What we liked

  • Australian retail sales grew by a robust 0.9% last month, with consumers splashing out on the new iPhone as well as outdoor goods due to the warm spring weather. The September result came in above market expectations of a 0.3% increase and stronger than the 0.3 per cent lift in the month prior.
  • The US workforce added 336,000 jobs last month, much more than expected, as the world’s largest economy remained resilient in the face of higher interest rates. The sharp acceleration in hiring saw non-farm payrolls rise during September by almost double the rate anticipated by economists. Highlighting the current strength of the U.S. employment market.
  • The purchasing managers’ index (PMI) for China’s manufacturing sector came in at 50.2 in September, bouncing back to the expansion zone. Also, a better than expected read on industrial productions and retail sales was encouraging. While too early to call a sustainable economic improvement, we are encouraged by recent signs of economic, “green shots.”
  • China’s central and local governments extended their borrowing spree in October to reach a new monthly high, buoyed by Beijing’s fiscal stimulus to support the economy. The NPC Standing Committee approved a mid-year expansion to the Central budget – the first time since 1998 in an attempt to stimulate economic activity.

What we didn’t

  • Further global instability, with the tragic events taking place in Israel/Palestine. The human tragedy is exposed for all to see, but the economic impact from the conflict was initially seen in higher oil prices. Any escalation outside of the current conflict would be negative for risk sentiment.
  • Australian inflation rose by 1.2% in the September quarter, up from 0.8% in June, highlighting the persistent quality of Australia’s inflation problem. However, the annual rate of inflation fell from 6% to 5.4%. The quarterly rate was higher than expected, placing greater pressure on the RBA to raise rates at its November meeting (on Melbourne Cup Day).
  • U.S. bonds yields rose to fresh highs in October. With the 10-year bond yield peaking at 4.99%, the highest rate since 2007.
  • China economic growth remains benign. This was exemplified by a flat read in inflation for September. While a positive in one as is it allows China to stimulate their economy it shows the lackluster economic growth China has experienced since opening its economy post-COVID lockdowns.

Base Case

Our view of the most likely scenario for markets over the coming months, for which our portfolios are currently positioned.

72% Probability

Global economic activity is expected to continue moderating over the remainder of the year, despite recent data exhibiting some resilience. Slowing consumer discretionary spend and margin compression are anticipated to remain strong themes over the coming months, adversely impacting company earnings.

Our view remains that inflationary rates of increase are expected to continue moderating, although to remain above historical averages from the past decade. In isolation, this should be supportive for credit markets as well as valuations of growth assets and manifest in greater financial market stability over the medium-term. This is likely to be mitigated by earnings downgrades, as lower inflationary pressures and impacts from a slowing economy impair company earnings.

The current environment leaves central banks, particularly the U.S. Federal Reserve, in a difficult position. Developed economy central bank choices appear to be to ease financial conditions and support the economy and financial system, while risking local currency weakness, higher yields and inflation or continue to fight inflation and risk more severe economic weakness and potential bond market/banking stress. The actions of policy makers to move in either direction will be a large driver of financial market performance over the coming months. It Is possible that continued liquidity injection from central banks to shore up the financial system will provide continued support for risk asset valuations.

This scenario is likely to see us maintain a neutral to slightly positive view on growth assets over the next few months as employment and consumer conditions remain sound. Capital preservation will be the primary objective through appropriate company/sector allocations to those companies and sectors that are resilient earners in a peaking business cycle, as well as those exhibiting pricing power. This is likely to favour defensive industry sectors that are resilient in a slowing economy. Should liquidity injections continue to be a feature of central bank policy, tactically increasing positions in risk assets may be warranted.

This will likely remain the investment stance until such time that we get a clearer macroeconomic trend emerge, or we see central banks reducing their efforts to provide liquidity into financial markets. Overall, asset allocation will retain a neutral bias, with short-term tactical positioning to be guided by macroeconomic developments and central bank actions.

Bear Case

Our worst-case scenario for the coming months, which we are prepared to position for should conditions deteriorate.

14% Probability

Global consumer demand for goods and services falls further than current constructive expectations as inflationary pressures and increased interest rates negatively impact discretionary spending. A reversion to bank stresses seen earlier this year would be expected to further tighten bank lending standards also. This could act to place pressure on the currently very strong global employment conditions.

