2024 Mid-Year Outlook | What's Next for the Australian Stock Market Amid Economic Recovery?

So far this year, Australia has navigated through a challenging economic landscape with high interest rates and cost of living pressures exerting a significant burden on households and the wider economy. Currently, the economy is showing signs of softness as the Reserve Bank of Australia (RBA) maintains its commitment to curbing inflation and wage growth. However, both the market and the RBA predict that after hitting a low mid-year, the economy will regain momentum under the backdrop of an upswing in consumer behavior.

Ric Deverell, Chief Economist at Macquarie Group, suggests that despite the current unfavorable economic conditions in Australia, the foundations for a recovery and stronger performance in the coming year are in place.

The combination of sluggish growth and persistent high inflation data seems firm enough to make the RBA cautious about decreasing interest rates too soon. Throughout the current year, the continuous inflationary pressures have compelled RBA to maintain its policy rate steady at 4.35%. The recent statement from RBA was generally hawkish in tone, while policymakers deliberated on the possibility of raising interest rates, a reduction was not on the table. Presently, the probability of an interest rate hike at the next RBA Board meeting stands at 35%.

According to Bloomberg, market forecasts now predict that the RBA will hold rates steady throughout 2024. As inflation is anticipated to decelerate, it is expected that the central bank will embark on a cautious and gradual cycle of monetary easing starting from early next year.

The labor market remains a pivotal determinant in the economic forecast, particularly concerning the potential for increased household incomes to translate into consumer spending. Although the unemployment rate has already seen a significant uptick, rising nearly half a percentage point over the past year—from 3.6% in May 2023 to 4.0% in May 2024—the figures are still situated at the lower end of the spectrum from the past decade. Moreover, both the employment-to-population ratio and the participation rate consistently exceed their pre-pandemic benchmarks.

In its May monetary policy statement, RBA acknowledged the likelihood of a continued escalation in unemployment until mid-2025. Bloomberg data indicates that market analysts project the unemployment rate to climb to 4.4% by the end of this year and to stabilize at 4.5% in 2025.

Here's the Bloomberg consensus for the aforementioned core economic indicators:

According to Bloomberg, the ASX 200 is currently positioned for a potential 3% increase from its aggregated 12-month price target.

In their June outlook report, Morgan Stanley raised their mid-term target for the ASX 200 to 8100 points by 2025. The firm noted that "the recent repricing for rates to remain higher for longer is linked to stronger growth as opposed to significant reflation risk and a return to rate hikes." They also anticipate that the significant performance gap between resource and banking stocks witnessed in the latter half of the year may begin to narrow.

VanEck believes that the upward price movement is sustainable given valuations are attractive and the increasing likelihood of a soft landing is supporting market confidence. Furthermore, they are bullish on the prospects of Australian mid-caps and equal weight sectors, predicting they are poised to outperform during the next phase of the market recovery. This optimism is primarily due to the fact that "smaller-sized companies offer more upside potential through market share expansion," in addition to having attractive valuations and performance. From a sectoral perspective, A-REITs, industrials, and consumer discretionary are among their top selections.