We are living in exciting times with one of the most significant advances in history – the release of Chat Generative Pre-Trained Transformer (ChatGPT). Ask any question and get an eloquently worded answer that’s (mostly) accurate.
This technology is dramatically increasing the speed of information processing with significant benefits for industry including banks, professional firms, government, and students in academia. Equity markets certainly love it with Apple +35%, Microsoft +39%, Alphabet +41%, Amazon +43%, Nvidia +166% and Nasdaq up 24% since 1 January 2023. However, these returns are not reflected in the wider market with the Top 10 performing S&P500 companies accounting for 80% of the index return. This is all despite the insolvency of several US regional banks in March 2023 and the 79th increase to the US debt ceiling since 1960.
At the same time, we have the widest divergence between large and small company valuations globally in over 20 years. Many small company investment managers say small company valuations are today similar to the levels seen in the GFC in 2008/9. This says we’re already feeling the impacts of rising costs and in our view, there is more to come. Whilst we’ve had 12 interest rate rises in the last 13 months, we haven’t seen the impact of the recently announced increases to Jobseeker. This puts pressure on minimum wages in addition to employee member groups getting more vocal seeking 7-10% pay rises on top of another 25% increase in electricity prices from 1 July 2023 (watch out for the notice from your supplier).
This makes the task of the RBA governor very difficult to curtail inflation, as interest rates are a blunt instrument that impacts only those with borrowings. This impacts property owners (residential and commercial) who increase rents to cover the increased costs of property ownership. This in turn puts more upward price pressure on inflation, making it very difficult to bring inflation down and unfortunately widens the gap in society between the ‘haves and the have-nots”. Why? Higher inflation and interest rates mean higher returns for those with capital invested. E.g. term deposit income has increased from <1% in 2022 to >4% now. History says that once the inflation genie is out of the bottle it becomes very difficult to manage. If Government is serious, it’s often necessary to simultaneously tighten monetary (interest rates) and fiscal policy via reductions in government spending and increase taxes (which can occur by default given fixed income tax scales). We comment on recently proposed tax changes on the next page. So, what does all this mean? Maintain a clear financial strategy tailored specifically to your own life goals. Here is a quote from one of world’s leading investment minds.
“When you act on the emotions of the marketplace, you’re making a big mistake. Stay the course, don’t let these changes in the market, even the big ones, change your mind and never, never, never be in or out of the market. Always be in at a certain level.” Jack Bogle