1 00:00:04,110 --> 00:00:06,570 Sean Aylmer: Welcome to the Fear and Greed Daily Interview. I'm Sean 2 00:00:06,570 --> 00:00:09,240 Sean Aylmer: Aylmer. It's the 1st of December, the start of summer, and 3 00:00:09,240 --> 00:00:11,100 Sean Aylmer: just a handful of weeks until the end of a 4 00:00:11,100 --> 00:00:14,670 Sean Aylmer: pretty extraordinary year for the global economy and financial markets. 5 00:00:15,000 --> 00:00:16,290 Sean Aylmer: I wanted to have a look at some of the 6 00:00:16,290 --> 00:00:19,110 Sean Aylmer: main economic forces that drove financial markets this year and 7 00:00:19,110 --> 00:00:22,770 Sean Aylmer: how investors have navigated that volatility. Without doubt, one of 8 00:00:22,770 --> 00:00:26,579 Sean Aylmer: the main themes of 2022 has been inflation; that yesterday 9 00:00:26,579 --> 00:00:29,790 Sean Aylmer: we saw the monthly consumer price index come in softer 10 00:00:29,850 --> 00:00:33,809 Sean Aylmer: than expected for October. Remember, this is general information only, 11 00:00:33,810 --> 00:00:36,809 Sean Aylmer: and you should seek professional advice before making any investment 12 00:00:36,810 --> 00:00:41,010 Sean Aylmer: decisions. David Bassanese is the chief economist at BetaShares, which 13 00:00:41,010 --> 00:00:43,770 Sean Aylmer: is a supporter of this podcast. David, welcome back to 14 00:00:43,770 --> 00:00:44,460 Sean Aylmer: Fear and Greed. 15 00:00:44,760 --> 00:00:46,050 David Bassanese: Great to be with you again, Sean. 16 00:00:46,440 --> 00:00:50,310 Sean Aylmer: So what do you make of yesterday's CPI data, which 17 00:00:50,310 --> 00:00:53,520 Sean Aylmer: was weaker than expected, and where do you think inflation 18 00:00:53,550 --> 00:00:55,110 Sean Aylmer: is at the moment more generally? 19 00:00:55,800 --> 00:00:58,590 David Bassanese: Well, I mean, I think it is peaking. I mean, 20 00:00:58,590 --> 00:01:00,990 David Bassanese: if you look at the monthly run of the inflation 21 00:01:00,990 --> 00:01:04,350 David Bassanese: numbers, we now get a monthly CPI here in Australia, 22 00:01:04,350 --> 00:01:09,060 David Bassanese: and if you look at the annualized monthly increases, they 23 00:01:09,060 --> 00:01:12,539 David Bassanese: got up around about 6% midyear, and now they're starting 24 00:01:12,540 --> 00:01:16,620 David Bassanese: to drop back down closer to 5%. So I think the 25 00:01:16,620 --> 00:01:19,649 David Bassanese: worst is over in terms of the inflation peak. The 26 00:01:19,650 --> 00:01:22,319 David Bassanese: only question now is how quickly does it fall back 27 00:01:22,319 --> 00:01:26,250 David Bassanese: toward the 2% to 3% band, but certainly it's starting 28 00:01:26,250 --> 00:01:30,000 David Bassanese: to move in the right direction. Yeah, so that's pretty, 29 00:01:30,000 --> 00:01:32,850 David Bassanese: I think, reassuring news for the Reserve Bank, and hopefully 30 00:01:32,850 --> 00:01:36,150 David Bassanese: for the economy and those concerned about the interest rate outlook. 31 00:01:36,510 --> 00:01:39,209 Sean Aylmer: I want to get onto what 2022 is all about 32 00:01:39,209 --> 00:01:41,250 Sean Aylmer: and what 2023 is going to be about, but I, just for 33 00:01:41,250 --> 00:01:43,830 Sean Aylmer: the moment, want to stick with the last few weeks, 34 00:01:43,830 --> 00:01:46,290 Sean Aylmer: really, and what happened yesterday. What does it mean for 35 00:01:46,290 --> 00:01:47,550 Sean Aylmer: interest rates in Australia? 