Markets in for a volatile ride, investors warn

22 Apr 2024

Article written by Cliona O'Dowd. Published in The Australian April 22, 2024.

Stubbornly sticky inflation and delayed rate cuts, alongside escalating geopolitical tensions, could see sharemarkets endure a rocky ride for the rest of the year, investment experts have warned.

While equities pushed higher in the first quarter, both in Australia and elsewhere, the market exuberance has rapidly deflated as expectations of rate relief have been pushed further out.

The risk now is for a near-term retreat in equities before a recovery kicks in later in the year, according to LGT Crestone chief investment officer Scott Haslem.

“Given the geopolitical situation, and growth slowing down, I think there potentially is a near-term drawdown in equity markets,” Mr Haslem said.

“With how strongly equity markets ran through both the fourth quarter (in 2023) and the first quarter, and given where valuations lie, I think (the market) is vulnerable to some short-term volatility.”

Despite that, Mr Haslem sees the Australian sharemarket as ending the year “moderately higher”.

“Notwithstanding that valuations aren’t cheap in equities, the broad macro outlook is not the worst backdrop, in the sense that we’re coming out of a period of higher inflation and rising interest rates, and going into a period of moderating inflation and moderating interest rates,” he added. The S&P/ASX200 has already dropped 4.2 per cent from its March high and could move even lower if inflation data due out this week is disappointing.

AMP chief investment officer Shane Oliver said the recent decline was in line with other countries. US sharemarkets had fallen about 5.5 per cent from their recent highs, he noted.

“It’s going to remain a volatile and rough ride into the end of the year. Ultimately we’ll probably be supported by interest rate cuts, both in the US and in Australia, which will then lead to optimism about the year ahead, about 2025 earnings,” Mr Oliver said.

He is more optimistic than others about the timing of the coming rate relief, tipping a cut in September. The broader market has pushed out the prospect of lower rates until February 2025.

Cost-of-living measures in the federal budget, meanwhile, alongside upcoming July tax cuts, risk challenging the inflation outlook, potentially delaying rate cuts further, in what would be an added blow for equities, economists have warned.

The federal government should be focused on taming inflation but could opt for populist measures in the budget, HSBC ANZ chief economist Paul Bloxham said.

“The risk is the government is going to start to pivot towards providing more support … There are now clearer signs that there’s going to be more spending and the federal budget is going to be more a driver of growth; it’s probably going to add more to consumer spending and more to inflation,” Mr Bloxham said.

“So, although the RBA is very patient, it’s not clear that fiscal policymakers will be as patient, and they’re starting to already give a sense that they’re going to want to support growth more. But if you do that, and you do it too soon, then of course it means that it’s harder to get inflation down.”

The Reserve Bank would watch closely to see the impact of any cost-of-living measures in the budget but would also want to wait to see how the stage three tax cuts affected demand in the economy, veteran economist Saul Eslake said.

“On the first of July, households will be getting tax cuts that are in aggregate equivalent to two 25 basis point rate cuts … Just because they were announced months before the budget, doesn’t mean they’re not important,” he said.

Mr Eslake also expects markets to be volatile this year, with the diminishing prospect of rate cuts in the US a negative that will be felt on the ASX.

The dampened near-term outlook for rates is already being felt across a range of sectors, including the major lenders.

Australia’s big four banks’ share prices rallied 20 per cent between October and the end of March on the back of easing financial conditions. But this rise now looks difficult to justify, Citi analysts have warned, as they downgraded all to sell.

“Rate cut expectations are progressively being pushed out. This leaves the poor earnings outlook exposed, with core earnings to decline by around 2 to 7 per cent in fiscal 2024, negative jaws, yet relatively full multiples,” the analysts led by Brendan Sproules said in a note to clients.

For investors seeking to hide from the volatility, LGT Crestone’s Mr Haslem sees insurers and resources stocks as offering some attractive opportunities.

“We would say areas like insurance look relatively attractive, there still seems to be margin expansion that’s being tolerated in the insurance space,” he said. “And commodity resource companies remain positive given current commodity prices.”

While bank stocks may take a breather after their big rally, Mr Halsem still sees value in holding the sector ahead of rate cuts.

Unlike the broader market, he expects the RBA to deliver a rate cut later this year but warned the easing cycle may be shorter than expected. “I think the outlook is for a pretty shallow rate cutting cycle. There’s still a likelihood that central banks, including in Australia, will give a little bit of relief in the second half of this year, but only one or two (cuts).”

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