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 decarbonisation
of Australia’s economy, and this will generate more demand for “green”
commodities such as lithium, graphite, copper, and aluminium.
The global decarbonisation 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
forwards.
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.