36 00:01:47,790 --> 00:01:50,400 David Bassanese: Well, I mean, I think the RBA is still likely to raise 37 00:01:50,400 --> 00:01:52,920 David Bassanese: rates somewhat more. I mean, I still think they are 38 00:01:52,920 --> 00:01:56,070 David Bassanese: going to raise rates at the next meeting by 25. 39 00:01:56,070 --> 00:01:57,480 David Bassanese: I mean, there was a small risk they might have 40 00:01:57,480 --> 00:01:59,370 David Bassanese: gone by 50, but I think we are getting to 41 00:01:59,370 --> 00:02:02,490 David Bassanese: the tail end of the likely rate increases. I've got 42 00:02:02,490 --> 00:02:05,580 David Bassanese: them raising rates twice more in the first half of 43 00:02:05,580 --> 00:02:08,250 David Bassanese: next year. And I think with this number, there is 44 00:02:08,250 --> 00:02:11,669 David Bassanese: a risk that they actually pause. I think they don't 45 00:02:11,669 --> 00:02:13,590 David Bassanese: necessarily want to get rates all the way up and 46 00:02:13,590 --> 00:02:16,320 David Bassanese: then just do nothing thereafter. I think they do want 47 00:02:16,320 --> 00:02:20,430 David Bassanese: to maybe keep people thinking about inflation, keep thinking about 48 00:02:20,760 --> 00:02:24,120 David Bassanese: the potential for higher interest rates, but maybe drag out 49 00:02:24,120 --> 00:02:27,600 David Bassanese: the process over which they are raising rates. So in 50 00:02:27,600 --> 00:02:30,330 David Bassanese: that sense, I think they could go in December, and 51 00:02:30,330 --> 00:02:32,520 David Bassanese: then potentially pause for a few months in the first 52 00:02:32,520 --> 00:02:34,950 David Bassanese: half of next year and just see what happens, and 53 00:02:34,950 --> 00:02:38,370 David Bassanese: then if the economy does remain resilient, real spending in 54 00:02:38,370 --> 00:02:41,880 David Bassanese: particular, then nudge rates up a little bit further. I 55 00:02:41,880 --> 00:02:44,430 David Bassanese: think they're also conscious of the US outlook as well, 56 00:02:44,430 --> 00:02:47,220 David Bassanese: which just gives them another reason to potentially pause in 57 00:02:47,220 --> 00:02:47,431 David Bassanese: the new year. 58 00:02:47,431 --> 00:02:53,040 Sean Aylmer: So I mean, financial markets particularly follow the US inflation / rate 59 00:02:53,040 --> 00:02:56,940 Sean Aylmer: situation very, very closely. Whereas while the Reserve Bank has 60 00:02:57,270 --> 00:03:00,120 Sean Aylmer: taken its foot off the accelerator, we're still going forward, 61 00:03:00,120 --> 00:03:01,980 Sean Aylmer: but we're just taking the foot off the accelerator, the 62 00:03:01,980 --> 00:03:04,260 Sean Aylmer: US hasn't quite done that yet, but it might. 63 00:03:05,580 --> 00:03:08,669 David Bassanese: Look, it might. I think the Fed are more hawkish 64 00:03:08,669 --> 00:03:11,400 David Bassanese: still than the Reserve Bank. So the Fed are likely 65 00:03:11,400 --> 00:03:14,400 David Bassanese: to raise rates 50 points or half a percent at 66 00:03:14,400 --> 00:03:17,339 David Bassanese: their next meeting in December, and the markets are still 67 00:03:17,340 --> 00:03:21,990 David Bassanese: looking for another 50 to potentially 75 in the first 68 00:03:21,990 --> 00:03:24,630 David Bassanese: half of next year. So the big difference between Australia 69 00:03:24,630 --> 00:03:26,760 David Bassanese: and the US is that wages growth in the US 70 00:03:26,760 --> 00:03:30,300 David Bassanese: is notably higher than in Australia. So they are more 71 00:03:30,300 --> 00:03:35,190 David Bassanese: concerned that the hot labor market can underpin a higher 72 00:03:35,190 --> 00:03:39,360 David Bassanese: level of inflation, whereas again, in Australia, wages are picking 73 00:03:39,360 --> 00:03:43,230 David Bassanese: up, but they're still relatively low, around about 3% or so, whereas 74 00:03:43,230 --> 00:03:44,760 David Bassanese: in the US it's closer to 5% or 6%. 