Warning: We've hit the bottom of a 40-year cycle, says expert

Share markets face a 'near-term correction', warns AMP Capital's Shane Oliver. But rainbows might await those who ride it out.

| More on:
A yellow sign with the words 'Changes ahead' on a city backdrop, indicating volatile share price movement

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A prominent economist has warned investors Australia has hit the end of a 40-year trend.

According to AMP Capital chief economist Dr Shane Oliver, current stock investor fears will be justified in the coming months as inflation rises up.

"Shares are at risk of a further near-term correction," he said in a memo to AMP Ltd (ASX: AMP) clients.

"In the next few months, a further rise in inflation will likely push bond yields higher which may further threaten shares (particularly tech stocks which are vulnerable to higher interest rates)."

But the good news is that this won't last long.

"While the risks have increased, we are of the view that the inflation spike will prove temporary," said Oliver.

"There are some very tentative early signs of this with some commodity prices rolling over… semiconductor chip prices trending down and business surveys showing a decline in the ratio of new orders to inventories. There is a long way to go before this is confirmed though."

A very long deflationary era is now ending

In a longer-term timeframe, OIiver warned investors the world was now at the end of a multi-decade trend.

"We're likely now going through the bottoming of the long-term decline in inflation that has been in place since the early 1980s," he said.

"Many of the factors that drove the declining trend in inflation since the early 1980s are now fading."

After years of struggling to get inflation up, the COVID-19 downturn has given central banks the impetus to be more aggressive.

"The shift from focusing on forecasts to actual inflation means central banks will be slower to raise rates — allowing inflation to rise further. And massive quantitative easing is now being combined with fiscal stimulus which provides an avenue for easy money to boost spending (unlike last decade when fiscal austerity offset easy money)," said Oliver.

"This likely constitutes a 'regime shift' in the approach to [boosting] inflation – much like the aggressive approach to keeping inflation down led by the Fed from the early 1980s was a 'regime shift'."

Oliver also observed that both the pandemic and the political climate has put globalisation into retreat, leading to less competition.

"We're seeing a trend to bigger governments and that can ultimately be associated with lower productivity growth," he said.

"The ratio of workers to consumers is declining in many countries which may drive higher wages growth and lower productivity growth."

How will this affect share markets?

Oliver's view that the inflation spike will be short-lived bodes well for equities in the near-term.

"Cyclical bull markets usually don't end until excesses build, central banks tighten aggressively, and this drives a collapse in earnings. But this still looks a long way off," he said.

"As a result, we remain of the view that share markets will provide solid gains over the next 12 months."

In the longer term, with the deflationary era now over, growth stocks can no longer be expected to outperform value shares.

The zero-interest environment that drove growth's winning streak the last 12 years will "start to fade", said Oliver, and investor returns will more closely correlate to "underlying yields and earnings growth".

"Inflation around target is the best scenario as it would still mean low inflation – but less risk of deflation and likely higher wages growth (which is positive in terms of social stability, rising living standards and equality). And investment returns would still be okay."

The pessimism for growth stocks matches the findings from a recent Vanguard study.

"We expect value to outperform growth over the next 10-year period by as much as 5% to 7% per year, and perhaps by even more over the next 5 years," read the paper titled Value versus growth stocks: The coming reversal of fortunes.

Should you invest $1,000 in Amp Limited right now?

Before you buy Amp Limited shares, consider this:

Motley Fool investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Amp Limited wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

And right now, Scott thinks there are 5 stocks that may be better buys...

See The 5 Stocks *Returns as of 30 April 2025

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Economy

A woman sits at her computer with her hand to her mouth and a contemplative smile on her face as she reads about the performance of Allkem shares on her computer
Share Market News

Will ASX 200 investors get the RBA interest rate cut they're expecting tomorrow?

The RBA is widely expected to cut interest rates on Tuesday. Will the central bank deliver?

Read more »

Media journalists on the desk reporting the news live.
Economy

Moody's strips the US of its triple A credit rating. Should I sell VTS ETF?

Moody's is the final credit rating agency to do so.

Read more »

A couple hang off their car looking at the sun rising over the horizon.
Economy

A tale of two economies: The stock market vs the macroeconomic data

Where will we be 12 months from now?

Read more »

Modern accountant woman in a light business suit in modern green office with documents and laptop.
Economy

The unemployment rate rises in April. What could this mean for ASX investors?

Today's figures are good news for investors.

Read more »

The stars from a Chinese flag meet those on a US flag.
Economy

How could a US-China trade deal impact my ASX share portfolio?

The Trump tariff sell-off might not be over just yet.

Read more »

A young woman lifts her red glasses with one hand as she takes a closer look at news about interest rates rising and one expert's surprising recommendation as to which ASX shares to buy
Economy

Why did Goldman Sachs just upgrade its S&P 500 target?

Is the S&P 500 about to enter a bull market?

Read more »

A woman sits in a cafe wearing a polka dotted shirt and holding a latte in one hand while reading something on a laptop that is sitting on the table in front of her
Economy

NAB Business Survey released: What did we learn?

Mixed signals are swirling throughout the Aussie business landscape.

Read more »

Man smiling at a laptop because of a rising share price.
Share Market News

How are ASX 200 investors reacting to the surprise US-China tariff deal?

The Nasdaq rocketed 4.4% on the US-China tariff agreement, but what about the ASX 200?

Read more »