2023 Reflections – A Year in review

As we approach the end of 2023, now is an opportune time to reflect on the year that was, and plan for the year ahead.

With inflation continuing to cool across most major economies, the key question for 2024 and beyond is – how long will rates remain elevated?

U.S. Resilience

The year 2023 has undeniably been one of turbulence. From geo-political turmoil in the Middle East, Eastern Europe and Africa, to a Chinese real estate crisis, and surging inflation, investors have endured a lot.

Despite this volatility and uncertainty, the U.S. economy remains resilient with low unemployment and robust GDP growth. Indeed, with last week’s U.S. inflation figures revealing an annual inflation rate of just 3.2% (down from highs of 9.1% in June), the argument that we’ve reached a peak in interest rates is growing stronger.

Euro Area On the Brink

It’s a different story in the Euro Area however which appears to be teetering on the brink of a technical recession. Just like in the U.S., inflation has come down significantly after 10 rate rises from the European Central Bank, but industrial activity and GDP growth is weak, especially in Germany. This economic decline hasn’t gone unnoticed by consumers which is being reflected in recent consumer sentiment data.

Australia lagging 

In Australia, while inflation still seems fairly entrenched with the latest CPI data increasing to 5.4% in the year to September, we have still witnessed a material decline from a high of 7.8% in December 2022.

Indeed, annual services inflation eased for the first time since December 2021 (despite remaining elevated across various segments) and annual food inflation also retreated for the third quarter in a row.

With housing (attributable to rising rents) and transport (primarily attributable to automotive fuel) still experiencing significant price pressures and which threaten to keep Australian inflation higher for longer, it’s clear that the global trajectory is moving lower.

Disinflation Underway

While wars in the Middle East and Eastern Europe continue to rage on, energy inflation is now dissipating, occurring alongside the alleviation of supply chain pressures derived from COVID-19 lockdowns.

Combined with higher interest rates, it seems increasingly possible that inflation in both the U.S. and Europe returns to 2% in 2024. In turn, this paves the way for potential future rate cuts as most economies grapple with sluggish growth, trade fragmentation and deteriorating fiscal positions.

Corporate Fixed-Income – Why Now?

As with other markets, corporate bonds and other fixed-income securities have experienced heightened volatility this year. However, with inflation continuing to cool and interest rates likely to be close to their pinnacle, the returns on offer currently are some of the most attractive we’ve seen in over a decade.

What’s more, when and if interest rates do start to decline, corporate fixed-income investors with exposure to longer-dated maturities will be able to limit some of the reinvestment risk associated with money markets and other short-term investment assets.

As such, with the new calendar year fast approaching, we believe now is a good time to review how your clients’ investment portfolios are currently structured, and whether they are appropriately positioned for what could be in store in 2024, and beyond.

How the Australian Bond Exchange Can Help

If you are interested in learning more about how corporate fixed-income securities work and how they can be generally used within investment portfolios to complement other asset classes contact an adviser at the Australian Bond Exchange today.