Geopolitical tensions could act to negatively impact supply chain bottle necks, further exacerbating inflationary pressures, placing greater pressure on central banks to tighten monetary conditions. A situation more likely over the next few months, as the northern hemisphere moves into winter and requires more heating fuel. Additionally, wage pressures and higher cost of lodging become more systemic as employees successfully lobby for wage increases. This will lead to a deterioration in company profits as increased input costs, and debt servicing costs (from higher interest rates) combined with lower demand converge to crimp company earnings.

Such a scenario would result in a tightening of financial conditions, while inflationary pressures remain elevated. This could see central banks continuing to withdraw monetary support (through higher interest rates) at a time as the economy is weakening. Additionally, an untimely withdrawal or reduction of central bank liquidity into the financial system could derail financial markets, which have become accustomed to liquidity support. When combined with reduced government expenditure, due to elevated indebtedness, this may cause consumer confidence and spending to fall, as prior government support is not fully replaced by gainful employment income.

Rapid escalation in geo-political tensions or a significant or systemic credit default, due to over-indebtedness in an environment of rising bond yields and elevated volatility in financial asset prices, could see a liquidation of risk assets within a compressed period. Such a situation would see us move rapid and meaningfully into cash at the expense of equities. Further to this, the recent stresses seen in globally systemically important banks could lead to more bouts of liquidity events, which would be expected to have a pronounced negative effect on economic growth.

Above scenarios will see us take a more defensive position and reduce equity exposures replacing them with defensive assets, such as cash. The accelerating bond yield scenario would require a more nuanced shift toward companies and sectors that would be the greatest beneficiaries of such a move. Focus will be on a more defensive posture with capital preservation being the primary objective. A further shift towards defensive sectors such as healthcare, consumer staples and utilities would combine with higher cash levels in this scenario.

Bull case

Our most optimistic view for markets over the coming months.

14% Probability

Economies across the developed world experience better than anticipated economic growth with economic activity exhibiting resilience. Combined with waning inflationary pressures, as supply chain bottlenecks ease, this would like lead to synchronous global economic growth as interest rate pressures ease on lowered inflationary expectations and financial conditions continuing to loosen. In this scenario disposable income for consumers would increase as inputs costs for corporates reduce. The result would be more resilient earnings for companies as economic growth accelerates.

Fiscal support from governments could combine with sound cash levels on household and corporate balance sheets to accelerate the speed of the global economic recovery. In the event central banks resume measures aimed at suppressing interest rates below inflation levels and potentially adding further liquidity enhancement measures to support financial systems, we would expect this to further fuel asset prices.

This scenario would be positive for financial markets as improving financial conditions act to fuel demand for growth assets in a low to negative real interest rate environment. We would act by ensuring a growth asset bias with low cash levels. Additionally, if leading economic indicators began surprising to the upside a net shift towards cyclical sectors leveraged to economic growth would occur.

Stock in Focus – L1 Capital

Investment Thesis

L1 Long Short Fund Limited provides investors access to an absolute return fund that offers a highly diversified portfolio of long and short positions based on a fundamental bottom-up research process. The Company’s investment objective is to deliver strong, positive, risk-adjusted returns over the long term whilst seeking to preserve shareholder capital. Its place in the portfolio is to reduce volatility and risk, with the aim of protecting downside risk while optimising upside return capture.


The L1 Capital Long Short Strategy, launched in 2014 and is the best performing long short fund in Australia since inception.

Investing in a portfolio of predominantly Australian and New Zealand Securities, with up to 30% invested in global securities, L1 Capital has the ability to both buy and short-sell securities, which provides a flexible strategy to deal with changing stock market conditions. The objective is to deliver strong, positive, risk-adjusted returns to investors over the long term.

The investment team invests the majority of its personal wealth in L1 Capital funds ensuring it’s interests are strategically aligned with its clients.

Saward Dawson Wealth Advisors Pty Ltd, a Corporate Authorised Representative of Akambo Pty Ltd t/a Accountants Private Advice

The information presented in this publication is general information only, and is not intended to be financial product advice. It has not been prepared taking into account your investment objectives, financial situation or needs, and should not be used as the basis for making an investment decision. Before making any investment decision you need to consider (with your financial adviser) your particular investment needs, objectives and financial circumstances.

Some numerical figures in this publication have been subject to rounding adjustments. Akambo Pty Ltd (including any of its directors, officers or employees) will not accept liability for any loss or damage as a result of any reliance on this information. The market commentary reflect Akambo Pty Ltd’s views and beliefs at the time of preparation, which are subject to change without notice.