Interest rates could rise in the months ahead in Australia, inflation proving especially intractable in Australia, while US technology stocks are likely to continue rallying which could underpin growth in Asian markets biased towards the technology sector, according to GSFM and its fund manager partners Man GLG and Munro Partners.
While the United States (US) is looking at cuts in interest rates in coming months, the circumstances in Australia are different and do not warrant any rate cuts, according to GSFM investment strategist Stephen Miller. Inflation remains relatively high and sticky, which raises the possibility of the Reserve Bank of Australia (RBA) raising the policy interest rate in August.
“The current RBA forecast issued in May is for trimmed-mean inflation in the year to the June quarter to be at 3.8 per cent. That was upwardly revised from the previous forecast in February. That forecast is likely to be exceeded when the June quarter CPI is released on 31 July, and a ‘4 handle’ is a distinct possibility,” Mr Miller says.
“I think that makes an interest rate hike in August more likely than not.
“Inflation in Australia is proving more intractable than in the US, in part reflecting the more cautious approach to raising the policy rate to tackle inflation. The RBA Governor Bullock has noted that the Board needs ‘a lot to go its way’ to get inflation back to target in a manner consistent with the RBA’s inflation projection. My concern is that ‘a lot is going the other way’,” Mr Miller says.
Turning to US markets, Mr Miller believes that while positive tailwinds from AI might persist and indeed be supported by Fed easing, there are some nascent risks on the horizon. In large measure associated with huge levels of US government debt. Unfunded corporate and income tax cuts under a Trump administration may provide a fillip to the economy but that may prove a temporary ‘sugar hit’ as bond yields will likely stay high given the already gargantuan US budget deficit.
“Even if a Trump Administration were to emasculate the US Federal Reserve, making the policy rate a more ‘political’ device, the economic support from such a measure will likely be mitigated, if not frustrated entirely, by higher inflation expectations and higher medium and long-term bond yields,” Mr Miller said.
“The positive valuation environment currently underpinning markets leaves it vulnerable to episodic bouts of volatility where investor conviction comes under strain. The forgoing underscores perhaps the most important and over-arching principle of investing: diversification. That doesn’t just mean via security selection within a particular asset class or sector but also diversification away from both bond and equity risks within multi-asset portfolios,” he says.
Nick Griffin, CIO at Munro Partners, says moderating inflation and the prospect of policy rate cuts are providing a more positive environment for growth equities. He expects US shares to rally whoever wins the US election.
“From an earnings perspective, we continue to see robust growth from AI-related spending driving earnings upgrades for some companies. Over the last quarter, we continued to pick up more data points suggesting that the market is underestimating the long-term potential for earnings growth for the AI enablers. We maintain conviction in this area and see it as the beginning of a multi-year growth runway,” Mr Griffin says.
“As the year progresses, we foresee the market broadening out with a gradual economic recovery later in the year and a focus on the US Presidential Election. Our industrial names such as Schneider Electric and GE Vernova may benefit from an economic recovery, and we will look to broaden our portfolio as and when we see the catalysts for this,” Mr Griffin says.
He notes that Microsoft has guided for an increase in capital expenditure (capex) for every quarter over the past year. “We anticipate this to continue along with their peers, with the peak somewhat off, given we are still in the early innings of an accelerated capex cycle. This bodes well for continued earnings upgrades for high performance computing names such as Nvidia, with a large proportion of the hyperscaler capex coming in the form of Nvidia GPUs for data centres,” he says.
Andrew Swan, head of Asian equities (ex-Japan) at Man GLG, says the technology rally in the US will likely benefit some Asian markets. “The region’s larger tech manufacturers are beginning to see the benefits of AI tech demand moving downstream to AI enabled devices. Asia is disproportionately skewed towards component and device manufacturers so as this trend plays out, we would expect to see a meaningful pickup in demand,” Mr Swan said.
In China, however, he says the economy remains weak.
“On the positive side, external demand appears robust, driven in part by a recovery in capex but also by the efforts made by Chinese companies to expand their geographic client base in the face of ongoing trade tensions with US and Europe. China has worked hard to enhance its exports with other nations and regions, and this appears to be proving successful.
“On the other hand, domestic consumption remains challenged, with more work required to address excess property inventory before we can see any meaningful improvement,” Mr Swan says.
“The third plenum and Politburo economic meeting remain key in terms of seeing an improved policy response to the current issues we see around the lack of reflationary forces and property stimulus. I think for China to navigate this challenging environment around deflation, the market expects more policy support on the demand side of the economy, particularly around consumption. And this is where I think there is some hope, particularly with regards to rural land reform and Hukou reform.
Mr Swan remains focused on bottom-up stock picking in Asian markets. “Within the portfolios, we continue to reduce our exposure to momentum. Key relative exposures on a sector basis include overweights in healthcare, communications services and utilities versus underweights in energy, consumer discretionary and staples. By market, we are overweight in China and Indonesia, equal weight in India, and underweight Taiwan and South Korea,” he said.
