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Hedge Clippings | 13 December 2024 As soon as Governor Michele Bullock had given the first indications of a softening of the RBA Board's stance on inflation, and with it the possibility of a rate cut, markets responded by factoring in 2 cuts prior to the election. Of course she still cautioned that inflation remained too high, and the outlook remains uncertain - standard fare for post board meeting comments. How much of that softening in tone has been as a result of pressure from your boss, The Treasurer, will probably never be known. And for those who think the RBA Governor's role is independent, just consider who appoints them to the role. If you're dependent on that, you're not independent, and they're the boss! However, market enthusiasm was dampened pretty quickly by Thursday, with the ABS announcing that the November unemployment rate had fallen to just 3.9%. The RBA has previously indicated unemployment would need to be 4.5% or above to dampen demand, and hopefully inflation. So back to the uncertain outlook, and with the Board not sure to meet again until the third week in February, when at least they'll have CPI data for November and December to chew on. Of course, the other additional information they'll have by then is almost a month of Donald Trump's presidency, an issue that Deputy Governor Andrew Hauser focused on in a speech this week, particularly referring to the potential for a tit-for-tat trade war between the US and China, and for that matter other countries, and the effects on Australia. While noting that nothing can be ruled in or out (particularly true when it comes to Trump) Hauser did emphasise that among a long list of 35 world economies, Australia is the least exposed to the negative effect on GDP of a 10% additional US import tariff. This is also reinforced by this week's article from PinPoint Economics, Part 2 of Risks and Issues for 2025 which is included below. PinPoint are suggesting we shouldn't look for a rate cut any time soon - in spite of other central banks cutting theirs. One interesting chart in PinPoint's analysis is titled "Measures of Misery", a term we hadn't been introduced to before - at least not in stark economic statistical terms. PinPoint's growth scenario depends on consumers opening their wallets again, however noting one certainty - at the end of 2024 consumers are miserable, and that the Enhanced Misery Index (based on a mix of CPI, unemployment, debt, and rents) is at the high end of the range over the past 30 years! Bank Hybrids and Franking Credits: Meanwhile back to the Treasurer's wish for influence on the RBA. Certainly no such independence across at APRA, in spite of protestations from head honcho John Lonsdale that this week's decision announcing the phasing out of Bank Hybrids by 2032 was to protect retail investors and ensure stability of the banking sector in times of stress. The decision was clearly a result of a directorate from Treasury (and presumably the Treasurer) with the intention of removing the $1bn per year in franking credit benefits from retail investors. To add insult to injury, APRA claimed that the submissions they invited from those in the industry were broadly supportive of APRA's move. Nicholas Chaplin, Senior Portfolio Manager at Seed Funds Management, whose Hybrid Income Fund has returned 8.52% over the past 12 months, noted that that the move also significantly reduces direct access to listed fixed income opportunities for Australian retail investors, and that professionally managed funds will no doubt benefit. Bill Shorten tried unsuccessfully to abolish franking credits on equities for mum and dad investors and pensioners, and in doing so lost the 2019 election, and his tilt at the Lodge. At the time, Hedge Clippings penned a poem warning "Wee Willy Short-One" that those investors and pensioners would vote - as they did - and also that Albo was breathing down his neck - as he was! The net result is that potentially the $43 billion in hybrids will now be forced into riskier bank equity, with potentially lower returns. That's great for the stability of the banking system in a crisis, but also an indication that when it comes to franking credits on equities, the government - or this government - still has its eyes on them. News & Insights How Trump will impact equity markets | Magellan Asset Management Mixed market sentiment for 2025 driven by global geopolitics and central bank easing cycles Risks & Issues in 2025 - Part 2 | PinPoint Macro Analytics November 2024 Performance News Skerryvore Global Emerging Markets All-Cap Equity Fund Bennelong Concentrated Australian Equities Fund Bennelong Twenty20 Australian Equities Fund Argonaut Natural Resources Fund |
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