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Investment Market Review and Outlook

31 December 2023



  • Investor sentiment improved markedly over the December quarter and markets rallied strongly to finish the year.
  • Global economic growth (outside of the US) has weakened, and inflation is continuing to fall. This led investors to price in the possibility of global rate cuts as early as March 2024.
  • However, inflation remains higher than the target ranges of many central banks. Although markets are expecting interest rate cuts, it remains unclear whether central banks believe they have done enough to bring inflation down to acceptable levels.
  • Bonds performed well on expectations of possible rate cuts, and returns from cash were stronger as a result of higher interest rates.

A more detailed discussion

What's happening in world economies?

Inflation has been gradually falling around the world, and the hope of a soft landing, rather than a recession, helped buoy markets over the December quarter. When central banks lift rates with the aim of curbing inflation, as they did in 2022 and 2023, their goal is to raise rates just enough to slow the economy enough to reduce inflation, rather than raising too much and causing an economic downturn. Getting the balance right is challenging, because there is a lag between rates going up and the economy slowing, so it can be difficult to predict with accuracy whether too little, too much, or just enough has been done.

In the December quarter, the belief that inflation would continue to fall gave rise to an increasingly widespread expectation that central banks could ease policy, or in other words, cut rates, sooner rather than later. As a result, we saw a swift rally in risk assets, particularly international shares, which made significant gains over the quarter and ended the year strongly positive.

Geopolitical tensions continued to weigh on investor sentiment and cause periods of volatility. Still, oil prices remained contained and actually fell during the December quarter.

The main economic event of the December quarter was the meeting of the US central bank, the US Federal Reserve, which kept interest rates on hold. In the statement accompanying the decision, as well as subsequent press conferences, the Fed’s language contained dovish undertones. In other words, they implied that they are inclined towards an easier stance in terms of interest rates and are likely to cut rates during 2024.

In fact, the Fed Committee has been discussing when it might be appropriate to begin cutting rates, and their own forecasts show three 0.25% rate cuts in 2024. The market, on the other hand, is pricing in deeper cuts.

In Australia, September quarter GDP data was released in December. It showed our economy hitting a wall, with growth of just 0.2% quarter-on-quarter, and annual growth of 2.1% year-on-year. This sluggish economic growth is starting to flow through into employment data. The labour market remains firm but is showing definite signs of weakening. Unemployment hit an 18-month high of 3.9% at the end of December.

Restraining economic growth is exactly what the RBA has been aiming for and inflation has been coming down as a result. However, with inflation still above its target range of 2-3%, the Reserve Bank of Australia (RBA) lifted rates to 4.35% in November and then held steady in December, to “allow time to assess the impact” of prior rate hikes. In other words, they want to be sure that inflation will continue to fall to acceptable levels before making further moves.

What might the future hold?

Looking forward, inflation and central banks’ likely response to inflation is still uppermost in investors’ minds.

As we ended 2023, markets were anticipating interest rate cuts in 2024 and if this happens, it will be generally supportive of investment markets and growth assets in particular. However, it’s possible that markets are overestimating the number or extent of cuts, and we will need to wait and see how the economic data plays out.

Geopolitics, including the US presidential election at the end of 2024, could cause short-term volatility as investors assess the potential impact of both the campaign cycle and eventual election outcome. And ongoing geopolitical tensions around the world may make markets volatile at times, and this could affect returns in the short term.

As we always say, no one has a crystal ball in investing, and economic cycles, which include periods of expansion and contraction as well as volatility, are normal and expected.

We take into account how current market conditions, events and themes could impact future returns, but as long-term investors, our focus is on choosing quality investments we believe will perform well over the long-term.

We focus on creating a diversified portfolio across a range of assets, including shares, property, bonds, and private equity as the best way to continue to deliver the strong long-term returns our members need for their retirement.

This year shares performed particularly well, and contributed to strong one-year returns for diversified investment options with higher allocations to shares. But over the longer-term, it is our highly diversified portfolio which has helped grow our members’ super savings.

Our infrastructure, property and private equity teams have been focused on identifying investments which will benefit from key long-term economic trends, like growth in the digital economy, the global energy transition, and evolving demographics, including the ageing population.

Read more about investments we’ve made and see what we invest in

Read more about how your super is performing

See the performance of our super and pension investment options

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