Financial year ending 30 June 2023


Give me the short version


  • Markets ended the 2023 financial year in positive territory – surprising investors with better returns than anticipated at the start of the year.
  • By way of example, the Australian share market (ASX200) returned almost 15% and international shares (MSCI world index) returned over 22% for the year to 30 June 2023.
  • Inflation remains a concern, although there are signs that it is starting to come down.
  • Economic growth is slowing and consumer confidence is low, but on the on the other hand, unemployment is at historically low levels and population growth is strong.
  • Economic cycles (periods of economic growth and periods of contraction) are normal and expected in investing
  • We have conviction in our long-term approach and our ability to deliver strong long-term returns
Now give me the long version


Investment markets ended the financial year up

This financial year has been less a case of the good, the bad and the ugly, and more a case of the bad (at the start of the year), fears of the ugly and finally, a pretty solid good. Investment markets, and in particular share markets, ended on a positive note, despite some challenging conditions during the year. International share markets did particularly well.

Negative factors including high inflation, rising interest rates and geopolitical tensions created some periods of market volatility. Very low consumer confidence (levels usually only seen in times of recession) and the impact on household budgets of higher mortgage costs and inflation also weighed on markets. Consumer confidence has been so low for so long in fact, that many are asking why we haven’t slipped into a recession.

The short answer (and this is the good) is that economic growth has held up much better than expected. And this translated into better performance and earnings from companies around the world. Labour markets have stayed strong (which means unemployment has stayed low) and it may be that consumers who feel they have job security, also feel confident to continue spending. It’s also true that the number of dual income households continues to rise, and this could account for the fact that consumers have managed to cope with rising interest rates and a higher cost of living better than expected.

Show me a chart to explain this

The graph below shows the periods of market falls (and rises) of global share markets throughout the year. You can see that markets fell sharply between July and September 2022, and then again at the start of the calendar year. From May 2023 they started an inexorable rise – ending up much higher than at the outset of the year - and much higher than most people expected.

Markets can change course quickly in the short term. For example, share and bond markets were flat or negative between July and Septembers 2022 but from October 2022 to May 2023 bounced back strongly. The reality is that market volatility in the short term is normal, and that ‘time in the market’ or in other words, sticking to a long-term strategy, can give you a better outcome over time than trying to ‘time the market’ as it moves up and down in unpredictable ways.

So, is it all good news now?

Unfortunately, the short answer is not necessarily. Economists love to give two-handed explanations, or in other words, present the economy in terms of good on one hand, and the less good on the other. What’s happening now is a classic example.

Global economic growth is good news, but it’s also bad news because it means that inflation is not coming down as quickly as hoped. When inflation does not come down quickly in response to rising interest rates, we describe it as being ‘sticky’ – and that’s what we’re seeing now, sticky inflation. And that’s worrying. Having said that, statements coming out of global central banks indicate that they may believe they’ve done enough to tackle inflation, at least for the time being, and that interest rates may not go much higher.

The difficulty is that no one can know for sure what the future holds, and inflation remains a major focus for central banks and governments. And there are also concerns about where inflation will ultimately end up. Factors including deglobalization, decarbonization and the rising cost of building supplies are all inflationary (likely to cause inflation to go up) and could mean that inflation ends up settling at a higher level than we have seen in the recent past. Only time will tell what this means for global economies and how central banks might respond.

Rapid interest rate increases

In Australia, we’re seeing many similarities with the global story. Starting in May 2022, the Reserve Bank of Australia (RBA) has raised rates 12 times, from 0.1% to 4.1% in June 2023. And even though we know that interest rate rises impact the economy with a lag (take time to take effect), many have been surprised that we haven’t yet seen as big an economic slowdown, or as much economic pain as some feared.

On the other hand, there’s no question that economic growth is slowing (which is what the RBA is trying to achieve by lifting rates), and consumer confidence is very low. The conundrum is that even though Australian households have been significantly impacted by rising mortgage rates and high inflation, unemployment is still at historically low levels, and strong population growth is also contributing positively to economic growth.

When it met at the beginning of July, the RBA left rates on hold at 4.1% - citing the need for “time to assess the impact of the increase in interest rates to date and the economic outlook”, or in other words they want to wait and see how things play out. May’s monthly CPI indicator (which measures inflation) showed inflation coming down but at the same time, Governor Lowe said that “inflation is still too high and will remain so for some time yet.” He also indicated that he may need to lift rates further in the future.

What does it all mean?

Not surprisingly, different economists have different views about whether we’re heading into a recession, or a less severe slowdown, which they refer to as a ‘soft landing’. On the one hand, we are seeing economic contraction (a decrease in economic activity) in countries around the world, including New Zealand and Germany. And US economists are predicting a mild recession for the US later this year. On the other hand, with unemployment low, and inflation likely peaking, we may yet avoid a serious global recession, and experience a ‘soft landing’ here at home.

What are we thinking about, heading into financial year 2024?

Looking forward, the economic backdrop we’ve faced over the past year is likely to continue. Even if we have seen the peak of interest rates (which is not certain), inflation is still high and ongoing global geopolitical tensions are likely to make markets volatile at times, and affect returns.

At the same time, it’s important to remember that economic cycles (which include periods of expansion as well as contraction) are normal and expected. And the good news for investors is that markets are forward-looking, which means that they have already priced in the prospect of a slowdown and may not therefore fall significantly if a serious slowdown eventuates.

As we invest, we are always thinking about the long-term, but also about how current market conditions and themes might impact our view of the future.

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