Economic and earnings recovery may have peaked as the country struggles with another wave of COVID-19, making it unlikely Australian equities will continue outperform global ones, according to T. Rowe Price.
The firm’s multi-asset team remained overweight to Australian equities in August while being underweight to international equities but was hesitant about the ability for Australia to outperform its international peers for much longer.
There was also expected to be a “serious headwind” from the latest wave of COVID-19 as various cities were having to go into an extended lockdown.
In a monthly update, it said: “Economic and earnings recovery may be peaking soon. While still benefiting from the global recovery in the short term, Australian shares might not outperform global shares for long. [We are] starting to be more cautious on the asset class”.
This was already being realised in the firm’s funds with the Global Equity fund returning 33.9% over one year to 31 July, 2021, according to FE Analytics, versus returns of 28.7% by the Australian Equity fund. However, when looking at the broader sectors, the global and Australian equity sector had both returned 30% over the same period within the Australian Core Strategies universe.
However, the team had resisted increasing its exposure to global shares yet as it felt they were being led by the US market which presented elevated valuations. Instead, T. Rowe favoured Japan and emerging markets as they were more cyclical markets.
Positive signs for Australia, however, were the economic data was at solid levels, business capital expenditure was expected to rebound to support future earnings growth and the Australian dollar would benefit from higher commodity prices.
Regarding fixed income, T. Rowe Price remained overweight to Australian bonds as it expected to see rising long-term yields and a policy shift from the Reserve Bank of Australia (RBA) in the coming months.
“While the economic growth might be peaking, the level of economic activity implies higher yields from here. Long term rates should rise in accordance with the shift in tone from the RBA,” it said.
