Markets set to recover after a shaky quarter, but don’t count on China

While trimmed mean CPI – a measure of inflation published by the Australian Bureau of Statistics that excludes irregular price swings – was 6.9 per cent in December, other measures came in higher. The NAB monthly business survey, for instance, showed the three-month annualized rate of growth in retail prices running at 10.8 per cent in December.

“If you take those numbers at face value, there’s got to be some upside risk in the Reserve Bank’s inflation forecast,” Miller says.

While the RBA is forecasting trimmed mean inflation to soften to 3.8 per cent by the end of the year, Miller anticipates it will land between 1 and 2 per cent higher.

“It’s not that inflation won’t come down, it just won’t come down as fast as the market is pricing in,” he says.

Despite uncertainty about inflation and China’s reopening, Jun Bei Liu, portfolio manager at Tribeca Investment Partners, says Australian equities will likely hit a record high in the second half of this year.

“Believe it or not, I think we might hit a bull market this year,” Liu says. “There will be a slowdown in economic activity but the sharemarket is very forward-looking.”

‘Believe it or not, I think we might hit a bull market this year.’

Jun Bei Liu, Tribeca Investment Partners portfolio manager

Relative to the US, Liu says Australian businesses are better positioned thanks to lower interest rates, sustained demand and good exposure to commodities and financials.

“Our corporate cash flow is holding up well, and the Aussie dollar will be stronger meaning that commodities will do better,” she said. “Offshore US dollar earners will be punished a bit, but domestic staples like Woolworths will hold up well.”

And as interest rates peak this year, the property market in particular is set to stabilize over the next six months as house prices have declined, making homes more affordable, Liu says: “There’s been a price fall of 8 per cent, so investor interest is already returning to housing.”

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Despite a strong start to the year, and a positive outlook for the second half of the year, Liu says the next three months will be rough.

“Investors came back from holidays this year and realized we were far too bearish by the end of December, so markets rallied really hard in the first two weeks.” she says. “But the challenge is that we haven’t had the big earnings downgrades yet.”

Liu says that both US and Australian companies are likely to warn about their profit outlook for the rest of the year when they report half-year earnings in February.

“US reporting season will be very poor, and while we expect reasonable corporate earnings in Australia, the outlook is going to deteriorate come February,” she says. “From every indication, we’ve heard Christmas was okay but that retail trading performance in the first six weeks will be weak.”

And if the US enters a recession, Liu says the stock market, which “never prices in recessions properly,” will decline even further.

Like Swan and Miller, Liu also believes China’s reopening won’t be enough to reignite global growth.

“China is still working through issues and consumers are locking themselves back in their houses, so the next few months will be rough for commodity companies,” she said. “In 12 months’ time, China may well be back on. But right now, they’re only good for sentiment.”

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