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Key points 2022 was dominated by high inflation, rising interest rates, war in Ukraine & recession fears. This hit bonds & shares hard, driving losses for balanced growth super funds. 2023 is likely to remain volatile and a retest of 2022 lows for shares is a high risk. But easing inflation, central banks getting off the brakes (with the RBA at or close to the peak on rates), economic growth likely stronger than feared & improved valuations should make for better returns. Australian residential property prices likely have more downside, ahead of a September quarter low. The main things to keep an eye on are: inflation; central banks and interest rates; US politics; China tensions; and Australian residential property prices. 2022 – from Covid to inflation & surging interest rates The good news is that 2022 finally saw the world shake off the grip of Coronavirus as it transitioned from a pandemic to endemic (albeit it’s still causing problems in China). However, the past year turned out far more difficult for investors than might have been thought a year ago: Inflation, which already rose in 2021 surged to levels not seen for decades, largely reflecting pandemic related distortions to supply and reopening & a stimulus driven surge in demand & floods in Australia. Russia invaded Ukraine, leading to a surge in energy & food prices. Central banks moved to aggressively withdraw monetary stimulus and raised interest rates at the fastest pace seen in decades to deal with inflation and rising inflation expectations. Bond yields surged in response to the rise in inflation & interest rates. Chinese growth fell sharply, reflecting its zero-Covid policy and a continuing property downturn despite policy stimulus. Geopolitical tensions surged with war in Ukraine and worries about a Chinese invasion of Taiwan following President Xi Jinping’s power consolidation, although there were hopes of a thaw near year end. As a result of all this, investors increasingly fretted about recession. Tech stocks and crypto currencies, having been the biggest winners of the Covid lockdowns & easy money, were hit hard by reopening and monetary tightening, ultimately proving no hedge against inflation. Growth was still ok – but a lot weaker than expected Despite these problems, global GDP is still expected to have come in at around 3.2% which is weaker than the 5% or so growth expected a year ago and down from 6% in 2021, but still reasonable as reopening and stimulus helped. And in Australia, GDP is expected to have been around 3.5%, lower than expected a year ago and down from 4.8% in 2021, but still reasonable. The growth slowdown saw a slowdown in profits. But the main problem for investment markets was the rise in inflation, interest rates and bond yields. Investment returns for major asset classes Total return %, pre fees and tax2021 actual2022 actual2023 forecastGlobal shares (in Aust dollars)29.6-12.54.0Global shares (in local currency) 24.3-16.47.0Asian shares (in local currency)-6.8-18.310.0Emerging mkt shares (local currency) -0.2-15.510.0Australian shares 17.2-1.110.0Global bonds (hedged into $A) -1.5-12.33.0Australian bonds -2.9-9.74.0Global real estate investment trusts 30.9-25.99.0Aust real estate investment trusts 26.1-20.59.0Unlisted non-res property, estimate 12.39.54.0Unlisted infrastructure, estimate 12.04.05.0Aust residential property, estimate 23.0-7.0-7.0Cash 0.01.33.1 Avg balanced super fund, ex fees & tax14.3-5.26.3 Source: Thomson Reuters, Morningstar, REIA, AMP Global shares had a rough year with a plunge of 23% into October on inflation, interest rate and recession worries, before a rally cut losses. Chinese shares led the weakness, not helped by its zero Covid policy, followed by Asian shares, given their exposure to China and cyclical sensitivity. US shares also underperformed reflecting its high-tech exposure & aggressive Fed tightening. Australian shares outperformed, helped by strong commodity prices and a relatively less hawkish RBA. Government bonds slumped as yields surged on high inflation & rate hikes. Australian bonds had their worst year since 1973 or the 1930s. Real estate investment trusts fell with the surge in bond yields. Unlisted property & infrastructure returns remained strong, being less sensitive to short-term share market and bond yield moves. Home prices fell sharply reflecting poor affordability after a boom &, particularly, as mortgage rates rose, reducing home buyer capacity. Cash and bank term deposit returns improved but were still low. The $A fell with share markets on growth concerns and relatively aggressive Fed rate hikes into October, before a partial recovery. Balanced super funds had negative returns reflecting poor share and bond returns. This followed very strong returns in 2021. 