75 00:03:45,540 --> 00:03:47,670 Sean Aylmer: Stay with me, David. We'll be back in a minute. 76 00:03:53,940 --> 00:03:57,120 Sean Aylmer: My guest this morning is David Bassanese, chief economist at 77 00:03:59,100 --> 00:04:04,500 Sean Aylmer: BetaShares. Okay, 2022 was all about energy prices and energy spikes; inflation; 78 00:04:04,590 --> 00:04:08,400 Sean Aylmer: interest rates. Do you think 2023 will be about recessions 79 00:04:08,400 --> 00:04:09,780 Sean Aylmer: or near- recessions? 80 00:04:10,410 --> 00:04:12,810 David Bassanese: Look, I unfortunately do, and it goes back to the 81 00:04:12,810 --> 00:04:15,240 David Bassanese: US. Basically, the US has got a red- hot labor 82 00:04:15,240 --> 00:04:18,960 David Bassanese: market. Wages growth is running well above levels consistent with 83 00:04:18,960 --> 00:04:24,660 David Bassanese: their 2% target, and unless wage inflation miraculously falls without 84 00:04:24,660 --> 00:04:28,589 David Bassanese: the unemployment rate going up, which seems unlikely, you need 85 00:04:28,589 --> 00:04:31,020 David Bassanese: that unemployment rate to go up to take pressure off 86 00:04:31,020 --> 00:04:34,710 David Bassanese: wages, and hence, inflation. So that means the economy needs 87 00:04:34,710 --> 00:04:37,289 David Bassanese: to slow, and when you do get that slowing, it's 88 00:04:37,290 --> 00:04:39,960 David Bassanese: very hard to fine- tune that. So I think the 89 00:04:40,800 --> 00:04:43,470 David Bassanese: risk is the US does need to tumble into a recession. 90 00:04:43,800 --> 00:04:47,400 David Bassanese: We can debate whether it'll be severe or mild, but 91 00:04:47,820 --> 00:04:50,909 David Bassanese: a recession is a recession, and that's certainly not priced 92 00:04:50,910 --> 00:04:54,000 David Bassanese: into markets yet. I guess maybe the theme of this 93 00:04:54,000 --> 00:04:56,820 David Bassanese: year has been very aggressive central bank rate rises, which 94 00:04:56,820 --> 00:05:00,150 David Bassanese: hurt bond markets, which in turn hurt the equity markets. 95 00:05:00,150 --> 00:05:03,719 David Bassanese: So it pushes down valuations. Earnings growth's held up. I 96 00:05:03,720 --> 00:05:06,210 David Bassanese: think next year's going to be where bond markets stop 97 00:05:06,720 --> 00:05:12,540 David Bassanese: underperforming, and as growth slows, bond yields will start to ease 98 00:05:12,540 --> 00:05:15,089 David Bassanese: and you may get better returns from bonds. But the 99 00:05:15,089 --> 00:05:18,089 David Bassanese: downside pressure on equities may persist for a while, because 100 00:05:18,089 --> 00:05:21,330 David Bassanese: we're going to get downside on the earnings side. Whereas 101 00:05:21,360 --> 00:05:23,700 David Bassanese: this year it was mainly valuations that took the hit, 102 00:05:24,089 --> 00:05:27,000 David Bassanese: next year it's probably going to be earnings, certainly in 103 00:05:27,000 --> 00:05:28,440 David Bassanese: the first half of the year at least. 