Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Why are markets rallying?
The month of May was a volatile one around the world, but ultimately the US markets finished flat and the S&P/ASX200 only slightly lower. This despite one of the most challenging economic backdrops in multiple years and the growing threat of higher interest rates around the world.
So, why are markets seemingly rallying?
One of the biggest red flags for me as an investor is when someone in the finance industry speaks with certainty around their expectations. There is no certainty in investing and those who predict the future with confidence tend to be found wonting time after time. This appears to be a key reason behind the short-term movements in markets.
Whether it is talk of the end of the technology sector, or the long-term bull market in commodities, the pandemic reminded us that no one really knows what the future holds and that the most important thing is to plan for multiple outcomes. Yet it is this certainty that seems to be providing the share markets with a floor from which to rally. When so many people think the outcome is all but guaranteed, it opens opportunities for the contrarian and less appreciated investments to recover.
Second, but likely most important is the role of China in the global economy. We must have short memories to understand what happened to the global economy post the lockdowns of 2021 and 2022; an economic boom resulted. China’s lockdowns are clearly more strict, and painful, than many seen around the world, and their impact on one the most important shipping port has clearly been underrated.
The loosening of these reins in China, along with a massive package of stimulus measures, not unlike those rolled out in Australia and the US post lockdowns, are offering hope of a return of the Chinese consumer to global markets sooner rather than later. Whilst there was plenty of talk that supply chains would become less reliant on China, they remain core to most major global businesses and are one of the few able to vertically integrate entire industries efficiently.
Bond yields remain the most important input into asset valuations and they have become more volatile than ever. In fact, in some cases bonds have seen more volatility than equities. After quickly rushing out to rates exceeding 3 per cent in both the US and Australia, they appear to have reached their upper band, at least for the time being. It is clear that markets and investors are now considering the impacts of higher rates on the economy and the risk of recession if they are acted upon.
This leads to the final point, which is the potential overpricing of inflation and interest rate hikes. Once the 3 per cent bond yield was priced in, the expectation of future movements in said bond yield became more important than the yield itself. Inflation data in the US last week showed the slowest monthly rate for several months, and the natural demand destruction from high oil and commodity prices is already filtering through. Therefore, any growth, inflation or spending data that is below expectations will likely trigger a rally in the market.