2023 – lower inflation and lower growth First the bad news: inflation is still way too high at around 7 to 11% in many advanced countries; tight labour markets risk wage-price spirals; central banks are still warning of more rate hikes; the risk of recession is high with inverted yield curves and weak confidence largely in response to rate hikes; the US has returned to divided Government with the risk of debt ceiling and funding standoffs; war continues in Ukraine; and tensions remain with China and Iran. Even Covid continues to disrupt – but mainly in China as cases surge as it reopens. These all suggest another volatile year and possibly continuation of the bear market in global shares. PMIs are surveys of business confidence and conditions. Source: Bloomberg, IMF, AMP However, there is reason for optimism. First, inflationary pressures may have peaked and are slowing rapidly (as reflected in our Pipeline Inflation Indicator): supply chain pressures have eased; demand is cooling; and labour markets are showing signs of topping out. In fact, it may only require a slight pull back in demand (to push capacity utilisation back down to normal & unemployment above the NAIRU – or non-accelerating inflation rate of unemployment, with the return of immigration helping in Australia) to further depress inflationary pressure significantly. This suggests inflation could fall faster than central banks expect in 2023. Note that this is more a guide to direction than level. Source: Bloomberg, AMP Second, central banks are likely nearing the peak in rates. The Fed is already moving to slow hikes, but conditions are likely to be soft enough to allow it to pause from around March ahead of rate cuts later in 2023. Sure, its signalling more but just as its signals were too dovish a year ago its signals now are likely too hawkish! In Australia, we see the RBA as being at or close to the top (3.1% is our base case for the peak with 3.35% our risk case) as by February/March conditions are likely to be weak enough to allow a pause, ahead of rate cuts in late 2023/early 2024. Third, it seems everyone is talking about recession for 2023, such that it’s a consensus call. The risk is very high (probably over 50% in the US and Europe) and this will likely keep markets volatile given the threat to earnings. But it may not turn out to be as bad as feared. In the US it may just be a sharp slowdown or mild recession in 2023 – if the Fed starts to ease up on the brake soon and given the absence of other excesses that need to be unwound, eg, there has been no overinvestment in housing & capex and leverage is low. Europe has moved away from Russian gas very quickly and providing its winter is mild, may continue to hold up better than feared. Or lags in the way rate hikes impact may mean recession does not hit till 2024, meaning its too early for share markets to discount just yet. After initial Covid related setbacks, Chinese growth is likely to rebound in 2023 as it reopens. Just like occurred in other countries upon reopening (recall Australia’s Omicron disruptions earlier in 2022) China is likely to see a surge in cases initially. But markets are likely to largely look through this to the reopening boost ahead which will provide an offset to slower growth in the US and Europe. Australian growth is likely to slow but avoid recession, reflecting the less aggressive RBA, the pipeline of home building work yet to be completed and the strong business investment outlook. Finally, geopolitics may not be so bad in 2023: there are no major elections in key countries in 2023; the war in Ukraine may not get any more threatening; and the Cold War with China may see a bit of a thaw. Overall, global growth in 2023 is likely to be around 2.5%, well down from 6% in 2021, but not recession in aggregate. In Australia, growth is expected to slow to 1.5% in the year ahead. And inflation is likely to fall. Implications for investors Easing inflation pressures, central banks moving to get off the brakes, economic growth proving stronger than feared and improved valuations should make for better returns in 2023. But there are likely to be bumps on the way – particularly regarding recession risks – & this could involve a retest of 2022 lows or new lows in shares before the upswing resumes. Global shares are expected to return around 7%. The post mid-term election year normally results in above average gains in US shares, but US shares are likely to remain a relative underperformer compared to non-US shares reflecting still higher price to earnings multiples (17.5 times forward earnings in the US versus 12 times forward earnings for non-US shares). The $US is also likely to weaken which should benefit emerging and Asian shares. Australian shares are likely to outperform again, helped by stronger economic growth than in other developed countries and ultimately stronger growth in China supporting commodity prices and as investors continue to like the grossed-up dividend yield of around 5.5%. Expect the ASX 200 to end 2023 at around 7,500. Bonds are likely to provide returns around running yield or a bit more, as inflation slows and central banks become less hawkish. Unlisted commercial property and infrastructure are expected to see slower returns, reflecting the lagged impact of weaker share markets and higher bond yields (on valuations). Australian home prices are