104 00:05:28,740 --> 00:05:31,739 Sean Aylmer: And that's because we just haven't seen a drop in 105 00:05:31,740 --> 00:05:35,789 Sean Aylmer: revenue come through. We haven't seen profit margins squeezed as 106 00:05:35,790 --> 00:05:38,880 Sean Aylmer: much as you might expect, given rates have been rising 107 00:05:38,880 --> 00:05:40,229 Sean Aylmer: so quickly. Is that what you're saying? 108 00:05:40,650 --> 00:05:43,020 David Bassanese: Yeah. Look, we've had one of the worst bond markets 109 00:05:43,020 --> 00:05:46,650 David Bassanese: selloffs globally in history, and one of the reasons is 110 00:05:46,650 --> 00:05:50,310 David Bassanese: that they've raised rates, but the economy, broadly speaking, and 111 00:05:50,310 --> 00:05:54,060 David Bassanese: I'm talking US and Australia here, has remained fairly resilient. 112 00:05:54,089 --> 00:05:58,170 David Bassanese: So consumer spending, employment growth are yet to buckle, and 113 00:05:58,170 --> 00:06:02,279 David Bassanese: so that meant that they've kept raising rates. But eventually, 114 00:06:02,400 --> 00:06:04,409 David Bassanese: I think those higher rates will take their toll on 115 00:06:04,410 --> 00:06:06,600 David Bassanese: the economy as we head into next year. 116 00:06:07,170 --> 00:06:10,170 Sean Aylmer: How important are two other things: the conflict in Ukraine 117 00:06:10,170 --> 00:06:12,510 Sean Aylmer: and what that means for energy, the first one, and 118 00:06:12,510 --> 00:06:16,440 Sean Aylmer: then China's COVID- zero policy and what that means? I 119 00:06:16,440 --> 00:06:21,270 Sean Aylmer: mean, from social unrest through to purchases of iron ore, 120 00:06:21,420 --> 00:06:24,720 Sean Aylmer: how important for an investor... How much should they be 121 00:06:24,720 --> 00:06:28,110 Sean Aylmer: thinking about those two things, energy crisis / Ukraine and China? 122 00:06:28,680 --> 00:06:31,739 David Bassanese: Yeah, so in the main, it's still true that the 123 00:06:31,740 --> 00:06:36,240 David Bassanese: US drive global markets. For example, if Europe has a 124 00:06:36,240 --> 00:06:39,239 David Bassanese: recession next year due to high energy prices but the 125 00:06:39,240 --> 00:06:41,580 David Bassanese: US manages to avoid a recession, i. e., has a 126 00:06:41,580 --> 00:06:44,910 David Bassanese: soft landing. I think equity markets can do quite well. 127 00:06:45,240 --> 00:06:47,310 David Bassanese: So it's really the US that's going to drive the 128 00:06:47,310 --> 00:06:50,490 David Bassanese: broad trends in markets. What happens in China, what happens 129 00:06:50,490 --> 00:06:53,610 David Bassanese: in Europe, affects things at the margin, I would say, 130 00:06:53,760 --> 00:06:57,120 David Bassanese: whether or not Europe outperforms or underperforms vis- a- vis 131 00:06:57,120 --> 00:07:00,000 David Bassanese: the US market. But I guess my take, firstly on 132 00:07:00,000 --> 00:07:03,060 David Bassanese: the Europe, we're in a war of attrition between Russian 133 00:07:03,060 --> 00:07:07,109 David Bassanese: and Ukraine. Europe have tried hard to economize on their 134 00:07:07,110 --> 00:07:09,960 David Bassanese: use of gas. They've bought up gas and filled up 135 00:07:09,960 --> 00:07:12,480 David Bassanese: this storage tanks to get through the winter, but if 136 00:07:12,480 --> 00:07:15,090 David Bassanese: the war drags on into next year, they're still going 137 00:07:15,090 --> 00:07:19,530 David Bassanese: to face energy shortages and rebound and energy prices there. 