Shares defy gloom to buoy returns
Tune in to any nightly news program and you’ll hear headlines that can determine the returns of your investment portfolio. From interest rates, to the cost of living, and a potential economic slowdown, many market-shaking issues have captured attention in recent months.
But against the odds, sharemarkets have produced some healthy gains led by a group of technology stocks known as the “magnificent seven” – which many experts believe are primed to benefit as artificial intelligence (AI) becomes part of daily life.
Like their Hollywood namesakes, these savvy young guns – including Nvidia, Tesla, Meta Platforms and Apple – have protected the US NASDAQ Composite Index against potential losses. Other global companies did well too, including Louis Vuitton, L’oreal and Toyota, so far defying expectations economic conditions would shoot down their profits.
The end result is that global shares overall rose 6% in the quarter and 17% in the year to June 301.
Aussie shares put in a relatively good show too, gaining almost 2% in the three months to June 30 and 11% in the financial year2. Our market doesn’t have a big technology sector, but local dynamics have played their part in sustaining returns.
China has relaxed its extended COVID-19 restrictions, increasing demand for the iron ore that will be needed as its construction, manufacturing and transport industries get back up to speed. That proved a definite plus for Aussie miners such as Fortescue Metals Group.
A resurgent housing market quelled fears the quick-fire rate hikes of the past year would spark a property price collapse – and companies like realestate.com rebounded as a result. Banks with big mortgage books – like Commonwealth Bank and Westpac – also did better. But, overall, the global banking industry has struggled for gains since the US banking crisis.
Shares aren’t the only component of investment portfolios that have been affected by recent news and events, so it’s worth looking at other asset classes too.
Fixed interest delivered more muted returns over the year, and mild losses over the quarter. That’s because inflation remained above target set by central banks, forcing them to increase interest rates even more. When interest rates go up, bond prices typically fall.
But alternative credit – an asset class gaining in popularity – did much better than traditional bonds. Alternative credit returns are generally based on “floating interest rates”. They tend to rise in line with interest rates, giving the investments a boost when rates go up.
So what is the outlook for the months ahead?
The run-up in global shares is likely to subside. A US recession is probable over the next 12-18 months and the easy share prices gains of the “magnificent seven” AI stocks are likely to head off into the sunset – for now, at least.
Aussie shares are better placed as the risk of a local recession is lower than elsewhere. Also, there’s reason to be cautiously optimistic that Asian markets will benefit as China’s reopening stimulates the economies of its local trading partners, including South Korea, Vietnam and Indonesia.
The outlook for fixed interest markets is relatively positive as government bonds often perform better than other assets during an economic slowdown.
1. Source: MSCI ACWI
2. Source: ASX300 accumulation index
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