Seven experts on the risks you're not thinking about – The Australian Financial Review

Chanticleer
We asked CEOs, investors, economists and strategists to nominate the risk or opportunity that we’re not paying enough attention to. The answers will surprise you.
On the cusp of the new financial year, Chanticleer was reminded by James Montier, senior investment strategist and partner at Boston firm GMO, of a famous Danish saying: prediction is hard, especially about the future.
With this in mind, this column asked a group of experts a different question: what is the risk or opportunity that we’re not paying enough attention to?
Investors will have to tread warily in the 2024 financial year, David Rowe
Below are some fascinating answers to get you thinking about your portfolio, your business and your personal finances.
But one response that’s stayed with me came from a top business leader who preferred to stay anonymous. Their suggestion was to zoom out and consider the implicit deal that we have with our kids and grandkids: we’ll leave this a better place for the next generation.
The risk we’re not paying enough attention to, our CEO says, is the risk that the next generation is losing faith in this deal.
Consider two of the most pressing problems in our society: housing affordability and the energy transition. Both are hugely complex, system-wide issues that will only be solved over decades, with large amounts of capital and large amounts of co-operation between all levels of government businesses and communities.
The sheer size of these problems is daunting for governments – there are no easy victories, but lots of potential political pain. But moving slowly risks eroding the trust of the next generation. And with a loss of trust can come division.
The flip side of that, of course, is the opportunity to tackle and start to solve these big problems. That will require thoughtfulness and patience and lots of money, our CEO says, but it also requires the right attitude: one that encourages debate and discussion, is open to new ideas and recognises that we need that whole-of-economy effort.
The idea of a Team Australia moment might sound a little hackneyed, but these thorny problems will require sacrifice and compromise if we are to bring all sections of the community along and make good on our deal with the next generation.
It’s a big idea for a new financial year, but an important one. Let’s explore seven more known unknowns for FY24:
Ryan Stokes, chief executive of Seven Group, sees strong demand across his conglomerate, which spans mining, infrastructure, energy, building materials and media. “But when things are going well, we also like to consider the prospects of what could go wrong.”
Stokes’ fear is a period of stagflation. While a bit of inflation is not necessarily a problem in itself, the danger is the buffer to economic growth that has been provided by low unemployment could erode over time, leaving Australia with the worst of both worlds: high unemployment and low economic growth.
Geoff Wilson, Jo Masters, Ryan Stokes, and Robert Almeida. 
Seven is looking at its overheads to see what cuts can be made ahead of such an environment. “Productivity gains are increasingly challenging and where we have scale it requires a constant focus on how we effectively leverage that position as a competitive advantage to ensure we deliver operational leverage. Organisational agility will require businesses to have well-considered plans to manage stagflation that can be enacted rather than merely contemplated.”
Geoff Wilson, founder of Wilson Asset Management, sees a rollercoaster ahead in FY24.“In the first half, the economy hits the wall as interest rates bite and earnings numbers disappoint. In the second half the market meets or beats low earnings expectations and rallies as signs of growth begin to appear.”
He has plenty of risks the market isn’t paying enough attention to. Will capital dry up? Will high interest rates actually dampen inflation? Will China be stronger for longer?
Jo Masters, chief economist at Barrenjoey, says the national economic conversation remains dominated by recession versus soft landing. But she says investors need to tune into the potential for a K-shaped recovery, where sectors move in very different directions.
“The consumer and housing activity will weaken, but we see strong growth in tourism and education exports, engineering investment and infrastructure, particularly related to energy transition,” she says.
But even in the struggling sectors, there will be differences. She points out top-end house prices in Sydney are up 5.6 per cent in the past three months, while the bottom third of the market is up 2.6 per cent and prices are still falling in regional centres like Gosford.
“There’s a split across households, with mortgage belt families hurting, but older Australians eating out and travelling. In construction, the commercial and residential sectors are clearly challenged, but logistics are on fire and there are tailwinds behind student accommodation.“
Masters also says investors need to think about the potential for the weakest sectors to swing back when the RBA eventually cuts rates and the stage three income tax cuts flow through.
James Montier sums up what markets are focusing on in three simple words: the long run.
The noise around everything from the Fed’s next rate move to the AI boom is overwhelming. “So instead, as unfashionable as always, I prefer to focus on the things we can know and that matter for the long run.”
That’s valuation, which he believes will matter once again. And Montier is hunting pockets were bad news has been priced in, rather than share prices “appear to discount all the good news and then some”.
He’s avoiding US markets, beyond a few pockets of deep values. But he likes Japan where “profits improvement looks reasonably sustainable, but doesn’t seem to be reflected in current pricing”. And for the really brave, he suggests emerging markets value stocks “which look like they are reflecting some truly terrible future”.
Rob Almeida, chief strategist at US mutual fund giant MFS Investment Management, argues real risk is typically hidden in plain sight.
He says investors haven’t woken up to the fact that we’ve witnessed the end of a regime, one where central banks subsidised company profits by suppressing interest rates, globalisation pushed down costs and companies prioritised capital returns over capital investment.
“The artificial and extreme suppression of rates doesn’t stimulate growth – it strangles it. It doesn’t create productivity – it murders it. That was on full display in the 2010s in what was a decade of economic stagnation,” he argues. “Suppressing interest rates effectively transfers wealth from savers to borrowers. That too was on full display in the 2010s, with all-time high profit margins despite the absence of material revenue growth, economic growth or inflation.”
Almeida says the new regime will be very, very different.
MST Marquee senior research analyst, Craig Woolford, says prices for retail goods are starting to fall, particularly imported products that are benefiting from reduced shipping costs and lower factory prices in China.
It’s good news for the RBA, but not for retailers and manufacturers, who will see falling goods inflation eroding sales growth, while sticky services inflation (particularly from wages) hurts profit margins.
“Profitability is likely to fall in FY24, given a combination of lower price inflation, weak volumes and wage rates up 6 per cent.”
Richard Schellbach, equity strategist at UBS, says it often feels like investors want the recession to arrive, and equity prices and earnings to fall so they can feel the worst is behind them. But what if we get an extended downturn, as in the 1990s?
While we did see periods of economic pain and equity market collapse in 2000, 2008 and 2020, Schellbach says these “were short, sharp and sudden, as opposed to the ‘slow bleed’ situation we may be in now.”
Few managers and investors worked through the 1990s recession and so may be expecting we’ll get downturns like those in 2000, 2008 and 2020. But Schellbach suggests that could “lead to further frustration and disappointment”.
Leading into the early 1990s recession, the All Ordinaries index peaked in September 1989, but did not regain that peak untl mid-1993. “This is what I would call a ‘pain-cycle’ – a multi-year period of the economy and markets failing to re-establish ascendancy.”
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