Australian investors should brace for another volatile year in financial markets, but equities are still expected to deliver positive returns despite lingering inflation pressures, geopolitical tensions and concerns over an AI-driven market bubble, according to AMP chief economist Shane Oliver.
Oliver said global and Australian sharemarkets had posted solid gains over the past week as easing inflation fears, lower oil prices and weaker-than-expected US payrolls reduced pressure for another immediate US interest rate hike.
Australian shares rose around 0.9 per cent, supported by gains in healthcare, mining, information technology and financial stocks.
Although the past financial year delivered another year of strong returns despite trade tensions and conflict in the Middle East, Oliver warned investors should expect significant swings over the year ahead.
“The combination of sticky inflation, an upwards drift in central bank interest rates, worries about an AI bubble, huge US IPOs, political uncertainty around the US mid-terms and high risks around the Iran peace deal are likely to continue to result in a volatile ride with a high risk of yet another correction,” he said.
Despite those risks, he argued the broader investment backdrop remained supportive.
“But the absence of a recession, solid profit growth, Trump likely to pivot to more consumer-friendly policies ahead of the mid-terms and the Fed and RBA likely to cut rates next year should result in okay overall returns,” he said.
Oliver noted Australian shares returned 6.1 per cent over the past financial year, outperforming inflation and most bank deposit rates, while global equities delivered around 23 per cent in local currency terms, led by Japanese and emerging market stocks.
Turning to the macroeconomic outlook, Oliver said the US labour market continued to cool without showing signs of a sharp deterioration, helping reduce pressure on the US Federal Reserve.
Payrolls increased by 57,000 in June, while average hourly earnings growth remained around 3.5 per cent year-on-year, suggesting inflation rather than employment would remain the key driver of monetary policy.
Closer to home, Oliver maintained his expectation for another Reserve Bank of Australia rate increase in August after minutes from the central bank’s most recent meeting reinforced its tightening bias.
“In Australia the minutes from the last RBA meeting noted that financial conditions were ‘somewhat restrictive’ with signs that monetary tightening was being transmitted to the economy,” he said, adding the central bank continued to cite “widespread inflationary pressures”, although the August decision remained “a close call”.
Oliver also forecast further weakness in residential property, expecting Australian home prices to fall around 2 per cent this year and 6 per cent over the next 12 months as higher interest rates, poor affordability and reduced investor demand weighed on the market.
He said the removal of investor tax concessions had prompted many investors to move to the sidelines while awaiting lower prices and stronger rental returns.
Looking ahead, Oliver said global and Australian equities should still generate positive returns over the next 12 months despite elevated volatility.
He expects bond returns to broadly match running yields, unlisted commercial property to benefit from demand for industrial assets linked to data centres, cash and bank deposits to return around 4 to 5 per cent, and the Australian dollar to strengthen towards a fair value of around US72 cents.
