By Andrew Doherty, Director, AssureInvest
A version of this article below first appeared in SMSF Adviser Magazine and is reproduced with permission by Andrew Doherty.
A global economic slowdown of significance is underway. Rolling recessions are likely in the next eighteen months as key regions are pounded by supply shocks relating to pandemic complications, war in Ukraine and rising interest rates.
A more challenged outlook reflects tighter monetary policy, higher inflation, tenser geopolitics and lifted taxes. Consumption is being pressured by wealth destruction associated with lower home and equity prices.
Analysts have maintained overly optimistic earnings forecasts. Dramatic downgrades are likely as deteriorating conditions become more evident, especially in more cyclical sectors.
Tailwinds for corporate earnings and share prices over the last three decade now appear less supportive, so more astute asset allocation decisions are required. The long rise in corporate profits as a share of GDP is under threat. This ratio in the US rose as high as 12.1% this year from 4.1% in 1989, helped by falling interest rates and taxes during the period. Wages costs also fell due to reduced union influence, automation and the shift of work to lower cost regions.
Now, rates are rising, labour markets are tight, taxes are unlikely to fall further, and geopolitical tensions encourage insourcing of production, at least at the margin. Automation remains as a threat to worker power, however.