April 2024
What Lies Ahead
Coming Soon
April 2024
Climbing to the Peak
There’s something almost mesmerising about the ongoing rally in global equity markets. Rather than a spectacular race to the peak, this quarter has seen a more slow and steady climb. By the end of March both the S&P/ASX 200 Index in Australia and the S&P 500 Index in the US are reaching new record highs every other day. With interest rates about to start coming down, is there anything to stop the markets climbing higher and higher?
April 2024
Quarterly Market Report - March 2024
After the exuberance of the “pivot party” in the last eight weeks of 2023 – when central banks all but confirmed that interest rises were over, and the next moves would be downward – many thought that there could be a retraction in early 2024. But markets have shaken off expectations that interest rate cuts are not coming as quickly as they had priced in at the end of last year and have been steadily climbing throughout the quarter.
March 2024
Cash is King - Until Inflation Steals the Crown
As interest rates have gone from 0.1% in 2021 to 4.35% at the end of 2023, mortgage holders have been hit hard. But those investors who prefer the security of term deposits to generate income are happy to see returns leap higher over the past 2 years. However, there is one big problem: inflation remains persistent, and it is eating away at the income from the term deposit.
February 2024
Rate Expectations
Since the end of 2021 equity and bond markets have been grappling with the consequence of increasing interest rates as central banks grapple with decade-high inflation. Now investors are betting on interest rate cuts after hopes that the US Federal Reserve had tamed inflation drove a powerful rally across global markets at the end of 2023. But do rate expectations in the US translate to rate cuts in Australia?
January 2024
Not Even Close... How Did Market Analysts Get It So Wrong In 2023?
As a new year in financial markets begins, it’s probably fair to observe that for most economic forecasters or market strategists 2023 was a humbling year. This time last year a global recession was imminent, stocks and property would free fall, although China would come roaring back, and bonds were the place to be. But none of that happened…
January 2024
Pivot Party
The pivot party kicked off in November when data showed inflation falling much faster than expected, and the Federal Reserve stated unequivocally that rate hikes were over and rate cuts were just around the corner. The pivot party was in full swing - and equities, listed property, and bonds all surged on the euphoria of falling interest rates in 2024.
January 2024
Investment Lessons From 2023
No year in markets has ever been like any year preceding it. Each year's end gives us a moment to reflect on the year that was and assess our investment approach. Much will be written about what happened in financial markets last year, but there are three key lessons investors can take out of 2023.
January 2024
Quarterly Market Report - December 2023
For most of 2023, Australian stocks struggled as concerns around inflation and interest rates dominated sentiment, while global stocks were driven by a narrow cohort of US tech stocks. But everything, everywhere, all at once changed in the last two months of the year, when data showed inflation falling much faster than expected and the Fed stating unequivocally that rate hikes were over and rate cuts were around the corner. The pivot party got into full swing – and everything from global stocks to corporate bonds all surged higher.
December 2023
2023: Financial Market Review
This is the Principia Investment Consultants review of financial markets for 2023. This time last year, analysts were busy telling the world about their forecasts for 2023, which centered around how Australia and the rest of the world were heading for recession, tech stocks had further to fall, and now was a great time to be in bonds. But none of that happened…
November 2023
Finding the Terminal Rate
A steady decline in inflation up to now has had central banks hit the pause button on rate increases for the last several months – but in Australia the RBA is not quite done just yet. Markets can’t decide if higher rates will bring about a soft landing or end up breaking something. Adding to the pressure are US Treasury yields which remain elevated – despite the conflict in the Middle East - due to high oil prices, farce on Capitol Hill and sticky inflation. We may be close to the Terminal Rate for interest rates, but higher borrowing costs and geopolitics could still end up breaking something.
October 2023
Dancing in the Dark
Financial markets are in a period of uncertainty. Central bankers are unsure whether they’ve done enough – or not enough – to get inflation back to their 2 to 3 per cent target band. Economists and market commentators have now danced from the “hard landing” scenario which seemed certain earlier in the year to the “soft landing” scenario in July and are now waltzing into the “could be hard or could be soft” scenario. Without any clear guidance, markets are just dancing in the dark…
October 2023
Quarterly Market Report - September 2023
This is the Principia Investment Consultants Quarterly Market Report for September 2023. For most of the quarter volatility stayed low and equity markets around the world defied interest rate increases and kept climbing upwards. But towards the end of the quarter it became apparent that inflation would remain sticky and any sign of rate cuts was being pushed out further into the future. Rising bond yields are increasing pressure on the economy and are causing market angst, while central banks reiterate that rates will stay “higher for longer”.
