, adaptability is key, and unforeseen changes can reshape outcomes in the dynamic landscape of financial markets. 

In the event of rate cuts, it tips the following to benefit most with 7-12% uplifts: Charter Hall Long Wale REIT (ASX: CLW), Healthco Healthcare and Wellness REIT (ASX: HCW), Centuria Office REIT (ASX: COF), Centuria Industrial REIT (ASX: CIP) and Charter Hall Retail REIT (ASX: CQR). The reason for this view is that these companies have the lowest hedge ratios and therefore would have full exposure to (and therefore the benefit of) a cheaper cost of debt. REIT valuations are reasonable enough to positive on returns over a 5–10-year timeframe. 

Australian Equities 

The current economic situation appears to be in a holding pattern, showing signs of a potential soft landing. While there are positive indicators, such as a jobless rate remaining near 4%, wages potentially catching up to or even surpassing inflation, and the federal budget maintaining its positive balance, these outcomes are not guaranteed. 

It’s important to note that in the coming quarter, there may be an inflationary uptick. Factors such as automotive fuel prices acting as a propellant, rising electricity and gas costs, and a weaker Australian dollar may contribute to this. The Reserve Bank, in its decision to keep interest rates stable for the fourth consecutive month, acknowledged the challenges faced by households enduring a “painful squeeze” from 12 rate rises and cited global uncertainty stemming from ongoing stresses in China’s property market. 

Barring any unexpected negative developments, it seems that the Reserve Bank of Australia’s rate hikes have nearly concluded. The labour market is described as “tight,” rather than “very tight,” and the economy is slowing but not stalling, according to the Reserve Bank. 

The recent release of national accounts by the Australian Bureau of Statistics supports this optimistic outlook. GDP growth in the June quarter accelerated 0.4% from the previous quarter, aided by a growing population. Although commodity prices, which have historically boosted profits, dividends, and royalties, declined in the June quarter, the volume of net exports increased, providing a substantial uplift to quarterly GDP growth. 

Government spending prompted by Covid-19 continues to buoy the economy, with new public demand contributing positively to GDP growth. Despite falling inventories and household spending, trade and public spending data are helping to balance these factors. 

Australian business conditions showed ongoing resilience to higher interest rates, defying expectations of a sharp economic slowdown, even as consumer sentiment remains “deeply pessimistic”. 

Job advertisements and consumer confidence surveys suggest positive trends, indicating a potential emergence from economic challenges. The recent rise in national housing prices, coupled with substantial savings buffers and higher interest income, adds to the positive outlook. While uncertainties persist, proactive actions by around 800,000 borrowers anticipating a “mortgage cliff” in 2023, along with a notable increase in refinancing, demonstrate a level of preparedness and resilience within the housing market. 

Global markets 

The eruption of military conflict in the Middle East has the potential to introduce new challenges for central bankers. This situation not only threatens to give rise to inflationary trends but also casts a shadow over economic confidence. It comes at a time when there had been increasing optimism about containing the price surge triggered by the pandemic and Russia’s invasion of Ukraine in 2022. 

There were echoes of the 1960s and 70s with the outbreak of conflict in the Middle East between Israel and Hamas which might just be the start of new cycle of rising geopolitical tensions. Not dissimilar to what occurred during those decades, gold and oil seem to be trading in similar patterns. 

The recent violence in Israel, where hundreds have lost their lives due to the conflict between Hamas and Israel, adds a layer of uncertainty to the global landscape, already shaken by Russia’s actions almost 20 months ago. The impact of this conflict remains uncertain and will hinge on factors such as its duration, intensity, and the extent to which it spreads across the region. Nevertheless, the war has the potential to introduce unpredictable forces into a global economy that was already experiencing a slowdown, particularly affecting U.S. markets adjusting to the likelihood of the Federal Reserve maintaining high interest rates for an extended period. 

The outbreak of conflict in a region crucial for oil production raises concerns about potential consequences. Central banks are faced with the dilemma of whether this situation will lead to new inflationary pressures, given that the Middle East houses major oil producers like Iran and Saudi Arabia, as well as critical shipping lanes through the Gulf of Suez. Alternatively, there is a risk that the conflict could severely dent economic confidence, leading to a slowdown. 

