The ASX closed the 2023 financial year with a total return of 14.8% (S&P/ASX 200 index) and international shares delivered a whopping 23%, defying the doomers who failed to understand the difference between the financial capital markets, the real economy, inflation and interest rates.
While the real economy is all about the prices we pay on the street for real-life things such as housing, food, labour and household appliances and services, the financial market is where we buy and sell securities like shares and bonds. Inflation is the rate at which things in the real economy are going up in price and interest rates are the price we pay to lenders if we want to borrow money.
There are a few rules of thumb we should remember. In the real economy, we are paying for things we want today. In financial markets, we are paying the price to invest into securities (pieces of paper that give us an ownership stake in an asset) based on what we think will happen in the future, say over the next few months or through next year.
Shares go up in value if we think the economy and business conditions will improve. Bonds go up in price if we think inflation will fall and bring down interest rates.
Long story short, it’s all about how we think capital markets, the real economy, inflation and interest rates will interact with each other.
The financial year’s strong sharemarket results vindicate analysis presented in this column at the beginning of this calendar year that showed how rare it was for the ASX to deliver consecutive negative years.
This story is from the September 2023 edition of Money Magazine Australia.
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This story is from the September 2023 edition of Money Magazine Australia.
Start your 7-day Magzter GOLD free trial to access thousands of curated premium stories, and 9,000+ magazines and newspapers.
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