AMP’s Shane Oliver is confident the US and Australia will ward off a recession over the next 18 months, which should enable share markets to be up on a 12-month horizon.
Short-term volatility is expected to rock shares as central banks continue to tighten to combat inflation and rising bond yields. The war in Ukraine and Chinese COVID lockdowns are also expected to continue to weigh on markets.
Share markets fell considerably over the last week amid ongoing worries that monetary tightening to combat high inflation could drive a possible recession.
The plunge in global shares, particularly US shares, dragged down the Australian ASX which saw sharp falls in IT, material, property and industrial shares.
Compared to their bull market highs, US shares have lost 18 per cent to date, while Eurozone shares have suffered an identical 18 per cent decline. Aussie shares are down 8 per cent over the same period, harmed particularly by a fall in commodity prices.
The most recent decline in share markets followed stronger than expected inflation in the US. While the consumer price index constricted slightly to 8.3 per cent, it was still higher than expected.
And while the long-term consequences of rising inflation are presently unclear, Dr Oliver is confident shares will continue to provide “reasonable returns” on a 12-month horizon. His forecast is, however, dependent on continued global recovery, solid profit growth and a slower pace of monetary policy tightening.
Responding to US CPI data earlier in the week, Russel Chesler, head of investments and capital markets at investment service VanEck, said shares could weaken further with the “risk that inflation keeps shooting higher”.
Mr Chesler explained that the US share market remains “especially vulnerable” to higher inflation and interest rates, “dominated as it is by growth stocks, particularly tech shares, which have dropped sharply on higher bond yields”.
As for the ASX, Mr Chesler remained optimistic.
“We are sticking with our view that the Australian share market is likely to outperform the US share market, with the heavyweight miners and energy exporters benefiting from higher prices.”
In regards to the Reserve Bank of Australia (RBA) and its impending decision, Dr Oliver noted that while he does expect central banks to slow their tightening policies, he is betting on a 0.4 per cent increase in the cash rate next month. He does, however, believe the rate will gradually rise to 1.5 to 2 per cent in December, before plateauing at 2.5 per cent next year.
