Monetary tightening by the Reserve Bank of Australia (RBA) and China’s policy shift away from COVID zero could translate to Australia avoiding a recession in the coming year, according to VanEck.
Outlined in VanEck’s latest quarterly economic outlook, VanEck ViewPoint: The Great Paradigm Shift, it said the Australian dollar could have better prospects in 2023.
The Australian share market should continue outperforming its US counterpart with high commodity prices coupled with China’s re-opening spelling out benefits for major resource companies like Rio Tinto, Woodside, and BHP, VanEck explained.
Still, there could be significant risks as wages and salaries, which included rising wages and employee numbers, rose 2.7% in Q3 2022.
“It is worth noting that Australian wage measures are not great, and while most show continued moderation, the broadest measure of labour cost, compensation of employees, rose 3.2% in Q3. Of course, this included one-off super contributions and national wage case, plus rising employment levels,” read the report.
The Australian dollar could do well, particularly against a sliding US dollar, if Australia was able to avoid a property/credit implosion and is assisted by easing of China trade sanctions.
However, much of this momentum depends on the full impact of the RBA interest rate hikes hitting households in months ahead.
Up to 15% of households could see spare cashflow turn negative with mortgage repayments, as per RBA estimates. Some 40% of households could witness spare cashflow drops of 40% or more.
The report noted, “In Q3, the household savings ratio dropped back to 6.9%, in the ballpark of pre-COVID levels. So, the RBA looks likely to be on pause, perhaps throughout Q1. Whether it resumes tightening or not depends on whether households are over-cooked or not.”
The investment playbook was to avoid risk assets, buy bonds/treasuries and avoid highly volatile and speculative equities, VanEck suggested.
“Navigating equities smarter through factor strategies such as ‘quality’ and ‘value’ becomes more meaningful. Asset allocation comes back to the fore, particularly after the brutal bond sell-off of 2022,” the report stated.
“Prudent investors focus on what is or what can probably go wrong, rather than to attempt to forecast what might go right.
“Anticipating the irrational fear that economic weakness can instill has historically been the platform for long-term wealth creation.”
