Following a dire 2022, share markets rebounded in early 2023 amid hopes of a short and sharp battle to quell inflation. But this was short-lived, with banking system instability in the US and Europe, and evidence of inflation stickiness dampening sentiment.
In the year-to-date, the US Dow Jones index has gained just 0.42 per cent, while in Australia, the All Ordinaries Index has slumped 0.5 per cent.
According to Simon Doyle, chief executive officer and chief investment officer for Schroders in Australia, there’s no respite in sight for the share market.
He said the “age of abundance” (lower interest rates, low energy costs, and cheaper labour) has made way for the “age of scarcity”, which he expects to weigh on company earnings and, as a result, favour active asset management strategies.
“We think inflation will be generally higher and more difficult to keep close to 2 per cent. Share markets are likely to be more volatile than investors have been used to over the past few years as the world changes,” Mr Doyle said during a webinar on Thursday (2 November).
The Schroders Australia CIO said he does not expect Australian share market returns to exceed 7 per cent any time soon.
But he claimed Australian equities would be more resilient than US shares, which he said are still “challenged from a valuations perspective”.
The commodities sector, he said, would help offset weakness in Australian equities.
“We are positive structurally on commodities, which could be a source of upside return for Australia’s share market, which is one of our preferred share markets,” he said.
This sentiment is shared by Shane Oliver, chief economist at AMP Capital, who recently warned shares are at “high risk” in the near-term.
“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.”
In assessing the broader macroeconomic outlook, Schroders’ Mr Doyle said he expects “greater cyclical and market volatility”, which could have “significant implications” for investment markets and accordingly, portfolio construction.
“Active management and asset allocation will become more important than it has been in the past,” he said.
“In the current environment, asset breadth is good, backed up by active management, to allow investors to navigate a more challenging path forward – but also a rewarding one if investors get it right.”