likely to fall further as rate hikes continue to impact, resulting in a top to bottom fall of 15-20%, but with prices expected to bottom around the September quarter, ahead of gains late in the year as the RBA moves toward rate cuts. Cash and bank deposits are expected to provide returns of around 3%, reflecting the back up in interest rates through 2022. A rising trend in the $A is likely over the next 12 months, reflecting a downtrend in the now overvalued $US, the Fed moving to cut rates and solid commodity prices helped by stronger Chinese growth. What to watch? The main things to keep an eye on in 2023 are as follows: Inflation – if it continues to rise, central banks will tighten more than we are allowing for risking deep recession. US politics – the return to divided government, with GOP controlling the House, runs the high risk of a return to brinkmanship around the debt ceiling, causing volatility in markets as we saw in 2011 and 2013. China issues – increased tensions around Taiwan are the main risk. An escalation of the Ukraine conflict could adversely impact Europe. Australian home prices – a sharper than expected fall as fixed rates reset and unemployment rises, could cause financial stability issues.

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‘It’s tough to make predictions – especially about the future’ attributed to Yogi Berra. It’s been a tough year for markets and portfolios Many 2023 forecasts are now irrelevant given US inflation and the Fed decision mid December We stay nimble to continually assess our views, and are ready to change with data and markets Expect the unexpected in 2023 with more risk when consensus lines up with the same view Long term returns look more attractive this year than last year based on the starting valuations Having a long term portfolio plan with some private markets helps smooth the journey In a tough year for equity markets there has been a lot of volatility and some poor returns, with the worst on record for bonds, deep negative returns in offshore equities, particularly the tech heavy US Nasdaq, and a retreat in listed real estate investment trusts (REITS). A surprise for most will be that the Australian equity market is actually up slightly year to date mid December on a total return basis including dividends. The year ahead could well be as difficult as this year as we have a strong consensus view for a US and Australian recession. The US S&P 500 equity index is forecast by broker analysts to have a negative return in 2023, the first time in decades there is such a negative view. Such a dire view is offset by the recent easing US inflation data and the Federal Reserve view which has just hiked 0.5% to 4.5%. The inflation print and the Fed’s decision and forecast of 5.1% terminal cash rate makes a lot of the broker and fund manager 2023 outlooks out of date. There may only be one 0.5% move and the Fed is on hold or maybe one more small move after that. Fed Chairman Powell reiterated that the Fed is likely to maintain a peak cash rate for an extended period. Hence, we aren’t going to make heroic point in time 2023 year end forecasts as there is a lot of uncertainty on the path forward. As the data evolves we will keep reviewing our position. So where are we in the market cycle and how should we be positioned? Our recent video message indicated that we still think that there is more downside to come in markets in the year ahead. This is driven by the still very restrictive conditions set by the Federal Reserve and RBA which slows activity in the markets. As equity and bond markets quickly discount the future, and have the ability to look through the economic cycle, there is a risk that positioning that is so negative can turn the other way and support a further rally. Our portfolios are positioned conservatively on our central view, however we are continually testing this thesis as the market and economic data evolves and we are alert to a change in investor positioning. Therefore our core view will be to stage a sensible stepping back into a neutral equities position which may evolve faster or slower depending on data flow. We believe bonds will become a better diversifier in 2023 as inflation becomes more subdued, with higher starting yields able to absorb most of any rise in yields from credit stresses. We will have our usual quarterly outlook in late January based on the year end finish and initial positioning in 2023. As we finish the year, we also think about long term cycles and themes. We are expecting more inflation and interest rate volatility over the next decade and some shift in investment style performance given likely persistently higher interest rates. We believe there are plenty of ‘picks and shovels’ opportunities and sensible investment niches to play in public and private markets in the years ahead. One theme we are consistent on is the attractiveness of middle markets in each asset class and private markets. We will address this in our private markets outlook diving deeper into alternatives. Have a safe and restful holiday season with family and friends.

