CFS Market Insights: May 2024

Welcome to CFS Market Insights, I'm Jonathan Armitage, the chief investment officer at CFS.

In previous Market Insights we've spoken about volatility of inflation data. And in the last couple of weeks, we've seen quite a bit of volatility in inflation information in countries like the US, the UK and also here in Australia. And that is something that we expect to persist over the coming months.

This has led to an adjustment in market expectations around the future direction of interest rates. And that has also led to some weakness in the last 4 or 5 weeks in fixed income markets and also in equities. And that's really why we've seen quite a bit of movement in markets in the last month or so.

This movement in inflation data is not unexpected, and it's something that we have positioned our investment portfolios for, as well as making sure that they're able to deal with other issues that may emerge that impact the pricing of equities, fixed income and other assets.

If we turn our attention to interest rates here in Australia, the March CPI data was really quite strong and slightly surprised markets. There is a federal budget which will be delivered in May, and that is likely to target the cost of living crisis that many in Australia are facing. This actually has the potential to add to inflationary pressures in the shorter term. And so that is leading market participants to expect that actually interest rates here in Australia will not fall in calendar 2024.

One of the issues that has been dominating news has been the escalation of the conflict in the Middle East. While the human impact of this conflict has been significant, the economic implications have been much less so, partly because these are not particularly large economies in a global sense. History suggests that these regional conflicts only impact markets in the very short term. So far, the impact on returns for investment have been relatively muted.

One of the issues that we've talked about in previous notes has been around elections and the significant number of elections that are taking place in 2024. Obviously, by far the most significant is the upcoming US election in November. One of the things that we do think is going to be a feature of that is a focus on China, and it's quite clear that the tensions between China and the US are not dissipating.

As we move closer to the election in November, we do expect the rhetoric from the two main candidates to increase when it comes to China. One of the things that the main politicians in America have worked out is that it is a very clear way to score political points by attacking China. So, we do expect that the language used around China and the economic relationship between China and the US will continue to amp up and may well lead to some market volatility in the short term.

What does this mean for the future direction of markets? It's possible that we'll continue to see increased fluctuations in markets as inflation data continues to be quite volatile. And that will be overlaid by the continuing ebb and flow of global events such as the US elections. However, we have prepared our investment portfolios for times like these.

This is why we continue to build diversified portfolios at CFS. And look at increasing the range of investment options that we have within our portfolios. For example, adding private debt to our investment portfolios, we think will help manage some of the volatility in returns. We also know that volatility can create opportunities, and we have the liquidity built into our portfolios to capitalize on new investment opportunities.

Thanks for watching CFS Market Insights. See you next time.