September 2023
Why Market Timing Doesn’t Work.
Everyday the financial media has stories about either impending doom or unbridled optimism for the stock market. Not surprisingly, many investors get the urge to move their asset allocations around based on these stories in the hopes of boosting their returns. They should resist that urge. While they might get lucky once and boost returns in the short term, they must get lucky twice to keep that excess return, or else they get financially hurt in the long run. So, do you feel lucky?
August 2023
Staying the Course: Financial markets now predict a soft landing for the economy.
At the start of the year most market commentators seemed convinced that the economy was heading for a hard landing and by the end of the year interest rates would need to come down to get us out of a recession. The obvious trade was to get out of equities and load up into bonds as they would be beneficiaries of higher income and falling rates. But equities have continued to climb while yields keep edging upwards and now market commentators agree that we are in for a soft landing. It’s why as an investor the best trade is to ignore media predictions and stay the course with the portfolio that has been created for you by your advisor.
August 2023
Breaking News: The US credit rating has been downgraded! (... and the market went wild)
Global Ratings Agency Fitch downgraded the US credit rating on August 1st from AAA to AA+ due to fiscal concerns, a deterioration in US governance, as well as political polarization reflected partly by the January 6th insurrection. The news took markets by surprise and caused a minor flutter, but despite the downgrade being an undeniable bad omen the financial media pretty much ignored the news. Does a downgrade to the US credit rating matter? Does it have any effect on investors here in Australia - or anywhere else for that matter?
July 2023
Quarterly Market Report - June 2023
This quarter has seen an eerie calm descend over markets as the banking stresses of early March fade into the background. Market measures of risk, such as volatility, have retreated, while global equity markets have rebounded strongly, buoyed by a resurgence in technology stocks.
However, there are mixed messages. The inverted yield curves in Australia and the US suggest that a hard landing may be in store.
Are we witnessing the calm before the storm?
June 2023
AI-Related Stocks Are On A Winning Streak:
But a diversified portfolio is your best bet.
There has been much written lately about the winning streak that AI-related stocks are having this year. Shares of Nvidia are up about 170 per cent, while Apple and Microsoft - the top two US companies by market value - have both climbed nearly 40 per cent. How do you pick these winners in advance? The good news is that you don’t have to.
June 2023
Bonds or Term Deposits: Which is best for your portfolio?
With term deposit rates up around 4.5% or higher, it’s reasonable that investors may question the role of a bond fund in their portfolio. Given that bond funds had their worst return on record in 2022, and term deposits are effectively a risk-free investment paying a guaranteed return, why wouldn’t investors use term deposits as the defensive allocation in their portfolio?
June 2023
Mixed Messages: Bond and Equity Markets are Sending Different Messages
Since the beginning of 2023 equity and bond markets seem to be on two different paths. Equity markets, which by their nature are optimistic, have been rising despite the continuing increase in interest rates by central banks. Bond markets, which by their nature are pessimistic, have been pointing to a dramatic slowdown in the economy. How should investors interpret these mixed messages, and what can they do about them?
May 2023
Dead Man's Curve:
Does an Inverted Yield Curve Imply a Recession?
For many investors, a yield curve is a little known and even less understood aspect of their investment journey. In general, when the financial media starts writing about yield curves it is almost always about an “inverted” yield curve and how it foreshadows a coming recession – hence the term “Dead Man’s Curve”. But what is a yield curve, why is an inverted one a doomsayer, and what does all this mean for investments in the stock market?
April 2023
Quarterly Market Report - March 2023
This quarter has been dominated by the collapse of Silicon Valley Bank and the ensuing banking crisis, set against a background of cooling inflation, continuing rate hikes, and the prospect of a global recession in 2023. Throughout the quarter the prevailing market mood has switched from “hard landing ahead” in the economy to “soft landing’” to “no landing” and then back to hard landing again when everything, everywhere came crashing down all at once when SVB collapsed. Yields are down, bonds are up, bank stocks are dazed and confused, and high tech is flying again.