With a year of consecutive rate rises that no-one expected, the Australian property market has finished the year quite differently to how it started. High levels of inflation caused by a range of factors including ongoing conflict in Eastern Europe, extreme weather events, and global supply chain issues have heavily impacted the supply and demand of goods and put pressure on household budgets in ways we haven’t seen for a number of years, in particular utilities, groceries, discretionary spending and the ability to save. The flow on effect from these commodities increasing is the sustained pressure on consumers with mortgages who are also seeing their rates increase each month whilst real wages aren't increasing at the same level. Many homeowners are probably wondering when these financial pressures will begin to ease, keeping a keen eye on the big four banks forecasts as to when rates will start to reduce and to what level. Commonwealth Bank seem to be the most optimistic of the four, predicting rates will start falling in late 2023 to 3.35 per cent. On the other hand, the remaining three have predicated rates to fall in early to mid-2024 at either 3.6 per cent or 3.85 per cent. Ultimately, the RBA acknowledges the future for the global economy and households is uncertain, however they are prepared to achieve a soft landing for the economy and overall lower inflation in the near future Further challenges in 2023 will come in the form of expiring fixed rates on term debt. An estimated 35% of all outstanding home loans in Australia are currently on fixed rate terms. The expectation is for two thirds of this debt to revert back to variable, causing borrowers to face between a three to four percent increase overnight. The large jump in interest rate will result in borrowers needing to utilise existing savings built through the pandemic period or reduce the amount of net surplus cash available on a monthly basis. Homeowners’ affordability will also be impacted with any potential future consecutive interest rate rises. As the interest rates increase in 2023, lending institutions will adjust servicing buffer rates accordingly. This will lead to a lack of confidence and clarity from borrowers who are seeking to understand their maximum borrowing capacity. Pre-approved applications will not be valid for extended terms due to the fluidity of the market. Buyers must be wary of their borrowing limits and ongoing commitments in order to have full confidence in purchasing a property in this ever changing market.  Despite the early indication that Limited Recourse Borrowing Arrangements (LRBAs) in Self-Managed Super Funds (SMSFs) would be banned in 2022, the popular wealth creation strategy remains in play. This may be reviewed in the May 2023 budget however for the meantime, Australians are able to take advantage of this strategy. This presents an opportunity in 2023 for business owners who are currently renting their business premises, to consider using limited recourse borrowing within superannuation to purchase the premises. The benefit for business owners in this approach is the ability to paying off the owned asset, as opposed to paying off someone else’s investment.

On 25 November 2022 the Social Services and Other legislation Amendment (incentivising Pensioners to downsize) Act 2022 was passed in the Senate. The act provides additional incentives to downsize your family home and enhance your retirement financially. One incentive is to reduce the age eligibility of making downsizer contributions for members to 55 from 1 January 2023. The current 12-month asset test exemption for age pensioners will also be extended to 24 months. This change will allow pensioners more time to purchase, build or restore a new home without the financial impact of their pension payments being impacted. Since 1 July 2018 we have seen many Australians take up the governments offer to contribute up to $300,000 each partner using a Downsizer contribution. With the downsizer contribution older Australians could contribute some of their proceeds from selling their family home into Super. It’s important to note there are no balance restrictions on contributing to superannuation, so members with balances over $1.7m are still eligible to contribute. Members who have already retired are also entitled to contribute to their super. A downsizer contribution is a good strategy to consider if you want to increase your Superannuation nest egg. There are a few conditions to meet to be eligible: The amount you are contributing must be from the proceeds of selling your home. You and/or your partner must be 55 years old or older from 1 January 2023 (Age 60 upto 31 Decemebr 2022). your home was owned by you or your spouse for 10 years or more prior to the sale. your home is in Australia and is not a caravan, houseboat or other mobile home. the proceeds (capital gain or loss) from the sale of the home are either exempt or partially exempt from capital gains tax (CGT). you have provided your super fund with the Downsizer contribution into superform either before or at the time of making your downsizer contribution. you make your downsizer contribution within 90 days of receiving the proceeds of sale, which is usually at the date of settlement. you have not previously made a downsizer contribution to your super from the sale of another home. If you meet these requirements you enjoy the following benefits You can make a downsizer contribution up to a maximum of $300,000(each spouse), you do not need to pass the work test. Your downsizer contribution is not a non-concessional contribution and will not count towards your contributions caps. You can still contribute if you have over $1.7m in the fund. This will count towards your transfer balance cap for future years. If the house was owned by one spouse, both spouses can contribute up to $300,000 each. You don’t need to downsize, so long as the proceeds of the sale of the house is used to contribute to your super, you are not required to buy a smaller house. You can upsize your house with your separate funds. Please note for social security purposes, your superannuation interest is an assessable asset and subject to deeming once you are over pension age. There is no social security concession for the downsizer contributions. If affected, we suggest you seek financial advice.