As conflict unfolds in a significant oil-producing region, market reactions from key players such as Iran and Saudi Arabia will be closely monitored to gauge the possibility of another surge in prices. The coming days will witness trading activities on bond and stock markets, providing insights into how markets anticipate the potential fallout from this geopolitical development. 


Once again, the recent surge in interest rates has proven to be too rapid for the stock market to handle. In September, Treasury yields experienced a significant increase, dampening the momentum of a robust stock market. Investors had to grapple with the realization that interest rates might remain elevated well into 2024. 

The yield on the 10-year Treasury, which impacts rates for mortgages and other loans, surpassed 4.50% in September and continues its upward trajectory, reaching its highest level in nearly two decades. The 2-year Treasury yield, which reflects expectations for the Federal Reserve’s interest rate policy, surpassed 5.00% in September and is steadily rising. Elevated bond yields make it less attractive for investors to venture into riskier stocks, particularly those of expensive technology companies. 

September has been a difficult month for US stocks and government bonds as markets added to bond’s risk premia partly in response to guidance from the Federal Reserve that interest rates are set to stay higher for longer than previously anticipated. 

The early autumn decline in bond prices, leading to higher yields, disrupted what had been a solid recovery for the S&P 500 and other major indexes in 2023. This trend may persist throughout the remainder of the year and into 2024. Despite a more than 17% surge in the S&P 500 through July, a dip in August, and a 5% setback in September following the Fed’s indication of sustained high rates, the Federal Reserve’s benchmark interest rate is currently at its highest point in over two decades. While there is a possibility that the central bank might consider pausing its aggressive rate hike policy designed to curb inflation, a rate cut is unlikely soon, keeping the pressure from high interest rates on the broader economy. 

The current Treasury yield levels haven’t been observed since mid-2007, a period during which the broader market fluctuated between ticking higher and holding steady until the 2008 financial crisis prompted the Fed to slash its benchmark interest rate close to zero. 

These elevated bond yields are not only dissuading investors but also making borrowing more expensive for companies. This situation increases the pressure on companies with significant interest expenses on their balance sheets, impacting corporate earnings, particularly for smaller companies that rely more on borrowing for operations. 

Wall Street anticipates a 14% decline in third-quarter profits for companies in the S&P Small Cap 600, following a 20% decline in the second quarter. This contrasts with expectations of stagnant profits in the broader S&P 500 after a 4% drop in the previous quarter. 

The impact of high interest rates extends to technology stocks with high price-to-earnings ratios. While insurance companies can benefit from higher rates due to better returns on their bond investments, consumers are likely to feel the squeeze as loans become more expensive, especially for mortgages, which are now at their highest rates in over two decades. High rates exacerbate the affordability challenge, with home prices near all-time highs even as home sales decline. 


Inflation in the Eurozone has shown remarkable resilience, prompting the European Central Bank (ECB) to adopt a cautious approach towards further interest rate hikes, relying on data to guide its decisions. This cautious stance raises concerns about the possibility of a recession and the likelihood of future rate hikes, albeit at a slower pace. 

The ECB has already raised interest rates by 425 basis points since July 2022. Economists hold varying opinions on whether additional hikes will be necessary, given the ongoing inflationary pressures. Prolonged high interest rates can lead to increased borrowing costs for businesses, potentially dampening their investment activities and weakening overall economic growth. These elevated borrowing costs are expected to persist into 2024. 

On a positive note, the Eurozone managed to maintain economic growth during the second quarter of the year, despite the swift tightening of monetary policy. This growth occurred against a backdrop of challenges, including a cooling Chinese economy, elevated geopolitical tensions due to the Ukraine conflict, and ongoing trade disputes between the United States and China. Investors have found some reassurance in China’s recent stimulus measures and are eagerly awaiting further policy announcements. 