March 2023
Australian Banks
and the Global Banking Crisis.
Volatility has struck financial markets as several banks in the US and Europe collapse and require Governments and regulators to step in to protect depositors. Contagion fears are widespread, and banking shares are being particularly hard hit. So, if there is another GFC brewing, are Australian banks at risk? The short answer is no.
March 2023
Volatility Ahead:
And how to safely navigate past it.
The last 16 months have been very volatile for equity investors, with significant falls in January, June and September of 2022, offset by gradual recoveries in the other months of the year. More recently, bank failures in the US and Europe have led to another bout of market volatility. Bringing inflation down by raising interest rates was never going to be easy and is likely to be met with an economic slowdown. Expect more periods of volatility ahead. But in many ways the swings and roundabouts of the last year and a half have reinforced the importance of sticking to a long term plan.
March 2023
To Hike or Not to Hike?
Now That is The Question
Economists are at odds over whether the Reserve Bank of Australia should suspend rate hikes in April or raise the cash rate by another 25 bps, as the RBA confronts how to bring inflation down with higher interest rates while not sending the economy into recession. The bond market is indicating rate increases are over… but inflation remains uncomfortably high. Will the RBA hike again?
January 2023
Quarterly Market Report - December 2022
A rally that began in October has dominated this quarter, resulting in (perhaps surprisingly) positive returns for Australian and global equities and bonds. But that rally ended on December 15th when the Federal Reserve made it clear that its job was far from over. And so, the year has ended much as it started – with markets trying to come to terms with how high rates will need to go before the “terminal rate” is reached.
December 2022
2022 - The Year That Was
This is our short review of markets for the year that was – 2022. For many investors it’s been a year to forget! By the end of September, bonds saw their worst returns for generations and the Australian stock market was down -9.6% - but unbelievably by early December the ASX 200 now has a small positive return! Other equity markets have also enjoyed a rally since September are not doing as well…
November 2022
Don't Give Up On Bonds (They can still come through)
Bond investors are experiencing what could be the most challenging year in fixed interest markets, with 2022 shaping up to be possibly the worst since 1931. But there are signs that global bond markets could be bottoming out and are ready to come back and play their traditional role as a defensive part of a portfolio.
November 2022
Gravity Catches Up with Big Tech
Coyotes can defy gravity for years in the markets — but generally there comes a point when gravity catches up to them. This year has seen the large tech stocks having to readjust to a world where persistent inflation has forced central banks to push up interest rates, thus ending the years of cheap money and the ability to defy gravity.
October 2022
Quarterly Market Report - September 2022
It was a wild ride in financial markets in the September quarter. For most of the quarter equities rejoiced in a “Bear Rally” - until Jay Powell’s comments at the Jackson Hole Symposium at the end of August that the Feds would do “whatever it takes” to bring inflation under control put an end to the rally. It may have taken 9 months, but the markets have now got the message…
July 2022
Living With Volatility
Financial markets kicked off 2022 with renewed volatility amid persistent inflation concerns, expectations for interest rate hikes and escalating geopolitical tensions over Russia and Ukraine. These market downturns are frightening, and it often feels like stocks are going down and they are never going to come up again. Here are some facts to help get through these volatile periods
June 2022
A Survival Guide for Volatility
Investors around the world have realized that fighting inflation is going to be painful—which in turn has caused turmoil in the markets. Since the start of the year the Australian market is down 12% - but that’s good relative to other markets. When markets are volatile it is very un-nerving for an investor, and more so if you are in retirement or are approaching retirement. Here are 5 survival tips so to help get you through this period.
May 2022
The Bond Bear Market - Deja vu all over again?
For the last 30 years 1994 has been known as the Great Bond Bear Market. But that’s the old Great Bond Bear Market – there is now a new Great Bond Bear Market. What are the similarities and what are differences between 1994 and 2022? Is it really déjà vu all over again?
May 2022
The Outlook: Cloudy with a chance of Recession
Rampant inflation, rising interest rates, the war in Ukraine, Covid in China, and falling bond and stock prices… It’s a very volatile time in markets and investors have every reason to be unsettled by global events. And on top of what’s already happening, now market commentators are throwing around the “R” word.