How fast has the time gone! The 2023 financial year is now history.
Despite 10 interest rate rises during the year, AMP Ltd (ASX: AMP) chief economist Dr Shane Oliver noted that ASX shares rebounded well after a terrible 2022 financial year.
"Australian shares returned 15%, benefitting from the positive global lead," Oliver said on the AMP blog.
So what do stock investors have to look forward to in the new 2024 financial year?
Let's break down Oliver's analysis:
What have we learned from the past year?
The "big lesson" from the 2022 financial year, according to Oliver, was that one can never count out inflation.
"Inflation was not dead — just resting — and can raise its head to cause mayhem when the circumstances are right."
Following that, the economist reckons there were two major learnings from the 2023 fiscal period.
"The first was that, just as easy money was a major contributor to inflation in 2021-22, the move to tight money looks to be working to bring inflation back under control again — albeit there is a way to go yet," he said.
"The second was yet another reminder of just how hard it is to time markets. Just when everyone was most gloomy about inflation and interest rates, share markets rebounded."
First, the bad news
Unfortunately, Oliver has calculated that the chance of a correction in the share market is high.
"Shares had strong gains in June and are now overbought, technically," he said.
"Leading economic indicators continue to point to a high risk of recession in the US, and the risk of recession in Australia is now around 50%."
In addition to the local economic clouds, Australia's biggest trading partner China is struggling with its post-pandemic recovery.
And Oliver fears that the Reserve Bank of Australia will go "too far" with its rate hikes.
"Risks also remain in relation to Ukraine – particularly with Putin looking to re-establish his authority after the Wagner mutiny in Russia," he said.
"And while the month of July is often good for shares — particularly in Australian shares after June tax loss selling is reversed — the period to September-October is often rough."
… then the good news
On the bright side, Oliver noted how inflation is falling without triggering a recession.
"This should enable central banks to start easing monetary policy through next year in order to at least avoid a deep recession. In Australia, we expect the RBA's cash rate to peak around 4.6% with four rate cuts through 2024."
So far, the global economy has been more resilient in the face of rapid rate rises than first feared.
The bounce in US stocks has now cascaded out to cyclical shares, which is a positive omen.
"So, while shares are vulnerable to a near-term correction, returns over the next 12 months should still be reasonable, albeit slower than they have been over the last 12 months," said Oliver.
"Overall, balanced growth super returns are likely to be reasonable – but more like 6 to 7% [rather] than the 9% or so seen over the last financial year."
Having said all that, he cautioned investors to take short-term forecasts with a grain of salt.
"Market timing is fraught with difficulty, and it's best to stick to sound long-term investment principles," said Oliver.
"During periods of uncertainty, when negative news reaches fever pitch, it makes sense to turn down the noise around investment markets in order to stick to an appropriate long-term investment strategy."
