Quarterly Market Outlook
By David Chen,
Associate Portfolio Manager
“The World Bank warned that the global economy could fall into a recession and recently slashed its forecast for global growth in 2023"
“The resilience of the domestic economy and tight labour markets give fuel to the RBA to continue with rate hikes in their February meeting”
“Jerome Powell has indicated that rate rises may slow as inflation declines, but made it clear that rates will remain high until inflation is brought down to the central bank’s target rate”
“The rapid reopening of China’s economy improved the outlook for global growth but introduced risks to inflation from resurgent demand”
“Financial markets remain volatile with an increasing probability of an economic downturn”
Global growth is slowing sharply from elevated inflation, higher interest rates and disruptions
caused by Russia’s invasion of Ukraine. The World Bank warned that the global economy could fall
into a recession and recently slashed its forecast for global growth in 2023 to 1.7% from 3%. China’s
recent re-opening may provide a boost to global demand but uncertainty remains due to severity of
current and future outbreaks and impact on global inflation.
In Europe and UK, the on-going Ukraine war has led to severe impacts on both inflation and the
economy. Political instability in UK gradually improved after Rishi Sunak became Britain’s third
Prime Minister in under two months and the new finance minister Jeremy Hunt reversed almost all
the tax cuts from the original mini-budget. Inflation in the region continued to hit record highs
during October. However, CPI data for November and December showed Eurozone Inflation falling
to 10.1% and 9.2% respectively and UK Inflation softened from 10.7% in November to 10.5%
In early December, China finally relaxed the majority of its strict covid related restrictions following
civil unrest and protests. The ensuing period resulted in a rapid rise in infection rates and deaths as
hundreds of millions of people are believed to have been infected in December alone. Commodity
prices rallied following the easing of restrictions, supporting the Australian economy which softened
over the last quarter.
US inflation has slowed for the 6th consecutive month reaching 6.5% yoy in December from lower
fuel prices, however high rent and services prices continue to pose problems for the slowing
economy. Recent economic data has been weaker than expected indicating that a soft landing may
be difficult to achieve.
Financial markets remain volatile with an increasing probability of an economic downturn. Against this back drop, CCIAM continue to advocate for a more defensive positioning. We reduced our underweight in Fixed Income as yields have become attractive and for defensive positioning. We retain our underweight positions in equities and property.
“The World Bank warned that the global economy could fall into a recession and recently slashed its forecast for global growth in 2023.”
Australian economy softening but labour markets strong
Australia’s GDP grew 0.6% QoQ in Q3 2022 and was the fourth straight quarter of growth in the
economy but the softest increase over the period. Household consumption growth slowed from
2.1% to 1.1% due to household cost pressures and rising interest rates. Household savings ratios
also dropped to 6.9% from 8.3% despite solid wage growth, indicating that consumption has been
supported from savings accumulated during the lockdown period. Export growth slowed as
commodity prices softened while imports grew 3.9%. China’s sudden reopening in December
will likely support exports over the near term as iron ore prices recovered significantly during
The Australian labour market remains strong with the unemployment rate steady at 3.4% in
November. More people searched for work, increasing the participation rate slightly to 66.8% and
64,000 jobs were added in the economy. However, businesses continue to struggle with finding
workers with fewer overseas students and other short-term visa holders compounding the tight
The residential housing market continues to fall as a result of the rapid rate hikes. The CoreLogic
house price index showed that house prices fell 7.2% yoy with the largest drops in Sydney (-12.1%)
and Melbourne (-8.0%). Chart 1 shows the % price change in the Australian median house prices
which has dropped each month since the first rate hikes in May 2022.
Chart 1 - Source: CoreLogic
Chart 2 - Source: Reserve Bank of Australia
RBA slows down rate hikes but domestic inflation still rising
In early October, the RBA decided to slow down its rate hikes to observe the impacts on the economy. Chart 2 shows the cash rate increasing 50bps each month from May 2022, before softening to 25bps from October onwards and ended December 2022 at 3.1%. However, the resilience of the domestic economy and tight labour markets give fuel to the RBA to continue with rate hikes in their February meeting.
Australian inflation increased to 7.3% yoy in November from 6.9% in October and the RBA expects that inflation will peak in December reaching 7.75% yoy. The on-going inflationary pressures are mainly due to high housing, furnishings, food and transport costs.
New dwelling prices remain high as builders passed through higher costs for labour and materials, although this has softened in recent months. The construction industry faces ongoing headwinds from high input costs and shortages of labour. The rental market tightened and rent prices increased 3.6% yoy in November. Food prices surged 9.4% yoy and reflects supply chain issues from flooding and increased input costs such as transport and wage costs. Fuel prices were up 16.6% yoy in November, up from 11.8% in October as the fuel excise cut ended at the end
China’s re-opening, whilst positive for global demand, may also contribute to rising inflation due to resurging demand. We expect inflation in Australia to remain high in the short term, however short term inflation expectations are moderating.
