Investors in Australia should ‘beware of a U-turn’ in the country’s financial situation in light of central bank guidance, according to T. Rowe Price.
In an update from its multi-asset team, the firm said it was currently overweight to Australia in its equities exposure but there were still factors to watch. The Reserve Bank of Australia was currently forecasting interest rates to remain at 0.1% until 2023.
“The central bank might change its policy guidance abruptly as it upgrades its economic forecasts. Beware of a U-turn for financial conditions,” it said.
“Accommodative fiscal and monetary policy provided powerful tailwinds for the domestic growth-driven turnaround. Australian is not expected to turn the tap off anytime soon either, especially with the COVID-19 vaccine rollout missing the mark so far. With COVID-19 vaccination rates still far below other major economies, it appears increasingly likely that Australia will need to push back expectations of opening its international borders perhaps to 2022.
“This points towards further support for the domestic economy where, not only are the conditions quite supportive, but will continue to be so over the course of 2021.”
Meanwhile, the firm said there was strong economic and earnings growth but that elevated valuations left little upside to equities and could be vulnerable to potential setbacks in recovery, higher interest rates and tax increases. This had led the team to move from neutral to underweight on equities and add more to cash instead.
“We increased our underweight in equities relative to cash as the risk/reward profile looks less compelling for equities after a strong rebound from March 2020 lows.
“Given how expensive other asset classes are, we use cash as a place holder while waiting for better entry points.”
The firm also saw elevated valuations in technology and had moved from neutral to underweight on global equities as a result. This was the only regional move made by the team during April and it was now overweight Australia, Japan and emerging markets and underweight to global equities, the US and Europe.
“Global stocks led by the US tech sector present elevated valuations. To benefit from the economic recovery, we rotate to more cyclical exposures such as value, Japan and EM stocks,” T. Rowe Price said.
“We are further tilting into value globally, based on more attractive relative valuations and expectations for cyclical companies to continue to benefit from the improvement in growth from a recovering global economy-bolstered by fiscal stimulus in the US, increasing commodity prices and higher interest rates.”
