"Turn down the noise": Shane Oliver's warning to investors

Christine St Anne: We're at the Morningstar Investment Conference for individual investors. And today, I'm excited to be joined by Shane Oliver, the Chief Economist and Head of Investment Strategy for AMP.

Shane, welcome.

Shane Oliver: Thank you. Great to be here.

St Anne: Wonderful. Now, you've just come off from a keynote, and in your presentation, you mentioned that it was better to watch The Brady Bunch than actually look at the outlook. Is it really going to be that bad?

Oliver: Well, I wouldn't quite put it that way. I think that there's a danger these days, there's so much information out there and so much commentary that you've got to find a way to turn down the noise. And a lot of the information and commentary floating around is very negative. So, if you're going to get sucked into that negativity, you are better off watching The Brady Bunch or watching something else than just constantly looking at the negativity which is around us.

I think the outlook in the short term is very uncertain. Obviously, we've got these inflation worries ongoing globally, central banks raising interest rates, recession fears, war in Ukraine, all these horrible things. But I also think that a lot of those inflation pressures will start to abate over the next three to six months, which will mean the downwards pressure – well, the upwards pressure on interest rates, the downwards pressure on share markets will start to abate and markets will then be able to, as we go through next year, look towards recovery globally in 2024.

St Anne: Well, you certainly did touch on a lot of hot button issues and of course, interest rates. So, when do you think that that will start to ease in Australia in particular?

Oliver: Well, I guess, a lot of us look at the economy and say, well, we've raised interest rates six times so far by 250 basis points and yet the economy is still booming, therefore, interest rates have to go up a lot higher. I think the problem with that analysis is you need to allow for the lags. It takes a while for an interest rate change to actually impact spending, and that lag can be 6 to 12 months. So, the reserve bank has already raised rates a lot. I think that's going to have a huge negative impact on cash flow for households with debt. You've got the rise in the cost of living. Those things will be a dampener. And as we go through next year, that will become more and more evident – slower economic growth, less demand, less pricing power on the part of companies which will combined with improved supply conditions to bring down pressure on inflation and ultimately, take pressure off the reserve bank. So, that's the way I see it unfolding. But obviously, we're still in that uncertain phase and that's why share markets are still very twitchy.

St Anne: Yeah. Well, it's an interesting point you made on share markets being twitchy. And one interesting point your highlighted was the bad performances during September and the midterms. So, are markets really all about that seasonality?

Oliver: Well, the seasonality is sort of a common factor. I always get wary about August, September going into October, because I know historically, they've been rough months. If the share market is in a rising trend, what might happen is just that the rise slows down. But if the share market is already in a declining trend, which it has been this year, then those months end up being worse. And that, of course, is what we saw in the September just passed and it lived up to its reputation as being a bad month. I guess the good news is that we are coming into seasonally stronger months – November, December, particularly January in the first half of the year as people look towards the new year, people spend bonuses they might get, in the U.S. you get tax loss selling, which pushes share markets down in September. And that starts to abate, people got to buy back into the market. So, all of those things tell us we are coming into a better part of the year seasonally and hopefully, if that lines up with the fundamentals, it should lead to better share markets. But we've still got a little way to go yet on that.

St Anne: Well, on that slightly optimistic note then, Shane, you'd also mentioned that it might be nervous times, but there are opportunities. Are you able to elaborate a little bit more on that, opportunities for investors?

Oliver: Well, I guess, there's two ways of looking at this. One, the overall picture of the share market, it's had a fall from its high in August last year of 16%. By the time you listen to this, it might be a little bit more – or watching this rather. And so, that's meant the share market has gone from a relatively high P/E – now it's a relatively low P/E, it's slightly below its long-term average. So, there's a bit of value creeping into the markets, and people should see it that way rather than think, oh, the share market is going down. That means I've got to sell, and they should see it like a sale at Woolworths or Aldi or Coles, things are cheaper. You can pick up shares at a lower price.

The other issue is at an individual level. Some sectors of the market have been hit a lot harder through that decline since August. Energy and utility stocks have actually gone up, believe it or not. Whereas things like IT stocks, consumer discretionary, consumer staples, real estate stocks, or probably listed property trusts, they've all come down quite aggressively, and there's opportunities in there for investors who are prepared to look through the current uncertainties and see that these stocks will rebound when economic conditions improve. So, there are opportunities there, and I think the key for investors is to keep calm, to look for those opportunities rather than thinking, well, now is the time to panic.

St Anne: Well, excellent advice, Shane, and thank you, as always, for your insights.

Oliver: Thank you. Thank you, Christine. Thanks for having me.