Investors eye a positive year for Aussie stocks, but threats remain

The world’s best-performing share markets this financial year may surprise you, as inflation and other fears impact investors.

Anthony Keane

@keanemoney

4 min read

June 23, 2023 - 4:28PM

The Australian Business Network

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Economies around the world are battling high inflation, rising unemployment and recession fears, but their share markets have remained resilient this financial year.

Among the world’s biggest stock exchange indices, only the two Chinese ones – Shanghai and Hong Kong – are in negative territory for 2022-23 so far, while the top performers have been twice as strong as Australia.

Three days of sinking share markets this week have put a dent in year-to-date returns at home and abroad, but the S&P/ASX 200 index is still about 8 per cent higher near 7100 points with a week to go before June 30.

Meanwhile, Japan is up 26 per cent, Europe 25 per cent, and the NASDAQ technology-focused index in the US is 24 per cent higher.

AMP head of investment strategy Shane Oliver said Australia’s stock market performance had been “middle of the road” over the financial year, but had lagged a little in the last six months.

Dr Oliver said US stocks had been supported by the surging NASDAQ benefiting from the AI boom.

Global share prices also had been driven higher by “increasing signs that inflation may peak and enable central banks to avoid a hard landing or recession”, he said.

Japan’s stocks have surged in the past financial year. Picture: Kazuhiro Nogi / AFP)

“The Japanese market has benefited from still-zero interest rates and their economy has had a very good run, and Europe’s recovering after the worst-case fears regarding the war in Ukraine receded.

“Europe slipped into a mild recession late last year and earlier this year, but generally speaking it’s turned out a lot better than investors had been feeling a year ago.”

Unlike the US, Australia did not have the huge technology stocks benefiting from AI’s rise, Dr Oliver said.

Also weighing on ASX returns were the Reserve Bank of Australia lifting interest rates further than previously expected and China’s economic recovery from Covid being weaker than hoped.

However, the 8 per cent increase in the ASX 200 index does not include Australia’s comparatively-high dividend yields that add another 4-5 per cent to annual returns.

A China cloud lingers, and Dr Oliver said this had weighed on Australian resources stocks.

“You could argue that some of the risks internationally have receded a little as inflation starts to come down, particularly in the US, but it’s probably still going to be a volatile ride,” he said.

“I wouldn’t be surprised if we go through a rough patch in the next few months – the September quarter is often rough.

“For Australia the risk of recession is probably now higher than it is internationally.”

Shaw and Partners senior investment adviser Jed Richards said US stock market returns had been skewed higher by technology company share prices.

Mr Richards said the ASX 200 performance during 2022-23 was “not too far off what we expected relative to the rest of the world”.

He said Europe has suffered more volatility the previous financial year because of Russia’s invasion of Ukraine, and China’s reopening after the pandemic was a concern.

“China hasn’t bounced back as strongly as we would have hoped,” Mr Richards said.

He said Australia’s economy appeared safer than the rest of the world, but it was extremely difficult to forecast where the share market would head in 2023-24.

“In the last few weeks, we have seen varying arguments on where interest rates are likely to go in the next six months. One week the experts say we need two more rate rises. The next week they say we have probably peaked.”

Mr Richards said inflation in Australia was still too high, and if that continued “our market’s going nowhere in the next few months”.

IG market analyst Tony Sycamore said rising interest rates would keep the banking sector in Australia and abroad “on the nose”.

“Downgrades to the consumer discretionary sector have started and more are expected to follow.,” he said.

Share market growth in the US has been driven by technology. Picture: Angela Weiss/AFP

Mr Sycamore said other negatives facing Australia’s share market including RBA rate rises, subdued GDP growth, shrinking household savings and high inflation.

But China was a potential positive, he said.

“Chinese authorities cut key lending rates this week, following continued soft Chinese growth and activity data,” he said.

“The rate cuts are expected to be part of a broad package of stimulus measures. The shift towards easier policy in China is a tailwind for ASX-listed resource stocks and the ASX200.”

Mr Sycamore said Australia’s share market would “continue to miss the tailwinds of investors looking for AI related exposure”.

“Best guess is we finish the year at 7200, which will not compare favourably to our global peers.”

AMP’s Dr Oliver said Australian households had high debt loads, the Reserve Bank remained aggressive in raising interest rates and worries about China persisted.

“The risk is we remain a bit of a laggard,” he said.

“There’s also the risk that geopolitics could make a comeback and we see something crazy … a negative reaction by Russia to Ukraine’s counter offensive could upset things again.”