With share markets looking vulnerable to further declines and volatility tipped to persist, AMP chief economist Shane Oliver has identified seven key charts for investors to keep an eye on.
In a recent note, Dr Oliver indicated that AMP is “reasonably upbeat” on the outlook for investment markets over the course of the next year.
“But it won’t be smooth sailing and after a strong start to the year, share markets are vulnerable to a further pull back in the short term given ongoing issues around inflation, interest rates, recession, and geopolitics,” he warned.
The following seven indicators are seen by AMP as being critical for the investment outlook:
1. Global business conditions PMIs
Dr Oliver stated that Global Purchasing Managers Indexes (PMIs) will be a key warning indicator on global growth in 2023.
“Whether share markets fall back to new lows and resume the bear market in US and global shares that started last year will be crucially dependent on whether major economies slide into recession and, if so, how deep that is,” he said.
AMP’s assessment is that global growth will be around 2.5–3 per cent this year.
2. Inflation
“A lot continues to ride on how far key central banks raise interest rates,” Dr Oliver said.
He predicted that inflation has peaked in both the US and Australia and assessed that the Fed could stop hiking interest rates in either March or May and could find itself needing to cut rates from later this year.
As for the RBA, Dr Oliver said it is, however, lagging the Fed, but emphasised that inflation is due to fall throughout the year.
3. Unemployment and underemployment
As for unemployment and underemployment, Dr Oliver noted that both remain very low in the US and Australia, therefore putting upwards pressure on wages, but pointed “some evidence” that labour markets have seen the best and may now be slowing.
“And wages growth in the US looks to have peaked,” Dr Oliver said.
“If wages growth accelerates too far, it risks locking in high inflation with a wage-price spiral which would make it hard to get inflation down,” he explained.
4. Longer term inflation expectations
“The 1970s experience tells us the longer inflation stays high, the more businesses, workers, and consumers expect it to stay high,” Dr Lowe said.
The good news, he noted, is that short term (1–3 years ahead) inflation expectations have fallen lately in the US and longer-term inflation expectations remain low.
“The latter is consistent with 2 per cent or so inflation and suggests the job of central banks should be far easier today than, say in 1980, when the same measure was around 10 per cent and deep recession was required to get inflation back down. The key is that it stays low,” he said.
5. Earnings revisions
“Consensus earnings growth expectations for this year are around 11 per cent for the US and around 7 per cent for Australia,” Dr Oliver said.
“They look a bit too high, but a deterioration on the scale seen in the early 1990s, 2001–03 in the US and 2008 would be bad news. So far so good”.
6. The gap between earnings yields and bond yields
Acknowledging that the gap between earnings yields and bond yields (which is a proxy for shares’ risk premium) has narrowed to its lowest since the GFC in the US, Dr Oliver said that: “Ideally, bond yields need to continue to decline, and earnings downgrades need to be limited in order to keep valuations okay.”
7. The US dollar
On the US dollar, Dr Oliver noted that last year the US dollar surged with safe haven demand in the face of worries about recession and war and more aggressive monetary tightening by the Fed.
However, since September, it has fallen back as inflation and Fed rate hike fears have eased and geopolitical risks receded a bit.
“A further fall in the US dollar would be consistent with our reasonably upbeat view of investment markets this year, whereas a sustained new upswing would suggest it may be vulnerable,” he said.
“So far so good,” Dr Oliver concluded.
