While much ado is made of the science that goes into fund manager research, real assessment puts comparable weight on the art as well according to investment leaders.
While financials and materials dominated trades leading into 2024, the popularity of other sectors like healthcare and information technology followed generational, and even demographic, lines.
Australia, the lucky country again?
During March, Australia’s sharemarket unexpectedly claimed pole position against the majority of the world’s larger and more developed markets. This was a rare event, that was likely driven by the fact that the S&P/ASX200 is expected to deliver positive earnings growth at a time when the US and Europe are looking at steeper contractions.
These are the views of Randal Jenneke, portfolio manager at T Rowe Price, who highlighted a rare trend of global investors actively increasing exposures to the S&P/ASX200 rather than the US, Asia or Europe. The allocations are coming on the back of a “tall wall of worry that has stood forebodingly in front of investors of late,” combining monetary tightening, inflation and the war in Ukraine as a perfect storm of issues.
The growth outlook for the US and European economies have been downgraded due to the Federal Reserve’s aggressive rates move and the flow-on effects of sanctions on Russia, while “the economic outlook for Australia is relatively positive,” Jenneke explained. “We are far enough removed from the conflict in Europe to avoid direct impacts and stand to benefit from Russian sanctions.
“We believe the strong commodity price environment, high level of domestic savings and tight labour market will help provide support to the economy, but inevitably, an economic slowdown is required to get inflation back under control. The risk is that we get tipped into recession in the process,” he says. And while the events in the Solomon Islands are an under-appreciated geopolitical risk, they pale in comparison to the events in Europe.
With the massive surge in the price of almost every commodity, Australia’s terms of trade are improving, and the country “can help plug the gap as a top exporter of the same commodities,” something that will benefit from China’s focus on monetary easing and fiscal stimulus post the current lockdowns.
Oil and gas names have performed exceptionally well, having benefited from the spike in energy prices, however Jenneke warns that “longer term, the terminal risks for the sector have increased,” with the growing importance of energy security meaning more countries are seeking to be self-sufficient through more renewable sources. This “reinforced our long-term preference for those commodities leveraged to electrification – nickel, zinc, copper and lithium,” Jenneke explained.
Australian equities remain well-priced, and “more attractive than markets like the US: with a larger than average P/E discount and the likelihood of earnings upgrades.” These factors combined with the relatively stronger economic outlook have driven “an increased allocation to Australia from global asset allocators, who for the first time in many years are increasing their weighting to the Australian equity market.”
