T. Rowe Price has released its latest asset allocation report, remaining cautious on future earnings expectations in Australia.
Although consumer spending in Australia remained healthy amid economic downturn, there were indications of potential earning downgrades, especially in the housing market and commodity prices, according to T. Rowe Price.
In its Global Asset Allocation Views report for November 2022, it retained a neutral view on Australian stocks, noting policy tightening by the Reserve Bank of Australia (RBA) could reduce pressure on yields rising.
It said: “The economic slowdown is pointing towards potential earning downgrades. While a China rebound could soften the slowdown, the housing market and commodity prices are poised to negative surprises in the coming months.”
As central banks around the world navigated high inflation in the face of weakening growth expectations, the global economy outlook remained uncertain.
“We are underweight stocks as we remain cautious on the environment for equities given still-aggressive central bank tightening and a weakening outlook for growth and earnings,” the report noted.
Within equities, the global investment management firm was underweight.
“Stocks remain vulnerable amid tightening liquidity and a hawkish Fed. Earnings expectations are fading rapidly but remain elevated. However, valuations are at reasonable levels after falling considerably through the year.”
A modest overweight to Australian bonds was held as a risk-off ballast to equities.
“Anticipating a slower economic growth on the back of this hiking cycle, long term yields are likely to trade in a narrow range going forward, with a downtrend bias. The RBA “pivot” could support lower long-term yields.”
Evidenced by price levels and activity, the firm said it believed Australia’s housing market had likely peaked, although geopolitical developments could mean potential demand on industrial metals.
A resilient labour market and improved supply chains bolster the US market that continued to be plagued with high inflation and restrictive monetary policy.
According to the T. Rowe Price report, “key risks to global markets include central bank missteps, persistent inflation, potential for a sharper slowdown in global growth, China’s balance between containing the coronavirus and growth, and geopolitical tensions.”