If you are in your 40’s or 50’s there is a good chance you could be part of the ‘sandwich generation’. The sandwich generation refers to adults ‘sandwiched’ between dependent children of their own and ageing parents with growing dependence on them for assistance. If this applies you will know that while there are many things to be grateful for it can also be a difficult time and leave you feeling torn, tired and stressed out! When it comes to ageing parents, it can be difficult to initiate a conversation about the impact getting older can have on independence, but it’s important to have these conversations early so you can put in place a plan for support when and if needed. Age related issues can happen suddenly, causing a once independent self-sufficient person to quickly become dependent and in need of support. If this happens, you will be glad you have a plan so you know what to do. Getting support As people age, support is often provided informally by family, friends or neighbours to do some of the things that become more difficult such as lawn mowing, arranging and attending appointments, grocery shopping and preparing meals. Depending upon your situation, providing this type of support to a loved one may be achievable now, but it’s important to realise that support needs are most likely to increase. If this happens, will you still be able to cope? Arranging outside support urgently can be difficult, but the good news is there are many government subsidised programs for in-home care that can be accessed before an urgent need for support arises. My Aged Care is a Commonwealth Government initiative that provides eligible people with various levels of aged care support. Basic services such as cleaning, meal provision, gardening and shopping can be provided through the Commonwealth Home Support Program (CHSP) administered by many local councils. Where a large number of services are required the Home Care Package (HCP) program may be better suited. There are four levels of home care packages, starting at level 1 for basic care needs and increasing to level 4 for high care needs. Each level attracts a different subsidy with funding allocated monthly. It is entirely up to the recipient to use the money for whatever support they want – they are in control. Registering for My Aged Care Before you register for My Aged Care make sure you have carefully thought through your loved one’s situation and needs. Write a list of all the things you or others are currently doing to provide support and any additional things that are either required now or likely to be needed in the near future. This is important, as if you don't provide clear and specific information to the call centre staff at My Aged Care you will likely be referred to the wrong assessment team and your loved one could miss out on the full range of services on offer from My Aged Care. Once you have thought carefully about your loved ones needs and are prepared, the next step is to register for My Aged Care. Once you register, you begin the process of being screened and assessed in order to gain approval for support programs for ageing people. As the initial screening and assessment process can take several months, it’s a good idea to register before an urgent need arises. Once the assessments have been undertaken, any support needs down the track are more likely to happen quickly and efficiently. Bear in mind that this first phone call is a high level screening assessment using a generic questionnaire. The facilitator is not an expert in aged care and will not be able to answer specific questions about your loved one’s situation, nor will they be able to ‘read between the lines’ or make inferences from what you are saying. For this reason, the information you provide is critical to getting the best outcome, so you are allocated the right team to undertake a more detailed and personal assessment. Once your assessment has been completed, you will be approved for the most appropriate level of home care support. This now puts you on the waiting list for that particular support service. The wait may vary from weeks to months depending upon availability. If in the meantime the need for urgent support arises, you can escalate your case by requesting a Support Plan Review. This will alert the assessment teams to your situation and help to secure support sooner.