“The resilience of the domestic economy and tight labour markets give fuel to the RBA to continue with rate hikes in their February meeting.”
US Inflation softens but services prices remain high
In the US, Chart 3 shows headline inflation dropping for the 6th consecutive month from 9.1% yoy
in June to 6.5% yoy by December – the lowest since October 2021. Core inflation also dropped
from 6.6%yoy in the September quarter to 5.7% yoy in December as higher apparel, shelter and
transport costs outweighed declines in new vehicles and used car prices.
On a monthly basis, headline CPI fell 0.1% in December, the first time since May 2020 and follows
a 0.1% rise in November. Falling fuel prices were by far the largest contributor to the monthly
decrease, falling 9.4% over the month, more than offsetting increases in shelter costs, which rose
0.8% over the month. Shelter and services prices remain sticky but leading indicators from
CoreLogic suggest U.S. rental price growth slowed for the sixth straight month in October to 8.8%
yoy. This is the lowest rate of appreciation in more than a year but still three times higher than the
Tight household budgets and improved supply chains led to a drop in used car prices which fell
2.5% in December and has now fallen 8.8%yoy. Used car prices peaked in early 2022 from surging
demand and constrained supply chains. Food prices also softened, rising 0.3% in December, the
lowest month on month increase since March 2021. Falling goods inflation has been the main
driver of lower inflation in the US but the Fed’s face headwinds with tackling core inflation which
is driven by services prices.
Chart 4 shows “sticky” US Services prices rising to 7.5% yoy and remains stubbornly high due to
tight labour markets leading to higher wages. Whilst goods inflation has been softening, it has
largely been offset by higher services and impacts on how quickly inflation can be brought under
control. Overall, Inflation is expected to continue to moderate in 2023, with leading indicators
such as the Producer price index softening for the fifth straight month.
The latest CPI data is encouraging and shows that the Fed’s aggressive monetary tightening is
working to cool prices and the economy. Fed chair Jerome Powell has indicated that rate rises may
slow as inflation declines, but made it clear that rates will remain high until inflation is brought
down to the central bank’s target rate. Their latest projections show the cash rate reaching
around 5.25% and staying there for some time before dropping to around 4.1% in 2024. This is at
odds with the market that has priced in a terminal rate of 5% followed by rate cuts to support the
economy in the second half of 2023.
Chart 3 - Source: Bloomberg
Chart 4 - Source: Bloomberg
"Jerome Powell has indicated that rate rises may slow as inflation declines, but made it clear that rates will remain high until inflation is brought down to the central bank’s target rate”
China’s abrupt reopening brighten global outlook but pose a risk to inflation
Until recently, China followed a zero-Covid policy including frequent covid tests, strict lockdowns
and quarantining those testing positive. In early December, China surprisingly made an abrupt Uturn,
abandoning most of its restrictions in response to heavy protests. China’s slowing economy
and high youth unemployment rate also contributed to the pivot as policy makers quickly realised
that it was impossible to contain the virus without considerable economic damage. The rapid
reopening of China’s economy improved the outlook for global growth but introduced risks to
inflation from resurgent demand.
Since Beijing began relaxing covid restrictions in early November, iron ore prices have rallied
significantly, surging 42% from the lows seen in late October as seen in chart 5. Local steel
manufacturers stepped up purchases to implement policy measures to support the slowing
economy. The Australian materials sector has benefited from the unexpected pivot, and was the
highest contributor to ASX200 performance over the last quarter.
Although the change is seen to be positive in the long run, boosting both Australia’s economy as
well as global growth, it comes at a significant social cost. The Chinese Centre for Disease Control
and Prevention (China CDC) reported that more than 250 million people —some 18% of the
population, had already been infected with the virus and millions were being infected each day.
China’s health system struggled with the surge in cases and pharmacies faced a shortage of
medical supplies including paracetamol. The authorities reported almost 60,000 covid related
deaths in the recent December wave, but this likely just the tip of the iceberg and the actual death
toll may be far higher.
China has a vulnerable population with low vaccination rates amongst the elderly and very little
immunity in the population. China’s National Health Commission reported that only 69% of those
aged above 60 and just 40% of those above 80 have had a booster shot. This was likely a major
roadblock to reopening, yet the authorities were not able to convince their elderly population to
Whilst the initial wave in December may be peaking soon, authorities fear a second larger
outbreak will occur during the Chinese new year holidays in late January. Higher absenteeism
from sick workers and other covid disruptions may also impact on production and supply chains.
