Oliver’s insights into investments, super and housing in 2024

AMP’s chief economist Shane Oliver dishes out his best insights on how investments, property and superannuation are likely to perform in the year ahead. 

By Shane Oliver

Key summary - Australia at 40% risk of recession

• 2023 turned out to be a strong year for investors. There were bumps along the way, but balanced super funds returned around 9.5%.
• 2024 is likely to see positive returns helped by falling rates but they are likely to be more constrained and volatile given risks around the timing of rate cuts, recession risks and geopolitics.  
• This year, we expect the Reserve Bank of Australia (RBA) to cut the cash rate to 3.6%, the ASX to rise to around 7900 (revised up) and balanced super funds to return around 5.3%. Australian residential property prices are likely to soften ahead of support from rate cuts.

The 5 key things to watch are: 

• inflation and interest rates; 
• the risk of recession; 
• the Chinese economy and property sector; 
• US politics; 
• and the Australian consumer.

What else is on the agenda in 2024

We expect balanced growth super funds to return around 5.3% this year.

Global shares are expected to return a far more constrained 7%. 

The first half of 2024 could be rough as growth weakens, but shares should ultimately benefit from rate cuts and lower bond yields and the anticipation of stronger growth later in the year and in 2025.

What about house prices?

Australian home prices are likely to fall 3-5% as high rates hit demand and unemployment rises. The supply shortfall should prevent a sharper fall but expect a wide dispersion. Rate cuts will help later in the year.

Cash and bank deposits are expected to provide returns of over 4%.

A rising trend in the $A is likely taking it to $US0.72, due to a fall in the overvalued $US and the Fed cutting rates more than the Reserve Bank of Australia.

Other asset classes in 2024

Australian shares are likely to outperform global shares, after underperforming in 2023 helped by somewhat more attractive valuations. (A recession could threaten this though so it’s hard to have a strong view.)

Expect the ASX 200 to end 2024 at around 7,900 points (revised up from our initial target of 7500).

Bonds are likely to provide returns around running yield or a bit more, as inflation slows, and central banks cut rates.

Unlisted commercial property returns are likely to be negative again due to the lagged impact of high bond yields and working from home.

3 big worries in 2024

Inflation is still too high and its decline is likely to remain bumpy – so central banks could still have another hawkish turn and even if not there is a high risk that rate cuts may come later than markets expect.

The risk of recession is high. It’s hard to see the biggest rate hiking cycle since the 1980s not having a major impact and the risks are already evident in tighter US lending standards, falling lending in Europe and stalling consumer spending in Australia. Risks around the Chinese economy and property sector also remain high.

Geopolitical risk is high: with half the world’s population seeing elections including the US, Europe and India.

4 reasons for optimism in 2024

1. Inflation has eased sharply to around 3% in major industrial countries and around 5% in Australia and is likely to continue to fall as: supply chain pressures have eased; demand is cooling; and labour markets are easing. This includes in Australia which lagged US inflation on the way up and is just doing so again on the way down. 
2. We expect the rest of the world to start cutting rates. While there is still a high risk of one more hike in Australia in February, falling inflation should head this off so our base case is that the RBA has peaked ahead of rate cuts from June, taking the cash rate down to 3.6% by year end. Just as rate hikes were bad for shares in 2022, rate cuts should ultimately be positive.
3. While recession is a high risk and markets are no longer priced for it, if it does occur it should be mild: most countries have not seen a spending boom that needs to be unwound; in Australia consumer spending, housing investment and business investment are not running at excessive levels relative to GDP; and Chinese growth is soft and property sector risks are high, but it’s likely to target roughly 5% GDP growth again and back this up with fiscal stimulus if need be.
4. Finally, while there’s lots of geopolitical risks, they may not turn out so badly: the US has a strong incentive to avoid an escalation in the Israel/Hamas war; the Ukraine war could turn into a frozen conflict;  elections won’t necessarily go in an adverse direction for markets.  

5 things to watch in 2024

• Inflation – if it fails to continue falling as we expect, central banks will be more hawkish than we are allowing for, risking deep recession.

• Recession – a mild recession should be manageable but a deep recession will mean significant downside in shares. So far global business conditions PMIs are soft but consistent with okay growth. 

• The Chinese economy – China’s property sector is continuing to struggle and without measures to support consumers this could hurt its economy with a flow on to demand for Australian exports.

• Geopolitics – the key risks relate to Taiwan, a possible expansion of the Israel/Hamas war and the US Presidential election.

• The Australian consumer – consumer spending has slowed sharply and risks stalling as a result of cost-of-living pressures, high interest rates and higher unemployment.

Read Shane Oliver’s 9 no-nonsense tips for long term investment.

_{Advice given in this article is general in nature and does not take into account your personal circumstances. It is not intended to influence readers' decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.}