Central bank inconsistency is the biggest challenge for investors
Was it really only a year ago that the RBA suggested the official cash rate wouldn’t increase until 2024? No wonder Australians have whiplash. We’re far from alone, with our global compatriots in much the same boat. We’ve been warned to expect more rises in the battle against inflation.
It’s far from just a problem for our mortgages, according to Simon Shields, co-founder of Monash Investors.
“I think the unpredictability of central bank and government behaviour at the moment is the hardest challenge for investors. The economy will do what the economy is going to do, but it will be affected by the central banks lifting interest rates.”
The good news is that Shields anticipates the unpredictable efforts of central banks will see the headline inflation rate come down. And in better news for many, he believes there’s not too much more to go when it comes to interest rates.
Simon Shields joined us for a three-part series of Expert Insights. In this edition, he discusses the opportunities and surprises in the current market, the outlook for energy, and his forecasts for inflation and interest rates.
What are the key opportunities and challenges in the market for investors?
The big opportunity at the moment is how share prices have fallen back. For some stocks, you could argue it was more than warranted. Like those tech stocks that had a lot of revenue, no earnings, and not much prospect of earnings in the near term either. They’ve come right back. Of course, there are a lot of stocks where market falls are overdone. That’s where the opportunities are.
In terms of the challenges, I think the unpredictability of central bank and government behaviour at the moment is the hardest challenge for investors. The economy will do what the economy is going to do, but it will be affected by the central banks lifting interest rates.
We went from a situation where they were quite complacent towards the end of last year. Then they started to panic, then they started to relax again. Now they’re really aggressive. It’s a lot of change in quite a small period. We’d expect them to be a lot more consistent than what they’ve been.
You’ve got the British government with some generous tax cuts to try to get their economy moving but this is in direct contrast to what the central bank is doing. It’s putting up interest rates at the same time.
Can you discuss your views on energy, in particular, whether oil prices have passed their peak?
In the short term, we’ve definitely passed the peak in commodity prices. It’s not just the oil price that’s come back. We’re seeing this across the commodity space. Even soft commodities like agricultural commodities have come right back. Why? It goes back to this spike we’ve seen in inflation that central banks are responding to.
I’m not as calm about the medium-to-longer-term price of oil. I certainly think there are some drivers of the oil price over time in terms of the lack of investment in new capacity or expanding capacity. This means inevitably the price of oil will rise again over the medium to longer term.
Why has consumer spending held up this year?
It’s quite interesting how that has played out. Earlier in the year, as we were starting to see interest rates go up fairly significantly, we started to see things consumers spend on go up in price. Whether it was petrol, utilities or food, prices were going up at a rapid pace earlier in the year. You would expect consumers to pull back on their spending on things that they had some discretion on. Particularly since they’d been locked up during COVID and spending a lot of money on household goods – furniture, coffee machines, computers, stuff for their homes. When we came out of covid, they started spending on other things and then inflation came through and non-discretionary costs came through.
Normally, they would start spending less on the things they’ve spent on before. But that was a big surprise here because consumers actually kept this rate of spending up overall. Household goods did lag the other sectors but overall, it held up.
Now we’re having another burst of higher interest rates from concern about inflation in the US and the UK. The question is will consumer spending continue to hold up in this environment?
It really comes down to will we maintain full employment and will wages rise. As long as we’ve got full employment and rising wages, consumer spending power should be pretty good.
What are your forecasts for inflation and interest rates?
We’re expecting that the headline inflation rate will come down. Obviously, the price of oils and petrol has come off. While the underlying rate of inflation might be rising a little bit, the headline rates are coming off and we think the underlying rate will settle down into the mid-low single digits. It’s a lot higher than what it was 3-5 years ago but still not huge. That’s where we see inflation going.
Interest rates are going to be around that mark too. They can’t be too high, of course, because governments are so indebted. It would blow a hole in all the budgets. I think the central banks are aware of that when they’re setting interest rates. Another issue is the degree of indebtedness for mortgages. There’s a height in rate levels that would drive not only recession but a lot of misery. I think central banks have demonstrated over decades that they’re actually quite aware of what’s going on in the economy and they don’t want to cause that sort of misery.
Benefit at every stage of a cycle
Monash Investors Limited invest in a small number of compelling stocks that offer considerable upside and short expensive stocks that are at risk of falling. Want to learn more? Head to their website or visit the fund profile below for further information.
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Sara is a Content Editor at Livewire Markets. She is a passionate writer and reader with more than a decade of experience specific to finance and investments. Sara's background has included working at ETF Securities, BT Financial Group and...
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