AMP chief economist Shane Oliver has warned that shares are at high risk of a correction in the coming months in light of the numerous risks currently weighing on the outlook.
In a recent economic and market update, Dr Oliver suggested that shares look to already be entering a correction following the falls seen across global markets over the past week.
“For some time, we have been concerned about the risk of a correction for shares given strong gains for the direction setting US share market into July which left it technically vulnerable as we came into the seasonally weak August to October period,” he said.
“From their July highs, US and Australian shares have pulled back by around 4–5 per cent but markets remain at risk of further falls.”
Specially, Dr Oliver pointed to the risk of recession, which he argued remains high, as well as the intensifying risks surrounding the Chinese economy.
The economist also highlighted a pause in disinflation, further interest rate hikes, a possible US government shutdown, and rising bond yields as key risks.
“We would regard further falls as part of a correction though and we retain a positive 12-month view on shares as inflation is likely to continue to trend down taking pressure off central banks and any recession is likely to be mild,” Dr Oliver said.
“The past week provided a reminder that while inflation looks to have passed its peak and central banks may be at or close to the top, it’s not necessarily smooth sailing yet.”
In the minutes from the US Federal Reserve’s latest meeting, Dr Oliver noted that the central bank had adopted a “somewhat hawkish tone” with the potential for more hikes due to what the Fed described as “significant upside risks” to inflation and a “very tight” labour market.
“With stronger data recently, the minutes indicated that the risk to US rates is still on the upside,” the AMP chief economist said.
Inflation data was also stronger than expected in the UK and Canada, while the Reserve Bank of New Zealand left rates on hold but delayed its projections for when rate cuts will begin.
“This all warns that the path to lower rates is not necessarily smooth and adds to share markets’ vulnerability of a correction,” Dr Oliver said.
Turning to Australia, Dr Oliver said the local situation was slightly different due to the greater vulnerability of Australian households to higher rates.
“The minutes from the RBA’s last meeting reiterated its softened tightening bias but saw the risks to its forecasts as balanced and jobs and wages data in the last week were softer than expected,” he said.
“Of course, wages growth will rise this quarter as this year’s higher award and minimum wage rises flow through which will add 0.3 per cent to wages growth taking it to 4 per cent or just above. However, this should be in line with our own and RBA expectations.”
According to Dr Oliver, the combination of slower-than-expected wages growth and signs of cooling in the labour market are consistent with the RBA holding at 4.1 per cent in September.
However, he added that upcoming retail sales data and the monthly consumer price index (CPI) indicator may still have influence on the next decision.
