In brief:
We are at the beginning of the end of this economic cycle. However, the duration of this slowdown remains elusive as employment conditions remain robust. Historical US recessions have been as short as two months to as long as 18 months but have averaged ten months overall. Now is the time to be cautious but not outright bearish.
Interest rates will stay higher for longer. Short-term interest rates continue to be influenced by inflation that, in turn, is not falling fast enough because of factors outside Central Banks’ control. For example, Reserve Bank of Australia (RBA) rate hikes will not mitigate the inflationary impact of strong immigration pushing up rental prices. For long term interest rates, the unsustainability of the US fiscal path remains a simmering issue, putting upward pressure on long-term interest rates.
Compensation to Equity investors is poor for taking on equity risk at this point in the cycle. Equally poor expected earnings growth compounds the disadvantage to Equity investors.
We have started to apply hedges in our global equity allocations to reflect the extreme move we have seen in the Australian Dollar.
To access the full Portfolio Perspectives for November 2023, download the PDF here, along with the charts & commentary.
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