As we take a broader look at Australia’s current economic position, we recognise some typical signs of a contractionary phase, such as a softening labour market, higher interest rates, and changing business conditions and sentiment. Historically, Australia’s economic contractions from peak to trough have averaged three quarters, followed by an expansion phase lasting around 15 quarters on a GDP per capita basis (Melbourne Institute Phases of the Australian Business Cycle, January 2024). With the last peak in December 2020, we are now considering when we might reach the trough and see more accommodative policies, including a lower RBA cash rate to support employment and business conditions.

The labour market will be a key indicator in this process. A tight labour market has been a significant factor in driving services inflation, which affects various sectors like healthcare, education, and hospitality, as well as consumer spending. As this dynamic shifts and households face fewer employment opportunities or lower incomes due to rising underemployment and unemployment, we expect inflationary pressures to ease, setting the stage for potential monetary policy easing and a lower RBA cash rate.

Government spending and fiscal policy will also play a crucial role in shaping employment conditions. While incremental spending may delay monetary policy easing, it’s important to balance economic perspectives with societal needs. Currently, we view fiscal policy as accommodative, which may postpone an RBA cash rate decrease.

We have observed many companies implementing cost-cutting measures and redundancies, with recruitment agencies reporting a weaker appetite for new hires. Among the circa 36,000 loans we monitor monthly, arrears rates are slightly increasing but remain within acceptable limits for all positions in the Fund. These observations, though anecdotal, align with our view and are likely to be reflected in widely discussed market data in the coming months.

We believe the conditions for RBA rate cuts are gradually forming. As noted earlier, it will take time for the data to confirm this and for the RBA to gain confidence in adopting a more accommodative policy in the medium term.

From the Fund’s perspective, this outlook calls for heightened sensitivity to areas most affected by weakening GDP, employment conditions, and contractionary policies. Our cautious approach, maintained over the past 18 months as we exited consumer loans in the portfolio, ensures the Fund’s resilience in navigating economic challenges. The Manning Monthly Income Fund has an unwavering commitment to offering investors a truly ‘through the cycle’ investment proposition, focusing on capital preservation and delivering a strong, consistent monthly income stream.