11/06/2024 Feature Articles 4 minutes to read Back to all News & Insights

Navigating the New Normal: Higher for Longer

Praemium’s Damian Cilmi hosted a panel discussion with Brett Lewthwaite from Macquarie, Andrew Dale from ECP Asset Management, and Nick Griffin from Munro Partners to understand what key themes will drive market performance in FY25 for Fixed Income, Australian and Global Equities market and the implications that ‘higher for longer’ interest rates will have across these sectors.  

Fixed Income

Macquarie’s Brett Lewthwaite commenting on the macro environment for Fixed Income, cited that historically, monetary policy has been the primary tool for managing economic cycles, with central banks adjusting interest rates to stimulate or cool down the economy. However, this approach has led to progressively lower interest rates and an accumulation of debt, highlighted by the 2008 financial crisis.

A poll taken during the panel discussion found that the majority of attendees were divided on the direction of interest rates in Australia over the next six months, anticipating one interest rate cut (47.1%), or no interest rate cuts (47.1%). Commenting on this, Brett highlighted the pandemic’s impact on economies, as governments were forced to adopt significant fiscal measures. He noted how this shift has persisted, with fiscal policy playing a more prominent role even as the immediate crisis has subsided. Structural changes in the global economy, including geopolitical tensions and the prioritisation of national security and supply chain resilience, have further cemented this shift.

The increased use of fiscal policy, combined with abundant liquidity and low interest rates, has contributed to inflationary pressures, and Brett pointed to the war in Ukraine as an exacerbating factor. Consequently, fiscal policy's support for the real economy may lead to higher inflation and interest rates. The transition from a monetary policy-dominated world to one where fiscal policy plays a significant role creates a complex dynamic. The financial economy, which thrived on low rates and ample liquidity, faces challenges in adapting to this new environment.

Contextualising how these themes may impact FY25, Brett discussed how the current environment suggests a period of higher interest rates, the sustainability of this scenario is questionable. Extensive fiscal deficits and the need for liquidity to support economies may necessitate a return to lower rates and increased liquidity. Geopolitical factors and evolving government priorities further complicate this dynamic.

Australian Equities

Shifting focus to Australian equities, Damian Cilmi spoke with Andrew Dale from ECP Asset Management to understand the prevailing key market drivers for equities. The attendees of the panel discussion were surveyed on what they considered to be the most important factor influencing Australian equities with  China’s performance (42.1%), wage inflation (31.6%), and the property market (21.1%) acknowledged as the biggest contributors to uncertainty in the Australian equities market.

Andrew discussed China’s economic movements, noting its significant impact on the Australian market as one of Australia's largest trading partners and the world's second-largest economy. He noted that property market dynamics, wage trends, and changes in China's economic policies directly affect Australia. He advised that monitoring these developments from both political and market perspectives will be crucial for navigating the Australian market in FY25.

However, Andrew also pointed to home-grown reasons for uncertainty, highlighting the fluctuating views on the market outlook, influenced by recent updates from major banks. Factors such as mortgage pressures, business banking challenges, and reduced consumer discretionary spending are critical elements that will continue to influence market sentiment in the year ahead.

Finally, Andrew dissected the Australian housing market. Despite initial fears of a downturn, housing prices have shown robustness, driven by stock shortages, low rental vacancies, and strong population growth through immigration. This complex interplay creates a "tinderbox" scenario for the housing market, where any rate cuts could trigger a sharp rise in prices, Andrew cautioned.

Global Equities

Nick Griffin of Munro Partners provided insights into the factors likely to influence global equities in FY25. Attendees were again surveyed on what they perceived to be the key impact on global equities in the coming months. Respondents cited central bank policies (42.9%), the US election (21.4%), the AI revolution (14.3%), and geopolitical tensions (14.3%).

Commenting on the high response rate regarding central bank policies, Nick highlighted that the once pivotal role central banks had on the global equities landscape is diminishing due to substantial interest rate adjustments. Rates have transitioned from near-zero levels to around five percent, prompting investors to look forward rather than dwelling on past monetary policy battles.

Addressing the impact of the US election and geopolitical tensions on markets, Nick explained that the outlook is positive for global equities, particularly in the US, which contrasts with Australian equities. As the US market is driven by earnings growth rather than the broader economy, companies that consistently increase their earnings generally see their share prices rise.

Concluding the discussion, Nick emphasised artificial intelligence as a key driver of the optimistic outlook for global equities, akin to the mobile internet revolution. He highlighted significant opportunities for companies developing and deploying AI technologies with the demand for high-performance computing, fuelled by AI applications, boosting earnings growth for companies like NVIDIA. Major cloud providers—Microsoft, Google, and Amazon—are also investing heavily in AI infrastructure to stay ahead of this transformative wave.

A New Fiscal World

In the current fiscal environment, the notion of rates remaining "higher for longer” is widely accepted. However, the possible conflict with the financialisation of the economy indicates this phase may not last indefinitely. Central banks and governments must carefully navigate this complex landscape, balancing the need to support economies with the risks of inflation and market instability.

Ultimately, we may see a return to lower interest rates and increased liquidity as financial and real economies seek equilibrium. The interplay between fiscal policy, monetary policy, and geopolitical factors will continue to shape the economic landscape, requiring careful consideration and adaptive strategies.

For an in-depth analysis of the key market drivers for FY25, watch our webinar with Damian Cilmi as he hosts an engaging panel discussion with Brett Lewthwaite from Macquarie, Andrew Dale from ECP Asset Management, and Nick Griffin from Munro Partners.