Market downturn not over soon

markets rates inflation

Investors have experienced a long run of good market outcomes that are unlikely to return for some time due to high inflation, interest rates and asset prices.

The current state of financial markets with high interest rates, inflation and stock prices represents the end of a long period that has been favourable to investors and is unlikely to return in the foreseeable future, according to an Australian boutique investment manager.

According to Maple Brown Abbott chief investment officer Garth Rossler there has been a watershed period in investment markets and the environment of the past 15 to 20 years of declining interest rates and increasing asset prices was over.

Speaking during a media briefing in Sydney earlier this week, Rossler said this environment started after the global financial crisis (GFC) of 2007 when interest rates were around 5 per cent to 6 per cent, and then fell to 0.70 per cent by 2020, with long bond rates following a similar downward trajectory.

“What did sensible people do [from 2007]? They bought everything they could find and, essentially, everything went up and the more speculative it was, the more it went up,” he noted.

“So we went through that period of asset prices going up and rates coming down and then we had COVID, which gave it an extra leg because things got tough, demand fell away and interest rates fell to nothing.

“Post COVID, people tried to get back to their normal lives, but interest rates started to rise, which put turmoil into stock markets and in 2021 every asset class was negative.”

Despite 2023 looking like the previous favourable period, he recognized current asset prices had not reacted to the reality of high inflation and interest rates.

Asset prices remained high on the stock market as well as in the residential and commercial property sectors, which had yet to adjust to the high interest rate environment, he explained.

“Inflation has gone from very high to just high, but it has come down and in many ways it looks like we’re back to the races again,” he said.

“For people who have been in the market only since the GFC, it looks like a stamp of approval on the investment style which worked for the last 15 years, but many stocks are incredibly expensive and their index weight is back to record highs.

“Inflation is coming down because oil and commodity prices were very high, but the more problematic things starting to creep through are labour costs and service costs.”

Rossler added there was an assumption inflation and interest rates would come under control because the Reserve Bank of Australia (RBA) had predicted that to happen, but this was not a guarantee nor likely in the near future.

“When you look at the maths of it, interest rates are still essentially negative [due to inflation] in real terms. So if the RBA wants to slow down consumption and bring inflation under control, it’s very difficult to see them doing it with negative interest rates,” he predicted.

“If I pull it together, we think it’s a much tougher environment for the next few years with higher interest rates, higher and more volatile inflation and a market much more suited to a value style than growth stocks.”


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