The ECB’s year-long policy of tightening monetary conditions has had the intended impact on credit markets. The ECB reports a significant decline in the broad money supply (known as M3), which decreased by 1.3% in August compared to the previous year, marking the sharpest decline since the Eurozone’s inception. A narrower definition of money, M1, which includes cash and short-term deposits, experienced a substantial 10.4% drop in August year-on-year. This drop can be attributed to depositors moving their funds from short-term to longer-term bank accounts to capitalize on higher interest rates. 

The consequence of this shrinking money supply has been a sharp deceleration in bank lending to both private sector companies and households. In August, lending to nonfinancial private sector firms increased by a modest 0.6% compared to the previous year, down from a growth rate of 2.2% in July. Similarly, lending to households grew by 1% in August year-on-year, down from 1.3% in July. 

The ECB’s tightening monetary policy, initially designed to combat the highest inflation levels in four decades, aims to reduce aggregate demand in the economy by weakening credit markets. The hope is that this will cool down the labour market and alleviate wage pressures, which are currently deemed excessive. The ECB has previously shown through research that a real decline in the narrow money supply (M1), adjusted for inflation, is a reliable predictor of recessions. The current rapid decrease in M1, however, appears to be driven by a shift of funds between types of bank accounts rather than a fundamental economic downturn. 

In September, there was a notable decline in Eurozone inflation, with consumer prices rising by 4.3% year-on-year, down from 5.2% in August, marking the lowest annual inflation rate since October 2021. Core inflation, which excludes volatile food and energy prices, also saw a decrease to 4.5% in September compared to 5.3% in August, signalling an improvement in underlying inflation, unrelated to energy and food price fluctuations. 


The Bank of Japan (BOJ) is maintaining its commitment to keep monetary policy relaxed, despite a 40-year high in underlying inflation. This determination has caused a notable depreciation in the yen’s value. However, there is lingering uncertainty among investors regarding the BOJ’s future course of action. In response to this, BOJ Governor Kazuo Ueda has reiterated the rationale for the current policy stance. 

Ueda has explained that the current inflation is primarily driven by supply-side factors rather than changes in demand. This is the basis for keeping interest rates low and steady. However, Ueda acknowledges the possibility of shifts in corporate wage and pricing behaviours, leading to uncertainty about the persistence of high inflation. 

Concerns are growing among investors about the yen’s potential further decline, possibly breaching the psychological threshold of 150 yen per dollar, as it currently stands at 148.8 yen per dollar. If the yen continues to fall, investors anticipate intervention by authorities through yen purchases, essentially tightening monetary policy. Japan’s chief currency diplomat emphasised close communication with foreign authorities and the undesirability of excessive volatility. Prime Minister Kishida affirmed that Japan is open to all options and will take appropriate action against excessive volatility, hinting at potential intervention or a warning to currency traders. 

Japan faces a challenge as the exchange rate is highly responsive to the interest rate differential between the United States and Japan. With U.S. rates rising while Japanese rates remain low and stable, downward pressure on the yen persists. If intervention occurs, it will involve purchasing yen, reducing the money supply. The BOJ might offset this by buying government bonds, a process known as “sterilised intervention,” which has a limited track record of success. Consequently, for Japan to significantly impact the exchange rate, a shift in monetary policy is likely necessary. 

In this light, we are increasingly heartened by the medium- and long-term outlook for Japanese equities. At the same time, we recognize that near-term economic conditions remain opaque globally as the post-COVID recovery has been lacklustre in China and data suggests that the US economic outlook may prove softer than expected. Given how quickly markets have risen without a commensurate increase in near-term earnings, it is reasonable to see choppiness or even a correction over the next few quarters. 

Japanese stocks have faced downward pressure in recent weeks due to the prolonged rise in U.S. interest rates, which has subdued risk appetite. Investors are cautious about acquiring equities amid concerns that the Bank of Japan may intervene in the currency market. 

We believe this may create an opportunity for investors to reevaluate their Japanese equity portfolio weighting given the positive long-term structural changes currently underway. 