Investment markets & key developments Share markets had a strong bounce in the middle of the past week from very oversold levels, helped along by the UK tax backflip, softer US manufacturing and job opening data which may take pressure off the US Federal Reserve (Fed), and for Australian shares, the dovish hike from the Reserve Bank of Australia (RBA). However, the bounce was short lived , with solid US jobs data being seen as keeping the Fed hawkish for now, so US and European shares fell sharply on Friday paring gains for the week, but still leaving them above their lows. Over the week as a whole, US shares still rose 1.5% and Eurozone shares gained 1.3%. Japanese shares rose 4.5% as did Australian shares, with both missing out on the Friday fall which came after US jobs data. Bond yields rose again in the US, UK and Europe, but they fell in Australia. Oil prices rose as OPEC cut oil production and metal prices rose slightly, but iron ore prices fell. The $A fell as the $US rose. Are we there yet? After falling back to around the June lows, shares were due for a bounce and having seen a double bottom it’s possible that we have seen the low. However, the tech wreck and GFC bear markets saw several similar big 5%+ rallies (like in the last week) that proved short-lived, only to see the bear market resume as we (maybe) started to see on Friday in the US. From a macro perspective, the risks for shares are likely still on the downside in the short-term as central banks remain hawkish, recession risks are high and still rising, the conflict in Ukraine looks likely to escalate, oil prices could move higher on OPEC’s move to cut oil production and earnings expectations are still being revised down. Looking at key developments in the last week: Global central banks remain hawkish , with ongoing hawkish comments from various US Fed officials, the Bank of Canada and European Central Bank (ECB) President Lagarde (all to the effect that they remain “resolute” and there is “more to be done” in controlling inflation) and the Reserve Bank of New Zealand hiking by another 0.5%, to 3.5%, for its 8th hike in a row and signalling more rises ahead. OPEC’s decision to cut oil production by 2 million barrels a day risks reversing the downtrend in oil prices . The cutback relative to actual production levels is really about 1 million barrels. But coming at a time when there is a high risk that Russia will cut production further to retaliate against EU/US price caps, it risks reversing the recent downtrend in prices and exacerbating the risk of global recession. A more benign interpretation is that OPEC is simply seeking to keep the oil price around $US90/barrel (as stated by the Nigerian oil minister) and so, if Russia cuts production by more than agreed with OPEC, it will offset it with increased production to try and stop the oil price going up too far, in order to avoid making any economic downturn worse (which could result in a worse outcome for OPEC). The UK Government’s decision to abandon its plan to cut the top income tax rate from 45% to 40% provided a bit of relief . The reality is that it only saved about 2bn pounds of the total 45bn pounds in fiscal stimulus, so still leaves pressure on the Bank of England, which is still expected to raise rates by 1-1.25% in November. The good news remains that our Pipeline Inflation Indicator continues to slow reflecting improving global supply conditions and reducing corporate pricing power . We remain of the view that this, along with slowing economic conditions, will see inflation falling faster than central banks expect through next year. This should enable them to start slowing the pace of hiking from later this year. The RBA has sensibly broken from the ultra-hawkish global central bank consensus and opted to slow the pace of rate hikes from the 0.5% to a more normal 0.25% . This made good sense given: the rapidity of the rate hikes so far; the need to better assess the impact of those rate hikes and in particular, allow for those on fixed 2% rates rolling over to rates two to three times higher next year; the greater sensitivity of Australian households to interest rate changes due to high household debt levels and a very high reliance on variable or short dated fixed rates (compared to 30-year fixed rates in the US); a bit of breathing space provided by lower wages growth in Australia compared to other countries; and the rising risk of global recession and financial turmoil. Of course, the slowdown in rate hikes does not mean that the RBA has finished hiking – it stressed that it “remains resolute” in returning inflation to target, will do “what is necessary to achieve that” and expects to increase rates further . We expect that the RBA will hike by another 0.25% in November or December taking the cash rate to 2.85%, which may be the peak, as a clear slowing in consumer spending is expected to emerge in the next six months. The risk is on the upside, but probably only to 3.1%. By the end of next year we expect that