Signal or noise? Three macro experts on what matters for your portfolio

The winds of change are upon us. The forces currently shaping Australian and global markets feel more whipsaw and shape-shifting than ever before and investors today must contend with a far broader set of variables. 

As Livewire’s Chris Conway put it:

"When I was coming up, admittedly many moons ago in markets, there was only three things that you needed to pay attention to have a handle on the macro, and that was inflation, interest rates, and growth. Now we have to worry about policy mistakes, housing, AI, deglobalisation and US exceptionalism, to name but a few."

So is it the same game with more moving parts, or is it genuinely more complex? That’s the question we put to our panellists at Livewire Live - Diana Mousina, Deputy Chief Economist at AMP; Damien Boey, portfolio strategist at Wilson Asset Management; and Roy Keenan, co-head of Australian Fixed Income of Yarra Capital.

Please note this panel was filmed 22nd September, one week prior to the RBA's September board meeting announcement.

Too tight or not tight enough?

The panel was split on its view on monetary policy. Boey argued the RBA was relying on an outdated view of how fast the economy can grow.

If AI genuinely lifts productivity, the economy's non-inflationary growth ceiling is higher than the RBA assumes, and the current cash rate too restrictive.

"So to that end, I actually think that the RBA is over-tightening. Our framework actually suggests right now that the equilibrium cash rate is 4%. It's already below where the RBA currently is."

Mousina sees it the other way. She thinks the bigger policy mistake would be not tightening enough, and pointed to Australia going against the global trend of falling inflation.

"I think we have a genuine inflation problem here, which comes down to the fact that we have very high wages growth. We have government spending that's too elevated and other countries that we compare ourselves to are just not in the same situation."

“Unless we want to have inflation running at three or 4% for the next few years, I think that the RBA will probably have to raise rates a few more times.”

Keenan said the debate matters less for bond investors, because markets have already done the work.

"It probably really doesn't matter what the RBA does because from a bond market's perspective, we've already got the cash rate priced up to 5%."

Housing - a dip but not a crash

Mousina's base case is a further 6% fall in average capital city prices, on top of the 4–5% already recorded.

"So basically a top to bottom fall of 11% with prices falling into the middle of next year before we start to see some pickup."

She said a 15–20% decline would be of concern, and only if unemployment rose with it. However, the continual undersupply of new homes and improving forward-looking jobs indicators both limit this possibility.

Keenan said credit spreads on mortgage-backed securities haven't moved, and that jobs are the number to watch.

The one area where he has seen arrears tick up is borrowers who took out loans when rates were at their lowest, though he described it as "a very small cohort".

Boey's warning was for bank shareholders. Household buffers (savings and home equity built up since 2020) have kept the economy resilient. Because the sharemarket looks ahead, he said bank share prices already reflect what those buffers will be worth in future.

"So by definition, if we're eating into the buffers, that's going to impact bank stocks."

Leverage makes those buffers shrink faster than house prices fall. 

"For every 1% drop in house prices that you get in Australia, you will see the average equity of the borrower drop by two." 

"Banks are expensive relative to that baseline and the buffers are going down. So even before you get to a really negative scenario, there are some issues already for equity valuation."

Fiscal policy 

"The government sector is certainly not helping the RBA's job," was Mousina's blunt observation. She points out that public spending is "still around a record high, about 28% of GDP", and it competes with the private sector for workers and materials in an economy whose growth is capped at about 2% by low productivity.

Boey explained why this matters for portfolios. When people are less sure where inflation is heading, shares and bonds tend to move together, so holding bonds does less to cushion a portfolio.

"The more uncertain you are about inflation, the more the two big drivers of a multi-asset portfolio, bonds and stocks move together. And the more that they move together, basically that's telling you bonds are not diversifying risk."

Bond investors then demand higher yields to make up for that.

Boey agreed with Keenan that the bond market has already priced in more rate hikes than are likely. "The hikes that are priced here are quite extraordinary and extreme. They're fully priced." He sees value in Australian bonds and bank debt for investors thinking about when the RBA eventually cuts.

He pointed to subordinated (tier two) bank debt, with 20-year Commonwealth Bank debt yielding "close to 7% fixed for 20 years". 

AI disinflationary? It may be closer than expected

"I think we are closer to the disinflationary side than the consensus currently believes," said Boey. He added that productivity gains won't be shared evenly.

"There's going to be winners and losers, and the people that invest are not necessarily the people who win."

He also said copper prices are "massively, massively overshooting" because growth is so heavily tilted toward data centres. It wouldn't take much of a global slowdown to reverse that.

Mousina said the ASX is poorly placed to benefit from AI growth, with tech exposure "sub 5%". She sees China as the bigger AI winner because its models deliver similar computing power at lower cost.

Keenan is cautious on the debt being raised to fund the build-out. Hyperscalers face heavy spending and falling free cash flow, and Yarra has passed on deals where the pay didn't match the risk. He compared it to European telcos chasing 3G technology, and went from being highly rated companies at the time to low investment grade.

"There's going to be winners and losers and try and pick the winners and losers is going to be difficult," he says. 

"But for us, the number one rule is get paid for the risk first."

A structural shift in US exceptionalism

Keenan sees the move away from US assets as structural and good for local credit.

"It's no doubt it's structural. It's the one thing Australia can thank Donald Trump for. Australia's credit markets are in the best shape we've ever seen them in my career."

Australia is now the world's third-largest market for new credit issuance, behind US dollar and Euro markets. "A country like Australia only needs small swings of capital flows our way to actually be a true benefit," he said. 

Mousina doesn't expect US dominance to fade quickly. "I guess not in the next few years. I do think that the US tech companies are going to keep being outperformers." Over 10 to 20 years, though, she expects more capital to flow to China and emerging markets as their share of the global economy grows.

Boey raised a point about who now funds US government debt. The traditional buyers (China, Japan and Middle Eastern oil exporters) are probably pulling back, while US deficits remain very large.

For now, he said, the Fed and Treasury have shown they will keep enough liquidity in the system to stop that happening.

Where the value sits

Keenan's pick for the next 12 months is Australian credit over global. Comparing five-year BBB-rated bonds in each market, he said Australia pays about one percentage point more than US bonds.

"You compare a five-year BBB US to five year triple B Aussie, you pick up about a hundred basis points in yield. I just haven't seen it that good."

Boey and Mousina agree markets have priced in too many rate hikes. For Boey, that points to a non-consensus call that the RBA will be cutting rates next year.