In contrast to most major economies, which have been focused on curbing spending and reducing inflation over the past year, China is undergoing a notable economic slowdown and seeks measures to stimulate growth. Although the Covid restrictions that hindered China’s economy have eased, a stumbling property market has swiftly emerged as a significant obstacle to confidence and economic activity. Economists have revised down their expectations for China’s GDP growth in 2023, suggesting that achieving the government’s lowest economic growth target in decades—5%—may be a challenging task. 

Earlier in the year, optimism prevailed about China’s post-Covid reopening, leading to a more than 50% surge in the MSCI China All Shares index from its October 2022 low. Many anticipated this rally to persist, but instead, markets have consistently declined, amplifying calls for a substantial government stimulus package. 

Market participants have expressed disappointment in the Chinese government’s lack of decisive actions this year. Investors typically prefer impactful decisions with immediate effects, and as it became apparent that such measures were not forthcoming, markets corrected from the initial reopening enthusiasm experienced at the start of the year. The performance of Chinese equities and Asian market indices, heavily influenced by China, has been disappointing this year. While the economic situation in China won’t transform overnight, signs indicate that the worst might be behind us. 

The government has taken steps to stimulate demand for property, including efforts to lower downpayment requirements and interest rates in the tightly controlled mortgage market. For instance, the minimum downpayment for first-time buyers in major cities is usually 30-40%, while second homes typically require downpayments in the range of 50%-80%. The government aims to reduce downpayments by establishing a nationwide minimum of 20% for first-time buyers and 30% for second-home buyers, expecting this to enhance affordability and spur demand. However, while these adjustments benefit existing homeowners, they do little to boost demand for vacant homes and add pressure on banks already coping with weak loan demand. 

While the government cannot directly stimulate external demand, stabilising the property market is viewed as a crucial initial step in rebuilding confidence. Additional measures are anticipated in the coming months, but the government has clarified that it won’t pursue the dramatic “shock-and-awe” stimulus tactics seen in the past. Beijing is prioritizing “better quality growth,” even if it requires a longer economic recovery. Despite challenges, opportunities still exist in China, particularly in areas where Chinese companies lead globally, such as solar and electric vehicle technology. 

In the long term, increasing incomes are expected to fuel growth in sectors like healthcare and insurance. However, the short-term outlook for growth, coupled with the government’s disciplined stimulus approach, suggests that Chinese markets may face challenges and potential volatility in the months ahead. 

Emerging markets 

Emerging market economies have displayed resilience compared to their developed counterparts. In August, the emerging market composite purchasing managers’ index stood at a robust 52.7, signalling expansion, while the developed market composite PMI dipped below the critical threshold of 50. Earlier this year, several emerging economies benefited from robust global demand and elevated commodity prices. Some countries also seized opportunities arising from shifts in global supply chains, with businesses diversifying manufacturing away from China. As economic growth potentially decelerates in developed nations, emerging markets may increasingly rely on domestic demand to drive growth. 

Encouragingly, after recessionary periods, domestic demand appears to be on the upswing in parts of Latin America and Eastern Europe. These regions have witnessed significant drops in inflation, prompting more accommodative monetary policies that can support domestic demand growth. In other regions, the likelihood of similarly accommodative policies is lower due to either benign inflation initially or persistently high inflation. Notably, the share of US imports from China has decreased by 7.2 percentage points between 2017 and 2023 year-to-date, amounting to roughly US$225 billion—a substantial figure for most emerging market economies. 

Countries best positioned to replace China in the global supply chain landscape include Mexico, Vietnam, Taiwan, and India, collectively contributing 5.1 percentage points to their share of US goods imports. However, the actual benefit may be smaller than the exported values suggest, as trade data doesn’t account for the value added by other countries before the exchange is measured. Recent research indicates that these countries experiencing import share gains have also seen rising imports from China, suggesting that the value they add to exports may be smaller than implied by export values. Nevertheless, substantial investments in these countries, particularly in Vietnam, hint at the potential for increased domestic value addition in the future. 

