By Nick Hedley
While investors are preparing for a possible recession in
the U.S., the outlook for Australian stocks is more positive thanks to
attractive valuations and market dynamics that are shielding the domestic
economy from global shocks, says Tim Rocks, chief investment officer at Evans
& Partners.
Like many other allocators, Rocks remains cautious about the
U.S. market, despite the recent decline in valuations. Macroeconomic risks are
escalating as the Federal Reserve attempts to keep inflation in check.
However, equities in Australia and Asia were “oversold” in
the first half of 2022, and Evans & Partners has been taking advantage of
attractive valuations in the region, Sydney-based Rocks tells Markets Group.
The Australian economy is holding up relatively well, thanks
in part to elevated commodities prices, which could boost mining investments.
At the same time, the labor market is on solid footing. At
last count, the Australian Bureau of Statistics put the number of job vacancies
in Australia at 480,100 – a significant increase since the start of the
pandemic. Unemployment in June was at 3.5%.
Further, Rocks expects the new government, led by Anthony
Albanese and his Labor Party, will increase spending rather than cut back.
Albanese has pledged to accelerate the decarbonization of Australia’s
economy, and this will generate more demand for “green” commodities such as
lithium, graphite, copper and aluminium.
The global decarbonization drive, which has been accelerated
by Russia’s war on Ukraine and Europe’s energy crisis, is expected to support
long-term demand for these metals. Evans & Partners’ modelling shows that copper
production is expected to fall well short of what is needed over the next
decade.
All things considered, Rocks says a full-blown recession in
Australia is unlikely. And since the economy is close to full employment, with high
vacancy levels, job cuts in a downturn would probably not be widespread. This,
in turn, will protect the housing market.
“I think Australia’s economic outlook is a lot more boring
than many people expect,” Rocks says.
With domestic earnings forecasts being revised upward,
valuations recently hit their lowest in a decade, barring the sell-off of March
2020.
Asia is also relatively compelling, according to Rocks.
“Two years ago, there were 1,000 reasons to exit China as
COVID restrictions hurt the economy and regulatory developments impacted
sentiment. But a lot of those risks are significantly turning, and I see no
reason why China won’t slingshot out of lockdown like other countries did, particularly
with the amount of stimulus coming through ahead of the Communist Party
National Congress in October.”
While most large economies are edging closer to recession
territory, Rocks says China “is in a totally different part of the economic
cycle. Yet markets don’t reflect that – valuations are low.”
As such, high-beta Chinese equities, including tech stocks
listed in Hong Kong, could be poised for a recovery.
Meanwhile, Rocks says fixed income is looking slightly more
attractive as an asset class, although “we want to see the reestablishment of
some kind of term premium – investors aren’t currently being rewarded for
taking on duration risk.”
If inflation proves to be sticky rather than transitory, this
is not yet priced in, he adds.
Elsewhere, some currencies “are really interesting,” including
the Australian dollar, which has held firm thanks to high commodities prices.
Evans & Partners has been trimming its exposure to
alternatives, partly on concerns that the big pool of capital raised by private
equity firms in recent years is not being allocated.
Rocks is also wary about private credit. “Wherever there’s
been a flood of money, there will be disappointment when the tide goes out, and
private credit is one of those areas.”
In recent years, private credit funds have mopped up
segments of the market that banks were avoiding, implying a transfer of risk
from banks to private investors. Some funds may struggle moving forward.
Rocks also believes “the great unwind of crypto” could be
unfolding as high levels of leverage in the digital currency market are exposed
by the withdrawal of liquidity.