CFS Market Insights: August 2023

Welcome to CFS Market Insights.

There's no doubt that earnings in the US have been better than feared, although they're still down year-on-year.

The biggest surprise has been in consumer discretionary.

So companies like Amazon, which have reported incredibly strong earnings.

What we are seeing is that those parts of the economy that did poorly in COVID, for example, consumer discretionary, is seeing a strong rebound in earnings.

The other side of this is that the parts of the economy, which did very well during COVID like technology and health care, are starting to see earnings decline.

We do think that this is a very good opportunity for active stock pickers because there will be more opportunities as you see volatility in earnings going forward.

So the consumer has been a lot more resilient than people had expected.

A large part of that is because of the fiscal transfer that occurred during COVID, where effectively the government put money into people's pockets and that money is still being spent.

We're also seeing skilled labour shortages and also wage increases coming through.

So I think it's still too early to declare that there won't be a recession.

The lag between interest rates rising and a recession hitting is still in place, although it may be extended into 2024.

So wage growth has continued to be an important part of the US economic expansion.

We're also starting to see energy prices rise up again.

Both prices at gas stations, but also increases in natural gas prices too.

We continue to believe that markets are being too optimistic that inflation has been defeated.

In terms of what that means for our portfolios, we are being selective in terms of the way that we put money to work, in areas like fixed income, and continue to believe that active portfolio management is the best way to deal with greater inflation volatility.

There's no doubt that Chinese economic data has been worse than expected.

But that's part of the slowdown in global manufacturing that we've seen in the last several months.

We do think that there's some valid criticism about the policy response.

But it's part of a wider shift away from mass irrigation, in terms of economic response, to more drip-feed policy initiatives that we've seen over the last three years

or so.

In terms of our portfolios, we do think that valuations both in China and emerging markets look very attractive and that's why we have exposure to emerging markets within CFS's portfolios.

We also think that notwithstanding the short term issues in China, it's a very important economy for Australia.

Thank you for watching CFS Market Insights.

See you next time.