138 00:07:19,530 --> 00:07:22,920 David Bassanese: So Europe remains in a world of pain, and we're 139 00:07:22,920 --> 00:07:26,490 David Bassanese: just waiting to see how the Russia- Ukraine war plays 140 00:07:26,490 --> 00:07:29,430 David Bassanese: out. I mean, ultimately, to me, it seems like Russia's 141 00:07:29,430 --> 00:07:30,870 David Bassanese: going to be the one that's going to have to 142 00:07:31,410 --> 00:07:35,670 David Bassanese: capitulate here. Ukraine seems to be pretty well supported, so 143 00:07:35,670 --> 00:07:39,840 David Bassanese: it's Russia capitulates, either with or without Putin. We'll see 144 00:07:39,840 --> 00:07:43,290 David Bassanese: how that plays out. In terms of China, my key 145 00:07:43,290 --> 00:07:46,170 David Bassanese: takeaway there is unlike the GFC where the US went 146 00:07:46,170 --> 00:07:50,280 David Bassanese: into recession, the global financial crisis a decade ago, and 147 00:07:50,280 --> 00:07:54,120 David Bassanese: China pump- primed its economy and helped support our economy... 148 00:07:54,660 --> 00:07:56,489 David Bassanese: Look, they're in a world of pain of their own 149 00:07:56,490 --> 00:07:58,890 David Bassanese: because they're trying to get out of a zero- COVID 150 00:07:58,890 --> 00:08:01,470 David Bassanese: strategy, which is not easy, because the first thing that 151 00:08:01,530 --> 00:08:04,830 David Bassanese: will happen is you'll get an absolute surge in cases 152 00:08:04,830 --> 00:08:08,010 David Bassanese: and deaths, and there's no real way of getting around 153 00:08:08,010 --> 00:08:11,820 David Bassanese: that because vaccination rates in China are quite low. Plus, 154 00:08:11,820 --> 00:08:16,560 David Bassanese: they're trying to nurse a property bubble along. They've relied 155 00:08:16,560 --> 00:08:20,940 David Bassanese: a lot on high- rise residential construction, and there's been 156 00:08:20,940 --> 00:08:24,090 David Bassanese: an excess degree of building. It's been important for regional 157 00:08:24,090 --> 00:08:28,260 David Bassanese: development, but it's a bubble that they're trying to manage. 158 00:08:28,260 --> 00:08:30,270 David Bassanese: On the one hand, they need that growth. On the 159 00:08:30,270 --> 00:08:35,160 David Bassanese: other hand, it's contributing to debt levels and it's contributing 160 00:08:35,160 --> 00:08:40,260 David Bassanese: to, basically, misuse of resources. So I just don't see 161 00:08:40,260 --> 00:08:43,020 David Bassanese: China coming to the rescue in the way that they 162 00:08:43,020 --> 00:08:45,510 David Bassanese: did a decade ago during the GFC. 163 00:08:45,960 --> 00:08:49,530 Sean Aylmer: Okay. So you've alluded to the fact that we've had 164 00:08:49,530 --> 00:08:52,949 Sean Aylmer: both bond and equity sell- offs, which is very difficult 165 00:08:52,950 --> 00:08:56,040 Sean Aylmer: for investors; where do you put your money? Going forward, 166 00:08:56,100 --> 00:09:01,140 Sean Aylmer: 2023, and of course, BetaShares specializes in exchange- traded funds, which 167 00:09:01,679 --> 00:09:05,040 Sean Aylmer: means investors in BetaShares are going to be thinking more 168 00:09:05,040 --> 00:09:09,480 Sean Aylmer: about broad trends rather than stock- specific, obviously, what should 169 00:09:09,480 --> 00:09:11,400 Sean Aylmer: they be thinking about? So if I'm an investor and 170 00:09:11,400 --> 00:09:13,260 Sean Aylmer: I'm interested in an ETF, what are some of the 171 00:09:13,260 --> 00:09:15,480 Sean Aylmer: themes that are worth considering? 