Quick Bite | 10 reasons why I’m “positive” for Aussie equities

They say one should be cautious about making forecasts – especially about the future! But its part of my job – so here goes. The following are 10 reasons why I’m positive on Australian shares over the next few years.

Before I list them, I acknowledge that investors should always take professional advice appropriate to their personal circumstances. Also, note that there is personal judgement and indeed speculation here, so no guarantees these forecasts will be correct. And lastly, as befits an organisation that discourages “groupthink”, there may be divergent views amongst Clime staff.

1. Rates will peak in Aust at 3.85%. The RBA next meets on 2 May, when I expect the last 25bp rate increase, taking the official rate from 3.60% to 3.85%. This level will plateau and possibly last until late in the year (of course depending on the data).
2. Inflation has peaked and is heading lower. This is true virtually across the globe. There will be bumps along the way and particularly in Australia given the anticipated electricity price rises in July, but the 3 major factors which drove up energy and food prices are now clearly reversing or stabilising: first the pandemic and supply line disruptions, second the war in Ukraine, and third the “helicopter money” dished out by governments during the pandemic.
3. High migration in Australia. Record migrant numbers will keep a lid on wages growth, boost tourism and the education sector, and sustain housing demand. A long term positive for Australia.
4. House prices have likely bottomed out. Trends in Sydney and Melbourne appear to show a bottoming process is underway, supported by very strong rental growth, population growth, and limited supply. Housing has a strong multiplier effect across the economy.
5. China growth will keep commodity markets high. A strong first quarter GDP growth number from China of 4.5% indicates recovery and confidence China’s annual target of 5% growth in GDP will probably be exceeded. Trade restrictions on Australian exports to China are likely to be reversed.
6. The low AUD is positive. Not only does a low AUD boost exports and stimulate tourism and education, but it correlates with a good entry point for the ASX. In other words, when the AUD starts to recover, the ASX tends to rise as well.
7. Corporate and household balance sheets are healthy. Corporates learnt many lessons during the GFC about the risks of over-leveraging, and companies that were resilient during the pandemic bolstered their business models. Household balance sheets remain strong with reserves gained during the pandemic still evident despite falling savings rates.
8. Valuations are “fair”. Investor sentiment is generally bearish and cash reserves amongst investors are high. This is a bullish contrarian indicator for the market. Price Earnings ratios are in line with long term averages (around 14x), and corporate earnings should cope reasonably well with any mild slowdown.
9. The energy and banking crises are manageable. This might be optimistic, and more casualties might emerge. But both crises tested markets – and they proved resilient. So the worst of those crises are likely over, although I’d highlight commercial real estate in the US as the next major worry.
10. The pandemic is over. Yes, we will get scientists and epidemiologists disputing that, but as far as markets are concerned, the pandemic effects are finally washing through. The global recovery may be somewhat hesitant and patchy, but there is a platform for solid albeit slow growth.

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