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5 May 2023 - Hedge Clippings | 05 May 2023

By: FundMonitors.com

    

Hedge Clippings | 05 May 2023

"This budget will be handed down in the context of an uncertain and volatile global economy which is precariously placed."

Thus Treasurer Jim Chalmers summed up his view of the challenge facing him next Tuesday following his visit to the US to meet his offshore counterparts, and things would seem to have become even more volatile and precarious since then.

That was back in mid April when he returned with the message that the IMF was forecasting "an incredibly weak five years of economic growth." Since then the US banking system has gone from bad to worse following the collapse of Silicon Valley, Signature, and now First Republic Bank, with others likely to follow as investor confidence tumbles. Bank failures are not that uncommon in the US, as shown by this list from the FIDC, with some analysts estimating that over 50% of the 4,800+ US banks could be under threat. While in Australia we have a well capitalised, and much more concentrated banking landscape, we too rely on the market's - and in particular depositors' - confidence that their funds are secure, irrespective of government guarantees.

While Australia's economy and budget may be insulated to a degree by record low unemployment, bracket creep, and high commodity prices, they are not immune to the stubbornly high inflation which is spreading to the services sector, and increased labour costs. Basic wage demands, along with calls for improved welfare, are likely to feature heavily in Tuesday's budget, even if any increases will be insufficient for those unable to offset the increases in their basic living costs. What is almost certain to be missing on Tuesday is any serious attempt to fix the outdated, inefficient and broken taxation system on which the welfare system relies.

Meanwhile, given this week's further tightening both here and the US, seemingly the only remedy to the current inflation is higher interest rates - with the outlook for a prolonged period of both, and the risk that the desire to dampen inflation will damage the economy to the point of recession. The RBA's March quarterly Statement on Monetary Policy, released earlier today, claims at the outset that inflation has passed its peak, and expects the current level of 7% to decline to 4.5% by the end of the year, before returning to 3% by mid 2025. That's dependent on GDP growth of just 1.25% as inflation and interest rates take effect, and with recent declines in retail sales, and the post COVID slump in the Household Savings Ratio, and a 3% decline in Household Disposable Income Growth, that may well be the case.

The Statement is careful to add the caveat that the "outlook is subject to a range of uncertainties," but what is certain is the Board's focus on inflation, which in the Statement's Overview gets mentioned no less than 49 times, more than interest rates, wages, labour and the economy combined. If that's not enough, it is worth taking notice of the last paragraph, and the final sentence: "The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that."

The RBA's intentions are one uncertainty Jim Chalmers won't have to deal with next Tuesday.

Meanwhile, it's no secret that the small cap equity sector, having returned on average 17.42% p.a. over the past three years to be the best performing peer group in AFM's database, has struggled over the past year, falling 11.63%. There's been some recovery over the past six months, so next Tuesday at 4:15 AEST we will be hosting a "round table" webinar featuring three fund managers from the Small Cap sector.


Click here or the register button below, and join me as we talk to Dean Fergie from Cyan Investment Management, Steve Johnson from Forager Funds Management, and Gary Rollo from Montgomery Investment Management to get their take on lessons learned, and what they believe is in store for smaller companies.

Register Now


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