Investors should be cautious in the near future as strong Australian equity markets are being offset by a fragile housing market, subdued domestic growth and a rise in barriers to trade.
A report released by investment manager T.Rowe Price references marco forces, local politics and shifting monetary expectations as dominant forces in the Australian equity market in recent days.
Head of Australian equities and portfolio manager for T. Rowe Price’s Australia Equity Strategy, Randal Jenneke, believes the recent bounce post election will only be for the short term.
“As the excitement fades, the market’s focus is expected to return to more fundamental factors, such as the ongoing trade and tariff tensions between the US and China and domestic housing weakness,” he said.
The big factors at play
Mr Jenneke believes concerns of a trade war will continue to dominate the short term, with potential long-term implications.
“The real danger we see is global trade grinding to a halt, which would have very serious consequences for Australia and global markets,” said Mr Jenneke.
“Companies are already responding by reducing inventories and capex plans, with adverse consequences for GDP growth and employment, all at a very inopportune time given the global economy is considerably less robust today than 12 months ago,” said Mr Jenneke.
Housing market push
With two rate cuts in consecutive months and APRA easing the rate that bank uses for stress testing mortgages, domestic support for the housing market should mean Australia’s housing market hits the bottom sooner.
“We believe the monetary authorities are trying to put a floor under growth, and to succeed in that, you first have to put a floor under housing. While RBA easing removes the tail risks from the housing market, it does not mean the economy is back off to the races,” said Mr Jenneke.
Key opportunities
As the market reacts heavily to perceived bad news, T.Rowe Price believes it’s an opportunity to buy select, high-quality defensive names.
“Volatility provides an opportunity for longer-term investors, according to Mr Jenneke. The volatility has enabled us to significantly increase the highest quality component of our portfolio – stocks that typically have strong balance sheets, excellent profitability and strong earnings growth,” he said.
Mr Jenneke believes the healthcare sector in Australia remains a strong sector to invest in with less threat of competition, market consolidation and stable business models providing growth.
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