February 2024 Market Update February 23rd, 2024

Just to recap.

The idea is to explain in simple terms, what we think may happen in the near future and suggest adjustments you might make to the overall mix of your investments. If your main investment vehicle is super, you do-it-yourself online by logging into your super fund’s website and shifting the mix.

If outside of super, you can effect the same changes but as you know, we need to weigh-up the consequential implications that might flow-on. For example, selling an asset at a profit might trigger Capital Gains liabilities (Netplan session 1.

As share markets test record highs, deposit rates are at levels not seen since the early 2000s, and residential property continues to surge, should you be making any tweaks to your investment portfolios?

What a frothy 6 months we've seen. It seems like anything we touch just keeps going up!

What’s happened

In an earlier market update, we raised the specter of continually rising interest rates as the inflation beast seemed yet to be tamed. Interest rates are lifted by central banks as a means of redirecting income to debt repayment rather than spending. If spending is too hot, prices increase, fueling inflation.

How quickly those expectations can change, and the flow-on effects have been profound.

Share Markets

World share markets now expect interest rates to stay where they are in the short term and to then start a decline later in the year.

Share Markets tend to lead the economy by about 6 months, so the upward trend has been due, in part, to a belief that people will have more in their pockets to spend when rates fall.

That’s what’s been fueling the increase in share prices, plus a few standout jumps by huge US corporations exposed to emerging Artificial Intelligence technology.

Some of the fundamental measures of share prices are indicating that things are overheated. This chart takes us to the end of January 2024, and since then, the market has risen by a further 4 percent, placing it well in the “strongly overvalued” range.

On the Australian domestic share market, however, the surge has been less dramatic, but we’ve still touched fresh highs. In part, this limited increase is due to uncertainty over the economic health of our biggest customer, China. That’s not been helped by competing suppliers coming online to deliver low-cost commodities such as Nickel and Lithium.

We think now is an excellent time to gather the profits you have made in the past 6 months or so and stash that into cash. It will top up the kitty for upcoming expenses and lock in your profits. This way, if the market continues to rise, we can do the same again in 6 months. If it drops, you know you cashed in and have real profits, not just paper profits.

Property

We need to differentiate between commercial and residential here.

The commercial sector (where most super funds invest) has been pretty much smashed over the past year or so as the oversupply caused by people working from home has seen values fall by as much as 20 percent. We see this as an opportunity but not where the fund invests in unlisted property (many of the large low-cost funds). That’s because they are under the blowtorch about valuations, and there are some concerns that these may see a fall in values.

Residential, on the other hand, has been fueled by a surge in immigration as a catch-up post-Covid, where immigration went from about 250,000 per year to almost nil. Post-Covid, we have certainly caught up, with new Australians currently at about 600,000. This has fueled a supply shortage which has forced up prices across the board.

The Government has recognized the issue and in December flagged that immigration would be tightened to pre-pandemic levels.

For that reason, we are very wary of recommending new investment in this sector at present, and if you are thinking of selling, now might not be a bad time.

Mining states are possibly even more vulnerable as commodity prices plunge. We are already seeing the closure of some mines, and unemployment is a potential issue that will impact property prices.

Interest Rates

Those who took up our previous advice to move into more conservative investment options using bonds have benefited from the potential reduction in interest rates. Netplan session 2

We think that rates might fall by the end of the year, but short of a recession, the falls would be modest. The days of 4 percent mortgage rates are almost certainly behind us. We think a drop of up to 0.75 percent in total over the next year is what we might see.

Retirees should take a serious look at lifetime annuities and have a look at the new video session we’ve done on the topic.

Right now, we think you get the benefit of the high interest rates, and these are effectively locked in for life.

What to do

Retirees running an ABP should look at the profits they made over the past 6 months or so and switch that amount into the cash option.

Those approaching retirement should look to move to the conservative or stable option to protect you from any market corrections.

Those who have just received an amount of cash (inheritance, lotto win, etc.) should park it in cash accounts using online savings accounts. At present, you can get up to 5.75 percent p.a. for 4 months at call!

If there was a correction, you could then move the cash into the markets to take advantage of the low entry prices.

If you are considering exiting a residential property investment, look at it critically with our and other expert comments currently out there.

Remember that we need to understand the economic drivers of further price increases, not just some face telling us that he or she thinks that the market will rise by another ten percent this year. The magic three-letter word always applies to anyone predicting the future… W H Y?

If your super fund allows you to invest in listed commercial property, now might present a bit of a buying opportunity – but don’t bet the house on it! We could be wrong…

Remember, listed property assets are those trusts and companies listed on the stock exchange. We like them because we have greater confidence that the share price more accurately reflects the value of the underlying commercial property assets.

Over the next few weeks, we are redoing most of the Netplan Sessions to ensure the numbers being used are current and reflect the big changes coming on July 1.