What ‘lit up’ the Australian economy in 2023, and what to expect in 2024

It’s been a tumultuous year for Australians—interest rates saw significant hikes, cost of living pressures increased rapidly, the tech sector continued to reach new ground with AI technology and geopolitical pressures are still engendering tremors in the global economy.

Moomoo Australia Chief Market Strategist Matt Wilson shares his commentary on 2023 in review, and what to expect in the new year.

All commentary is to be attributed to Matt Wilson, Chief Market Strategist, moomoo Australia.

Global Recession

• The biggest fear among investors was that rising interest rates and heavily indebted countries, corporates, and households would tip the global economy into recession in 2024.
• It seems clear now in hindsight that inflation peaked in most major economies during December 2022. The rate of inflation fell throughout the first 10 months of 2023 although it was still elevated enough to see central banks raising the levels of their respective cash rates.
• As interest rates rose, the forecast of recession was very much a focus for markets. It was a month-to-month proposition as economic data showed consumers modifying their behaviour and drawing down on cash reserves. Despite high immigration numbers in Australia, the demand for workers has meant employees were in control and salaries have generally grown.
• The global economy is not out of the woods by any stretch, but a ‘soft landing’ is becoming increasingly likely.

Electrification

• One of the biggest investment themes of the past few years has been the electrification of the global economies. Closing down coal-fired power stations (largely in Western economies) to switch to wind and solar-powered energy has seen the demand for commodities such as cobalt, lithium, graphite and rare earth minerals skyrocket.
• There were warning signs at the beginning of the year with some broking houses forecasting an oversupply of lithium (in particular) and a glut in the supply of electric vehicles.
• These forecasts largely came to fruition with the price of Lithium Carbonate falling by 73% to Nov 23. Share prices of Lithium stocks fell heavily although strong takeover activity in the sector suggests global mining companies are still believers in the longer-term theme and are positioning themselves for an increasing commitment to the sector.

Artificial Intelligence (AI)

• At the tail-end of 2022, there was a surge in interest in AI stocks as US companies like Nvidia, Google, Microsoft and Apple invested heavily in AI-powered products.
• This saw huge upward price movements in IT stocks throughout 2023 in the US and this flowed into the Australian IT sector which is up 14.73% YTD (Nov 23).

Geo-Politics

• On Oct 7 we saw a violent Hamas terror attack on Israel. Israel predictably responded aggressively and at this point, no one is sure whether this will grow into a greater regional conflict.
• Aside from the personal tragedies, markets have largely reversed any moves from the immediate aftermath of the conflict. Oil prices surged towards $US93 per barrel before falling back to around $US78 per barrel at the time of writing (Nov 23).
• The Gold price has remained elevated throughout 2023 and the spike in prices from early October to $US2000 an ounce has held. The war in Ukraine continued throughout the year but it seems the effect on markets is muted.

ASX Sector Performance in 2023

• The IT sector has been the top performer in Australia (+14.73% YTD) followed by Materials (+5.87%), Consumer Discretionary (+4.55%) and Telecommunications (+4.22%). The biggest underperformers have been Health (-10.09% YTD), Consumer Staples (-9.32%) and Energy (-9.29%).
• Weakness in energy stocks has possibly been the biggest surprise because the high cost consumers are experiencing are not reflected in energy company profits it would seem. Or it is possible that capital costs of the transition away from traditional fossil fuels is consuming capital at higher rates than forecast. In 2022 Energy was the best performing sector with prices on a tear after the Ukraine war so perhaps price multiples were being viewed as unsustainable.
• In 2022 IT stocks were among the worst performers in global markets as interest rates rose and many companies in the sector were unprofitable. 2023 has seen IT stocks regain lost ground largely on the back of the surge in interest in AI.
• Health stocks soared after Covid but in 2023 they performed poorly with the sector losing 10.9% YTD.
• The recovery of China’s economy has been a see-saw affair however demand for resources has returned with Australia’s mining giants benefitting strongly.

WHAT TO LOOK OUT FOR IN 2024 

Aging world

• As Baby Boomers move to retirement they will be looking to cash in on their life savings to enjoy holidays personal health and travel-related services. The generation is perhaps the most indulgent generation we have ever seen and will continue to spend money on things that see them healthy and enjoying their later years. A generational transfer of wealth post-Baby Boomers will be the largest in history and drive global economies for many years to come. So look for Health and travel stocks to rebound on the back of structural tailwinds in 2024.

Digital Disruption

• The glimpse of the AI revolution we saw with the launch of ChatGPT is just the beginning of how ‘big data’ and machine learning will alter our lives. Now we are seeing a ‘frontier grab’ as large tech companies battle it out to create the ‘killer apps’ that will shape the future.
• There will be many hits and misses in this arena but the changes we will see will ultimately be as profound as the development of the personal computer.
• Microsoft and Google start with a tremendous advantage in the space and will continue to buy up any companies that can catapult them ahead of their competition.

Supply Chain certainty

• One of the great lessons from COVID-19 was that countries can no longer rely on global supply chains in critical industries such as pharmaceuticals, technology, and defence. Many countries are seeking to bring manufacturing and logistics back onshore, reversing a globalisation trend of some 40 years. For Australia, this will see a greater focus on maintaining and using critical commodities such as Lithium, rare earth minerals and possibly Uranium but it remains to be seen whether Australia can rebuild its manufacturing base.

Transitioning to net zero.

• This theme will continue despite increasing uncertainty about Australia’s ability to: a) reach net zero carbon dioxide emissions; and, b) Australia’s ability to re-grow its manufacturing base with unreliable wind, solar and in some cases hydropower. The disruption in this space will be prolific with vast amounts of money being spent to ensure the transition happens with increasing speed.

Politics

• The big one is the US election set for November 2024. It will be a highly febrile and contested election unlike any other. Donald Trump is leading in several early polls against the likely Democrat candidate Joe Biden. But with Joe having just celebrated his 81st birthday anything is possible.
• Some political trends that can be discerned however are a shift away from the globalist policies of the past 40 or so years to more conservative or right-wing governments.
• Finland, Italy, Poland, Sweden, and Austria have all recently elected right-wing (or conservative) parties. Argentina has just elected a far-right President. This may well have an impact on the election of the new European Parliament in 2024.
• It is reasonably likely these political trends will continue, and it would be a brave person to guess where things go from there!

Australia’s Economy in 2024

• Pressure on consumers will continue to increase, exacerbated by increasing migration and pressure on housing and infrastructure.
• Internationally many of the major economies may start to see interest rates fall gradually as Central Banks seek to keep their economies moving forward.
• Immigration levels will likely see interest rates remain relatively higher in Australia with interest rate cuts a long way off. The Australian Dollar however should be a beneficiary of this.
• Home building will be a huge focus for Australia although 2023 has been a very difficult year for builders with costs increasing rapidly. Large-scale builders will be under pressure to churn out more and more housing as quickly as possible, but the building sector is struggling with as many as 750 companies going into liquidation since June 2023. This will crimp our ability to build at the rate that is needed.
• Insurance costs will continue to increase regardless, and this is one industry that can pass on higher costs to consumers and businesses.
• Financial services in Australia are dominated by the big four banks and whilst it appears that they have managed the rising interest rate environment very well their franchises will come under further pressure from fintech businesses that are more nimble and able to connect with younger demographics. The major banks should be able to ride out 2024 increasing their impressive profitability.