the RBA will have started to gradually cut rates, as inflation should be falling rapidly by then as supply improvements continue and demand weakens. The RBA’s latest Financial Stability Review is more sombre than six months ago and consistent with its decision to slow the pace of rate hikes . The key points are that: financial stability risks have increased globally with tightening financial conditions; Australian households, firms and banks are generally in a strong financial position; but household resilience is uneven with some households already feeling the strain and a small number with high debt and low savings are particularly vulnerable. It’s clearly within the household sector that the greatest risk lies with RBA analysis showing that: 40% of variable rate borrowers won’t have to raise their payments after the 2.5% cash rate rise, but about 20% will see their minimum payment go above 30% of their incomes; A household earning $150,000 with $800,000 debt will see their monthly free cash flow fall by around $1300 following the 2.5% rise in rates so far; If rates go up another 1% then just over half of variable rate owner occupiers will see their free flow fall by more than 20%, with 15% seeing negative cash flow; Two thirds of fixed rate loans (which are about 35% of total mortgages) will expire by the end of next year and will face a 3 to 4% increase in their interest rate. It notes that recent home borrowers and particularly first home buyers are most vulnerable. A 20% fall in home prices (we expect a 15 to 20% fall) would see around 3% of all mortgages and 20% of new first home buyer loans go into negative equity. While the RBA notes that signs of financial stress are low right now, surveys, Google searches and liaison suggest that it’s picking up. The key is that the decline in free cash flows from higher rates and inflation will slow consumer demand. The RBA sees the direct impact on financial stability as being modest, but this could change if there is a large rise in unemployment and a large fall in home prices. Along with the rising risk of global recession, it all supports the case for the RBA to be cautious in raising rates further from here. In Australia, we are now getting lots of reminders that a Budget is near and under a new Government, with warnings about how bad the budgetary situation is – just as we were seeing 9 years ago with the new Coalition Government . There is nothing new with the blow out in spending (on aged, health, NDIS, defence and interest costs) as they were well known before the election (when neither side wanted to discuss how to pay for them). But it all seems to be gearing up to difficult decisions in the Budget (and beyond), including regarding the legislated final phase of the tax cuts. Regarding the latter - which is mainly about removing bracket creep from 2008-09 (under which taxpayers find themselves in tax brackets never intended for them) - there is a strong case to index tax brackets to wages growth to take it out of the hands of politicians (who use it for pretend tax cuts or to surreptitiously raise revenue). 20 Golden Greats . There is an excellent new documentary on Brian Wilson called Long Promised Road on Amazon Prime worth a watch where he is driven around to various places in LA that have figured in his life, chatting to Jason Fine from Rolling Stone magazine. It reminded me of the first time I discovered the magic of The Beach Boys, with a cassette called 20 Golden Greats. As the title suggests it was packed with classic Beach Boys hits from the 1960s like Fun, Fun, Fun but it was the last four songs from the late 60s that I would play over and over as they were all brilliant recordings and showed the maturing of the band in the late 1960s. Darlin was a real upbeat song sung by Carl Wilson (and recently covered by She and Him). Do It Again was written by Brian and Mike Love and reflected the retro feelings that began in the US in the late 1960s and reached fever pitch with American Graffiti and Happy Days in the 1970s with a desire to get back to something simpler. I Can Hear Music is one of The Beach Boys best but it was a Phil Spector/Jeff Barry/Ellie Greenwich song and sung and produced by Carl. Breakaway is an underrated Beach Boys gem written by Brian and his father with lead by Carl. Coronavirus update New global & Australian COVID cases & deaths are trending down . However, new cases are up in Europe & China. Economic activity trackers Our Australian, US and European Economic Activity Trackers slowed a notch in the last week . Based on weekly data for eg job ads, restaurant bookings, confidence, mobility, credit & debit card transactions, retail foot traffic, hotel bookings. Source: AMP Major global economic events and implications US data suggests no (real) recession (just yet anyway), but still points to a slowing in growth . The ISM manufacturing index fell more than expected, but at 50.9, remains consistent with continuing growth, while the services ISM fell only slightly and