Supply chain shifts are not exclusive to the China-US relationship. The pandemic exposed vulnerabilities in global trade, leading to supply chain adjustments into Japan, albeit to a lesser extent. China’s share of Japan’s goods imports decreased by 1.6 percentage points between 2019 and 2023. While the benefits of these shifts are currently modest, over time, these countries are likely to enhance the value they contribute to exported goods, bolstering their manufacturing capacity and competitiveness. 

Most emerging market central banks have been more successful in taming inflation than their developed counterparts. Countries in the Americas and Europe, grappling with strong inflation, have witnessed rapid declines in price growth. Emerging economies that have effectively controlled inflation are poised to maintain positive economic momentum while the rest of the world grapples with recession risks. However, support for further economic growth from policymakers may be limited due to bloated government budgets and inflation concerns. Although the external sector may not provide significant support amid a slowing global economy, shifts in supply chains are expected to offer an additional boost to selected Asian emerging markets and Mexico. 


Australia identifies 26 minerals crucial to modern technology, its economy, and national security as critical minerals. Critical minerals are essential elements for technology, economies, or security with a vulnerable supply chain. Countries determine their lists based on industrial needs and risk assessments. Australia designates 26 resource commodities as critical minerals, aligning with global technology requirements, especially those of partner nations like the US, UK, Japan, India, South Korea, and Canada. 

The list is dynamic, reflecting market and political conditions. Australia’s critical minerals sector, responding to the growing global demand, is expanding. In 2021, Australia maintained its top position as the world’s leading lithium producer and ranked among the top five producers for various critical minerals. The country continues to explore and develop new deposits, emphasising its role as a global leader in critical mineral supply. There are 26 minerals (or groups of minerals) that Australia classifies as essential to modern technology, the economy and national security. A critical mineral is a metallic or non-metallic element that is essential for modern technologies, economies, or national security, and has a supply chain at risk of disruption. 

Australia retained its position as the world’s top lithium producer (53%) and was also a top five producer for antimony (3%), cobalt (3%), magnesite (3%), manganese ore (11%), rare earths (8%), rutile (26%), tantalum (5%), and zircon (30%). As well as being a global leader in the supply of critical minerals, many more deposits have been discovered or are under development, as seen in the map above. 


Gold experienced a 3.7% decline in September, primarily concentrated in the final three days of the month. We attribute this challenging month for gold to a notable increase in bond yields and a stronger dollar. The sell-off at the month’s end likely resulted from a robust adverse reaction to US economic data. As bond yields continue to rise amid a resilient US economy, gold is anticipated to encounter ongoing turbulence in the coming weeks. 

However, we don’t anticipate a significant downtrend to be established, as there is support stemming from fragile equities, escalating recession risks, volatility in inflation, and sustained central bank interest in gold. For certain investors, this situation could present a buying opportunity should the market become excessively short. 


The oil market has seen a resurgence, reaching over US$90/bbl, a level not seen in a decade, following Saudi Arabia’s and Russia’s decision to extend voluntary supply cuts. Initial expectations for Brent to hit US$90 were delayed due to slower-than-anticipated demand growth linked to a weakening global economy and concerns about China’s recovery. Despite adjusting demand forecasts, 2023 is expected to witness strong post-Covid recovery, with global demand hitting an all-time high of over 102 million b/d. 

The trigger for prices rising above US$90 was more about supply than demand, particularly the extension of supply cuts by Saudi Arabia and Russia. Non-OPEC production is expected to continue growing, albeit at a slower rate, with the US, Canada, Brazil, and Guyana being major contributors. OPEC+ may consider reversing production cuts in the next two years, depending on demand growth and the global economic recovery, with Iran’s export plans adding uncertainty. 

Oil prices have the potential to move higher in the coming months, with tight markets and OPEC+ support. Brent is forecasted to average US$90/bbl in 2024, 7% higher than the current year. While higher oil prices have economic and political implications, the impact on global GDP growth is expected to be marginal. However, inflation could be fuelled, potentially delaying interest rate cuts. The winners and losers from higher prices include producing countries benefiting while net oil-importing countries face challenges. The economic impact, especially at the gasoline pump, may influence voters’ sentiments, introducing a political dimension to OPEC+’s decisions during the upcoming US presidential campaign. 

