Article written by Scott Haslem. Published in The Australian Financial Review November 6, 2023.
Even with its latest downgrade, the IMF expects our growth to average 2 per cent over the next five years, toward the top end of developed market peers.
The past month has been challenging for investors, here and abroad. For those who call Australia home, our social fabric has been challenged by a bruising referendum campaign and heightened geopolitical tensions following Hamas’ attack on Israel.
Our growth outlook has been downgraded by the International Monetary Fund (IMF), while the RBA has hinted at another hike on Melbourne Cup day. To this we can add recessionary consumer sentiment, continued rental stress and a record proportion of Aussies taking on multiple jobs to make ends meet.
With all these headwinds, it can be difficult to paint an optimistic picture for our economy.
Of course, many of Australia’s challenges are shared by economies globally. And history has shown our economy typically outperforms. Even with its latest downgrade, the IMF expects our growth to average 2 per cent over the next five years, toward the top end of our developed market peers.
Some key drivers sit behind this, and other forecasts, pointing to Australia’s continued economic outperformance.
Not surprisingly, one of these is population growth. Overseas migration should continue to be a source of economic dynamism for Australia, supporting demand and providing a strong supply of skilled and unskilled workers that can help ease our labour shortages.
Then there is our relatively healthy fiscal position. Sure, the recent “surprise” surplus will almost certainly slip back into deficit. But our healthy starting point does give us some fiscal flexibility to deal with unexpected shocks. And, like the rest of the world, our jobs market is tight. While there are early signs of some softening, this should continue to be a positive for households.
Finally, Australia is uniquely positioned as a reliable supplier of the critical minerals required to power the energy transition. To the extent the government can provide clear policy direction – and the private sector mobilises to capture the opportunities – this is likely to manifest itself over time through stronger business capex, higher tax receipts and jobs growth.
Of course, there are always risks. Our rapid population growth is putting significant strain on existing infrastructure and housing supply. Our productivity has been poor, with labour productivity recently regressing to 2016 levels.
This argues for greater efficiency in our infrastructure and a reinvigoration of flexibility in the industrial relations sphere. Finally, the peak in policy tightening may not yet be in given still sticky inflation, and our fortunes are always somewhat tied to an uncertain global outlook.
For investors, it feels like the balance for Australia still leans glass-half-full compared to other regions of the world – something that we should try to reflect in our portfolio positioning.
Traditionally, when we assess a certain asset class or region as likely to outperform, we tactically “overweight” it. This means buying more of something in the short term relative to our long-term portfolio positioning, possibly because we view it as oversold or below “fair value” relative to other asset classes.
If we believe Australian equities are cheap (given its relative valuation to the rest of the world is now in the bottom decile of readings since 2008), we may take the opportunity to have a larger exposure in our portfolio relative to our long-term allocation.
Similarly, if we think 10-year government bonds, having risen in yield to 5 per cent, represent good long-term value (not to mention a good defensive hedge if things go wrong), we might add more to our fixed income asset class via a bond manager.
While the traditional tactical asset allocation approach remains important, the question is whether we live in a world that also supports more creative opportunism. The great disinflation of the past 30 years – where markets had a tendency to trend higher – has passed. Volatility is now heightened by a range of factors, from geopolitics, nationalism to inequality, that together with shifting demographics feed into inflation volatility. This, in turn, parries into interest rate volatility.
This is a world where taking more opportunistic “sub-asset” or “within asset” opportunities has a role to play in supporting portfolio returns over the longer term.
Within the fixed income asset class, this might look like capturing the 6.25 per cent to 6.50 per cent yields, fixed for five years, which are on offer in subordinated tier 2 major bank paper.
In Aussie equities, it might look like focusing on unloved sectors of the market, such as healthcare. In unlisted alternatives, it might be getting exposure to distressed assets as the lagged impact of policy tightening comes through.
Given the investment environment ahead probably has greater elements of change and uncertainty, investors may need to get more detailed, more active, more creative and more constructive to deliver on their long-term objectives.