THE fate of markets over the remainder of the year will largely depend on the answers to two key questions: the outlook for interest rates and inflation, and the resilience of the Chinese economy.
“It’s a tough period for macro,” says Saunders.
“There are different thematics driving different stocks and sectors. From a macro perspective, it’s much more of a mixed bag than we’ve seen for quite a long time.”
One key distinction that makes projections difficult is the differing outlooks for inflation in Australia and the US.
“Australia is still at least three to six months behind the US inflation cycle,” says Saunders.
“In the US, we have a reasonably high degree of confidence on where inflation is headed. We understand the various constituents and makeup of inflation — and most of those inflation drivers have peaked.
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“But in Australia, we’re still seeing some fairly aggressive inflation in certain parts of the economy, mostly labour related.”
Compounding that is a softer approach from the Reserve Bank of Australia which has been notably less aggressive than other OECD economies in raising interest rates.
“That has put us a fair bit behind in terms of the evolution of both the inflation cycle and interest rate cycle.
“Therefore, we can realistically expect to see rates go higher and inflation remain an issue in Australia for a while.
“In contrast, in the US it feels like the inflation has peaked and is making its way down — albeit more slowly than many had expected.”
The second big challenge investors are grappling with is whether Beijing will deliver meaningful stimulus to its property sector to boost the flagging Chinese economy.
“There’s been some frustration that the expected stimulus hasn’t been forthcoming,” says Saunders.
“Any kind of incremental stimulus could be translated quite positively in the market. But China remains quite convinced that it’s not something they want to do.
“They’re still trying to hold that line — they don’t want to re-stimulate the property sector unless they absolutely have to.”
Chinese growth is a key factor affecting metals prices, which directly impacts Australia’s big miners.
“There’s a lot of two-way opinion on how that plays out in the mining sector.
“The mining sector is quite precariously positioned — we have seen some weakness in metal prices and a failure to recover in some that were already in pretty bad shape like aluminium.
“If we don’t see stimulus forthcoming in the next little while, it places some of the traditional mining sectors like iron ore somewhat at risk.”
Ironically, the one area where Beijing is offering stimulus — electric vehicles — is also seeing weakness.
“Electric vehicle raw materials like rare earths and more recently even lithium have been a bit indifferent at a time when you would expect them to be quite strong given the regulatory support for the sector.”
Brenton is a portfolio manager with Pendal’s Australian equities team. He co-manages Pendal MidCap Fund and our natural resources portfolio, drawing on more than 25 years of expertise in resources, derivatives, investment banking and private equity. He is a member of the CFA Institute.
Pendal MidCap Fund features 40-60 Australian midcap shares. The fund leverages insights and experience gained from Pendal’s access to senior executives and directors at ASX-listed companies. Pendal operates one of Australia’s biggest Aussie equities teams under the experienced leadership of Crispin Murray.
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