The reopening will be a bumpy ride but investors are hopeful that stimulus from Beijing will prop
up the global economy at a time when other countries are slowing down.
Chart 5 - Source: Bloomberg
Chart 5 - Source: China's National Health Commission
“The rapid reopening of China’s economy improved the outlook for global growth but introduced risks to inflation from resurgent demand”
Our global macronomic economic views are set out in the following table:
Rising headline and core inflation remain the key risk for the domestic economy. The labour market is solid but housing market continues to weaken. Consumer spending remains strong, supported by above average household savings which have started to soften. China’s re-opening support the exports and materials sector.
Inflation and the Fed’s pace of tightening are key risks for the US. Whilst recent inflation data has been encouraging, the Fed’s higher than expected terminal rate suggests more needs to be done before a pivot can take place. High rent and services prices continue to feed into high core inflation. The labour market has been strong, but this will need to soften in order to reduce wage growth and services inflation.
Europe & UK
Geopolitical risk and inflation remain key risks for the Euro and UK region. The Ukraine war continues to impact on economic growth and inflation in the region, particularly in food and energy.
China’s economic rebound remain the key risk for emerging markets. Economic activity has been soft due to soaring COVID cases, even after reopening. China’s property market continues to weaken despite stimulus. Geopolitical risks increased from conflicts with Taiwan and US. Growth will likely improve once current outbreaks are brought under control but there is still uncertainty around the execution of reopening.
Upside and Downside Case
The table below shows the opportunities and risks around our base case. The following shows the opportunities and risks around our base case. The short-to-medium term outlook still dependent on the outcome of the Ukraine war, the trajectory (and pace) of monetary policy tightening and global inflationary pressures.
- Oil prices ease from lower demand due to a global slowdown
- China announces strong fiscal and monetary stimulus to drive consumption and investment, enhancing global growth
- Inflation reaches its peak and begins to trend downwards resulting in central banks adopting less hawkish stance
- Risks to rising inflation resulting in central banks lifting rates higher than expected
- Uncertainty in geopolitics and escalation in Ukraine conflict
- China’s economic rebound adds to inflationary pressures
- Spread of new Covid-19 variants
Total Portfolio Positioning and Key Implication for Market
“We remain cautious over the near-term and we have tilted towards a more defensive risk position”
Financial markets remain volatile with an increasing probability of an economic downturn. Aggressive monetary tightening will flow through to impact on earnings and could lead to further downside. Against this backdrop, CCIAM continue to advocate for a more defensive positioning.
We reduce our underweight in Fixed Income as yields have become attractive and for defensive positioning.
We retain our underweight positions in equities and property.
We slightly increased the duration of the fixed income portfolio for downside protection. However, retain our overall short duration vs the index
“Financial markets remain volatile with an increasing probability of an economic downturn. Aggressive monetary tightening will flow through to impact on earnings and could lead to further downside. Against this backdrop, CCIAM continue to advocate for a more defensive positioning.”
Key: Our asset class views are considered when positioning the portfolio against its Strategic Asset Allocation (SAA).
Positive views would likely lead to an overweight position against the SAA.
Negative views would likely lead to an underweight position against the SAA.
Valuations have re-rated and improved since the start of 2022. China’s reopening support materials sector but financials sector remain under pressure from falling property market and higher loan losses. Higher mortgage rates are expected to dampen consumer spending as savings deplete.
US inflation is still high and further softening in the economy, particularly in labour markets, is required to reduce core inflation. Company earnings are expected to decline next quarter as inventories increase and demand softens.
Fixed interest - Gov’t Bonds
Bond yields have risen and are more attractive. The increasing risk of recession improve the potential downside risk protection from bonds, particularly as inflation is expected to peak in December.
Fixed interest - Credit
Australian credit continues to provide a spread premium and are at or above historical averages. Corporate fundamentals remain strong and default levels are very low, although rising.
Rising bond yields continue to weigh on the asset class. Spread above government bonds have compressed significantly down to historic lows. The asset class faces cyclical headwinds from a slowing economic outlook. Industrials outperform retail and office, although valuations look stretched.
Cash provides capital protection and reduce portfolio volatility. Yields have increased in line with rate hikes which improved returns.
USD is still considerably overvalued and has appreciated significantly relative to other currencies from an aggressive Fed and flight to safety from increased geopolitical risks.
CCI Asset Management does not guarantee the repayment of capital or the performance of any product or any particular rate of return referred to in this presentation. The information contained in this presentation is current as at the date of preparation but may be subject to change.
While every care has been taken in the preparation of this document, CCI Asset Management makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts.
The information contained in this presentation is intended as general commentary, view and perspective by CCIAM, and CCIAM’s Asset Consultant, Frontier Advisors Pty Ltd, and should not be regarded as financial, legal or other advice.
This presentation has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs.
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