172 00:09:16,590 --> 00:09:19,260 David Bassanese: Well, I mean, again, if it's a year in which 173 00:09:19,260 --> 00:09:22,470 David Bassanese: global growth slows, the impact of the higher interest rates 174 00:09:22,470 --> 00:09:25,170 David Bassanese: that we've endured this year finally starts to slow economic 175 00:09:25,170 --> 00:09:29,340 David Bassanese: growth, then bonds, I think, are looking attractive. And again, 176 00:09:29,370 --> 00:09:32,550 David Bassanese: with ETFs, you can invest in equity markets, but you can also invest 177 00:09:32,550 --> 00:09:36,120 David Bassanese: in fixed- income bonds. In fact, it's made it much 178 00:09:36,270 --> 00:09:40,469 David Bassanese: easier to invest in bonds. ETFs have arguably been as 179 00:09:40,530 --> 00:09:43,050 David Bassanese: great for investing in bonds as they've been for equities 180 00:09:43,050 --> 00:09:46,650 David Bassanese: because it's been very hard to access bonds for investors 181 00:09:46,890 --> 00:09:49,109 David Bassanese: before the advent of ETFs. Now you can just buy 182 00:09:49,110 --> 00:09:52,440 David Bassanese: them on the exchange. So longer duration, fixed- rate bonds, 183 00:09:52,440 --> 00:09:55,979 David Bassanese: bond indices. You can lock in a pretty attractive yield 184 00:09:55,980 --> 00:10:01,020 David Bassanese: on things like long- duration corporate bonds, like our Cred ETF. If you 185 00:10:01,020 --> 00:10:05,189 David Bassanese: want government bonds, there's the AGVT long- duration government bond 186 00:10:05,250 --> 00:10:08,730 David Bassanese: EFT. And so, A, you can lock in a decent 187 00:10:08,730 --> 00:10:11,730 David Bassanese: yield now, and when and if bond yields start to 188 00:10:11,730 --> 00:10:15,059 David Bassanese: fall as growth slows, you'll then get capital gains on 189 00:10:15,059 --> 00:10:18,270 David Bassanese: those bonds as well. So that's something to think about. 190 00:10:18,270 --> 00:10:22,050 David Bassanese: Now, as we get through the downturn, I think value 191 00:10:22,050 --> 00:10:24,210 David Bassanese: will emerge in the equity market, and I think as 192 00:10:24,210 --> 00:10:28,199 David Bassanese: we get on top of inflation, the growth technology parts of 193 00:10:28,200 --> 00:10:31,109 David Bassanese: the market, which were beaten up last year, will also 194 00:10:31,110 --> 00:10:34,500 David Bassanese: start to look attractive. So things like the NASDAQ, again. 195 00:10:34,860 --> 00:10:38,460 David Bassanese: NDQ is our ETF that tracks the NASDAQ, for example. 196 00:10:39,150 --> 00:10:42,960 David Bassanese: I think we'll see a renewed interest in those longer- 197 00:10:42,960 --> 00:10:44,040 David Bassanese: term growth thematics. 198 00:10:44,640 --> 00:10:46,800 Sean Aylmer: Fantastic. David, thank you for talking to Fear and Greed. 199 00:10:47,640 --> 00:10:48,151 David Bassanese: Thanks very much, Sean. 200 00:10:48,151 --> 00:10:52,290 Sean Aylmer: That was David Bassanese, chief economist at BetaShares, the supporter of 201 00:10:52,290 --> 00:10:56,130 Sean Aylmer: this podcast. Head to betashares. com. au for more. This 202 00:10:56,130 --> 00:10:58,679 Sean Aylmer: is the Fear and Greed Daily Interview. Remember, this information 203 00:10:58,679 --> 00:11:02,219 Sean Aylmer: is general in nature and doesn't consider your personal circumstances. 204 00:11:02,460 --> 00:11:05,970 Sean Aylmer: You should get professional advice before making investment decisions. Join 205 00:11:05,970 --> 00:11:07,890 Sean Aylmer: us every morning for the full episode of Fear and 206 00:11:07,890 --> 00:11:12,000 Sean Aylmer: Greed, Australia's most popular business podcast. I'm Sean Aylmer. Enjoy 207 00:11:12,000 --> 00:11:12,390 Sean Aylmer: your day.