remains strong. Both show a sharp fall in indicators relating to prices, delivery times and order backlogs, pointing to falling inflation pressures. September jobs data was solid. Payrolls growth was robust, at 263,000, but appears to be trending down and wages growth looks to be slowing a bit, but the decline in unemployment to 3.5% and underemployment to 6.7% will likely keep the Fed on track for a 0.75% hike in November. A decline in job openings suggests that the labour market is starting to cool, albeit it’s still strong. Australian economic events and implications The Melbourne Institute’s Inflation Gauge rose again in September pointing to a further rise in underlying inflation, albeit it’s tending to run below the reported ABS rate of inflation. The ANZ Job Ads series fell again suggesting the labour market may be starting to cool, but it remains up 22%yoy. Housing data was mostly soft . Housing approvals bounced 28% in September after a 17% fall in July due to normally volatile apartment approvals, but the trend remains weak. Housing finance commitments continued to fall sharply, with more declines likely as higher rates and falling prices impact. Core Logic data showed that home prices fell another 1.4% in September . National average prices are now down 4.8% from their high and have seen their fastest pace of decline over five months since the early 1980s. While the rate of monthly decline slowed a bit (including in Sydney and Melbourne), this likely reflects the market getting used to the initial shock of rate hikes, bargain hunters taking advantage of lower prices and vendors holding off selling. But with the full impact of rate hikes to date yet to be felt, interest rates still rising, and the economy set to weaken, it’s unlikely to presage an imminent bottoming in home prices. Past periods of property price falls experienced a few gyrations in the pace of price declines before prices ultimately bottomed. In the last two major up cycles (starting in 2012 and 2019) property prices did not bottom from their prior falls and start to turn up until interest rates started to fall – see the purple ovals in next chart. We continue to expect a roughly 15-20% top to bottom decline in prices to September quarter next year after, which prices will likely start to stage a gradual recovery as the RBA starts to cut rates again. What to watch over the next week? In the US, the focus will likely be on September CPI data (Thursday) which is expected to show a decline in inflation to 8.1%yoy from 8.3% and some moderation in monthly core inflation . Producer price inflation (Wednesday) is also expected to slow a bit. Minutes from the Fed’s last meeting (Wednesday) are likely to be hawkish – but more interesting will be comments by Fed Vice Chair Brainard (Monday), who in comments a week ago was a bit less hawkish. Retail sales growth (Friday) is expected to be slightly negative in real terms. Chinese September CPI inflation (Friday) is expected to rise to 2.8%yoy but remain around 0.8%yoy at a core level, with producer price inflation falling further to 1.0%yoy. Trade data is likely to show a further slowing in export & import growth. In Australia, the Westpac/MI consumer sentiment index (Tuesday) is likely to have remained weak in October , with the rebound in petrol prices offsetting the slowdown in RBA rate hikes. The NAB business survey (also Tuesday) is likely to show continued solid confidence and conditions readings. A speech by RBA Assistant Governor Lucy Ellis (Wednesday) will also be watched for any implications for monetary policy. Outlook for investment markets Shares remain at high risk of further falls in the short-term as central banks continue to tighten, uncertainty about recession remains high and geopolitical risks continue. However, we see shares providing reasonable returns on a 12-month horizon as valuations have improved, global growth ultimately picks up again and inflationary pressures ease through next year, allowing central banks to ease up on the monetary brakes. With bond yields likely at or close to peaking for now, short-term bond returns should improve. Unlisted commercial property may see some weakness in retail & office returns, plus the lagged impact of higher bond yields is likely to drag down unlisted property and infrastructure returns. Australian home prices are expected to fall 15 to 20% top to bottom to the September quarter next year, as poor affordability & rising mortgage rates impact. (This assumes the cash rate tops out around 3%, but if it rises to 4% or more as the money market is assuming, then home prices will likely fall 30%.) Cash and bank deposit returns remain low but are improving as RBA cash rate increases flow through. The $A is likely to remain at risk of further falls in the short-term as global uncertainties persist and as the RBA remains a bit less hawkish than the Fed. However, a rising trend in the $A is likely over the medium-term as commodity prices ultimately remain in a super cycle bull market.