Agriculture commodities 

El Niño, a recurring climatic phenomenon with a cycle of two to seven years and a potential duration of up to 18 months, can bring about drought conditions in Asia, Australia, and parts of Brazil while causing increased rainfall in the U.S. and certain regions of Africa. This well-documented weather pattern, dating back to the 1600s and last observed in 2018-19, is known to significantly impact crop yields, thereby influencing short to medium-term commodity prices. Research indicates that nearly 25% of harvested areas worldwide experience negative effects on crop yields during El Niño events. 

Given that 60% of global food production is concentrated in five heavily impacted countries—China, the U.S., India, Brazil, and Argentina—even a moderate El Niño can disproportionately affect the global food supply, leading to reduced availability of essential commodities and subsequent price increases. The current challenge is compounded by already elevated food prices. While the temporary surge in prices due to the Russian-Ukraine conflict is subsiding, a moderate-to-strong El Niño could create further shortages, potentially driving global food prices upward. This scenario could contribute to broader inflation, offsetting some of the recent progress made by central banks in controlling it. The severity of the impending El Niño event will determine the extent of its impact on markets. Investors should remain vigilant regarding risks in specific commodities markets and explore opportunities within agribusiness-related companies. 


12 Month Forecast 

Economic and Political Predictions 



As the Reserve Bank of Australia (RBA) has maintained a steady stance since June, and China faces ongoing economic challenges, the Australian dollar lacks significant positive catalysts. This situation raises the prospect of the currency engaging in limited range trading at subdued levels. Given that China constitutes approximately 40% of Australia’s total exports, the currency, closely tied to commodities, looks to Beijing for potential stimulus measures to boost the Australian dollar. 



$US1700-/oz- $US2100/oz 

Gold experienced an uptick in global markets driven by uncertainty surrounding the Israel-Hamas conflict. Additionally, the dollar and bond yields faced downward pressure due to cautious comments from key US Federal Reserve officials, providing support for the precious metal. 









Despite the uncertain macroeconomic environment, the long-term outlook for the metal industry looks promising. The demand for metals is expected to be driven by the rapid transition toward clean energy across different sectors and economies, investments by the government to build and repair existing infrastructure. 

The price of oil could rise above $100, but we doubt the current demand and supply dynamics will support it there for a sustained period. 



Real estate values have been repriced throughout the year, due to the high interest rate environment and the macroeconomic outlook. Vacancies continue moderating but remain well below historical long-term averages across many property types. 

Australian Equities 


We expect that the Reserve Bank of Australia’s policy is very near to its terminal rate as inflation is cooling and consumer demand is showing signs of slowing. The Australian yield curve is still positively sloped, making it better relative value than many of its peers, and its IG spreads are some of the widest in the developed world and offer above-average pickup to other markets. 


Begin to increase duration. 

The medium-term highs in the yield curve might now be in for the US bond market. Long-term valuations are attractive, in our assessment, fully reflecting monetary policy that is still expected to tighten a little further. Decelerating growth and tighter bank lending standards complement this view. 

Cash Rates 

RBA to hold rates at 4.10% in October, deliver one final hike by end-2023. 

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. 


Global Markets



We look for a U.S. recession to begin in 2024. 2023 is expected to continue to show mixed growth messages as consumer spending is anticipated to continue offsetting weakness in the manufacturing sector. 





Growth continues to weaken due to China’s slower-than-expected growth, energy, the lagged impacts of policy tightening, and waning fiscal support. 



Japan equities have stumbled with the (very) partial normalisation of policy, but it does not change the fact that policy remains easy while reforms remain promising. 

Emerging markets 

Start Buying 

The region’s economic activity surprised to the upside in 1H23 in Mexico and Brazil, but the growth, like other regions, is expected to decelerate. 



Meanwhile, the Chinese economy looks to be picking up again somewhat. The average of the two Chinese purchasing manager indices for industry climbed for the second consecutive month in September – now above 50 


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