Australian equities have continued to underperform following a strong start to 2023, with the All Ordinaries Index down 1.6 per cent in the year-to-date.
Since peaking in February, the All Ords has lost 9.7 per cent of its value.
More recently, equities have been impacted by surging bond yields, fears of a longer-than-expected monetary policy tightening cycle from the Reserve Bank of Australia (RBA), a slower economic recovery in China, and the flare-up in geopolitical tensions in the Middle East.
The latest consumer price index further dampened sentiment, with both headline and trimmed mean inflation rising 1.2 per cent over the September quarter – well beyond the RBA’s forecast for trimmed mean inflation of 0.9 per cent.
Given recent hawkishness from RBA governor Michele Bullock, markets are pricing in another 25 bps hike from the RBA at its next monetary policy board meeting on 7 November.
According to Shane Oliver, chief economist at AMP Capital, these latest headwinds have heightened the risk of a local recession.
“So, I think as we go through next year, it will become more apparent that the economy is really slowing down if not having gone into recession,” he told InvestorDaily.
“So that makes for a difficult balancing act for the Reserve Bank. It doesn’t want to push the economy into recession, but that that may be what actually happens.”
He said Australia could be at more risk of a recession than the United States, given the latest indicators suggest the US economy may achieve the “Goldilocks” scenario.
US CPI slowed to 3.7 per cent over the 12 months to 30 September while at the same time, its GDP strengthened to 4.9 per cent.
As for what this means for the Australian share market, Mr Oliver said the near-term outlook is grim.
“The next 12 months are likely to see a further easing in inflation pressure and central banks moving to get off the brakes,” he said.
“This should make for reasonable share market returns, provided any recession is mild. But for the near-term shares are at high risk of a further correction given high recession and earnings risks, the risk of higher for longer rates from central banks, rising bond yields which have led to poor valuations and the uncertainty around the war in Israel.”
Like most economists, Mr Oliver is expecting the RBA to lift rates by a further 25 bps next month but has previously stated the RBA has done enough to quell inflation and should instead wait for the full impact of 400 bps in cumulative hikes to filter through to the economy.
The AMP economist continues to expect the RBA to commence a monetary policy easing cycle in 2024, but added a resumption of tightening could bring forward the timeline.
“[The RBA] has had to keep tightening, and it’s sort of delayed the timing of the cuts, because the economy is more resilient,” he said.
“But there could come a time where that suddenly changes – where the RBA ends up going too far and they realise a month or two later that they’ve got to reverse course.
“That is quite possible but at the moment, we stick to the view that they’ll start cutting in June next year.”