Markets are recovering after a shaky quarter, but don’t count on China

While the trimmed mean CPI — a measure of inflation released by the Australian Bureau of Statistics that excludes erratic price swings — was 6.9 percent in December, other measures were higher. For example, NAB’s monthly business survey showed that the three-month annualized retail price growth rate was 10.8 percent in December.

“Taking these numbers at face value, there must be some upside risk in the Reserve Bank’s inflation forecast,” Miller says.

While the RBA forecasts trimmed mean inflation to fall to 3.8 percent by the end of the year, Miller expects it to end up between 1 percent and 2 percent higher.

“It’s not that inflation won’t go down, it just won’t go down as fast as the market is pricing it in,” he says.

Despite uncertainty about inflation and China’s reopening, Jun Bei Liu, portfolio manager at Tribeca Investment Partners, says Australian stocks are likely to hit record highs in the second half of this year.

“Believe it or not, I think we could see a bull market this year,” Liu says. “There will be a slowdown in economic activity, but the stock market is very forward looking.”

“Believe it or not, I think we could see a bull market this year.”

Jun Bei Liu, portfolio manager at Tribeca Investment Partners

Compared to the US, Liu says Australian companies are better positioned thanks to lower interest rates, sustained demand and good exposure to commodities and financials.

“Our corporate cash flow is holding up well and the Aussie dollar will be stronger, which means commodities will do better,” she said. “Offshore earners of US dollars will be penalized a little, but domestic staples like Woolworths will do just fine.”

And with interest rates peaking this year, the real estate market in particular will stabilize over the next six months as house prices have fallen and houses become more affordable, Liu says: “There was an 8 percent drop in prices, so the interest of investors is already returning to housing.”

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Despite a strong start to the year and a positive outlook for the second half, Liu says the next three months will be tough.

“Investors came back from vacation this year and realized we were way too bearish at the end of December, so markets rallied really sharply for the first two weeks,” she says. “But the challenge is that we haven’t had the big earnings downgrades yet.”

Liu says both US and Australian companies are likely to issue warnings about their earnings outlook for the rest of the year when they report half-year earnings in February.

“The US earnings season is going to be very poor and while we expect reasonable corporate earnings in Australia, the outlook will deteriorate in February,” she says. “From all indications we’ve heard that Christmas was fine but that retail performance will be weak for the first six weeks.”

And if the US goes into recession, Liu says the stock market, which “never properly prices recessions,” will fall even further.

Like Swan and Miller, Liu believes that China’s reopening will not be enough to restart global growth.

“China is still working through issues and consumers are locking themselves back in their homes, so the next few months will be tough for resource companies,” she said. “In 12 months China might be back. But at the moment they are only good for the mood.”

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