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Australia to narrowly avoid a recession; these sectors will benefit
Inflation concerns continue to rattle markets with the RBA raising rates by 25bps at their May meeting to 35bps. Uncertainty throughout the month saw April fall by 0.8 percent bringing the total year to date (end of April) returns of the ASX 300 Accumulation Index to +10.2 percent. Ausbil Investment Management have released their Equity Market Review and Outlook for the month of April. The tech and growth sector sell-off were a lot deeper in other developed markets. The NASDAQ sold off by roughly -13.4 percent, followed by the Hang Send -9.1 percent, S&P 500 -8.7 percent and Shanghai A-Shares -6.3 percent. In that context, Australia outperformed all other markets other than the UK.
In terms of individual Australian market sector performance, Utilities (+9.3%) outperformed the rest of the market given its status as an inflation hedge by offering regulated pricing arrangements. Following this were Consumer Staples (+3.4%), Industrials (+3.0%) and Energy (+2.5). The obvious laggard was the tech sector which fell by (-9.9%).
The war in Ukraine together with the push towards decarbonisation has had an effect on certain commodity prices. Sanctions placed on Russia together with supply gas supply cuts to Poland and Bulgaria have seen energy prices go through the roof. US Natural Gas was up +28%, and Thermal Coal +26%. Soft commodities were also affected with Corn +10% and Wheat +4%. Since the invasion Gas +49%, Oil WTI Crude +25%, Brent +19%, Nickel (+39%), Wheat (+37%), Corn (+31%), Grains (+27%), Soy(+14%) and Cheese (+30%+ and Butter (+21.4%).
The market and media seemed obsessed with inflation and rate rises fixated on the negative and how it could be a sign of major problems that are to play out. Ausbil says “we would see significant transitory spikes in inflation. With strong rebounding economic growth, we saw this as part of the normalisation process following the extraordinary events of COVID and the unprecedented governmental response.”
“We always expected the average rate of inflation to rise with growth, back to within the RBA’s target range as the economy tracked back to normal after posting supra-normal growth. The inflation spikes we have already experienced have not been accompanied by wage-price spirals, and are more attributable to the impact of the two supply shocks we have experienced, and the strength in the rebounding economy,” says Ausbil.
The Russian invasion has added upside risk to inflation which has caused the market to raise rates a lot earlier than expected. As a result, Ausbil has brought forward their interest rate expectations, which were expected to start mid-year in Australia. These interest rate hikes have occurred a touch earlier than expected but Ausbil says, “we believe the market is pricing in too many rate hikes at this stage and a terminal rate that is too high.”
Australia is however seen as an outlier to the general negative global outlook. Its economy is underpinned by its strong exports in energy and other commodities with special reference to commodities used in renewable energy and the transition to decarbonisation. Ausbil says “it does not see a high risk of recession at this stage, and the environment remains very supportive for business and consumers.”
“As we move beyond anticipation and into the actual tightening cycle, we expect markets to refocus on how Australian companies are faring on their earnings growth outlooks. To this end, the consensus outlook for EPS growth has firmed for FY22 and FY23. With Australia’s relatively stronger economy, Ausbil expects some upside EPS growth surprises in critical sectors including Materials and Financials,” comments Ausbil.
