Below-trend growth but no recession in Australia in 2023

Although entering a period of slowing growth, there are opportunities in the market and it’s unlikely that Australia will enter recession in 2023, according to a top executive at Ausbil.

Australia’s resource economy was well-placed to outperform other developed markets, said Paul Xiradis, chief investment officer, head of equities, and executive chairman at Ausbil.

“We have clearly entered a period of slowing growth. However, given the relative strength of the Australian economy, the demand for our resources, low unemployment, and the current strength in the job market, Ausbil does not currently see Australia entering recession,” he stated.

“We think earnings growth will be hard to come by in 2023, but there will be some clear opportunities. Given the inflationary environment we are still in, resource companies generally (including energy and gold), general insurers and select diversified financials are expected to deliver positive earnings growth again in FY23, some delivering upward earnings revisions yet to be recognised in the consensus outlook. 

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“Quality leaders across the market, particularly those with relatively inelastic demand and the capacity to pass on inflationary rate costs are also expected to deliver superior earnings growth in FY23.”

Echoed by other industry pundits, it was likely the bulk of monetary tightening had already occurred and interest rate rises would come to a halt in the new year. 

On average, Australian equities had relative low gearing and could be expected to deliver single-digit earnings growth, particularly in services like travel and leisure. Meanwhile, stock valuations had fluctuated across the board in the face of interest rate hikes, but the outlook was “not bad” for all sectors.

“The additional volatility that came with the invasion of Ukraine, the energy shock and the inflation-driven monetary tightening has seen values come off more, to the point that a portion of the market looks oversold,” Xiradis highlighted. 

“Of course, opportunities become more relevant to us if earnings or positive revisions are better than what market consensus is expecting. In other words, even with lower valuations across the market compared to last year, we are still seeing superior earnings growth in a range of areas for FY23.”

The main risks outlined by Ausbil were primarily in sectors that were “too cyclical, over-exposed to slowing economic growth” and ones where inflationary pressures adversely impacted earnings, such as in retail, housing, construction, and generally consumer-facing discretionary sectors. 

“Looking ahead, there are a number of secular themes driving activity and sustaining higher inflation. These include decarbonisation and the shift to renewable energy, the shift from globalisation to regionalisation, sovereign security and energy surety. 

“These drivers, including the expected strong post-COVID Chinese recovery in 2023, are very supportive for a range of commodities in which Australia is dominant, providing a platform for higher commodity prices and hence earnings for the wider resources sector,” he elaborated.

“The relative outperformance expected for Australia’s economy compared to advanced economies is also offering opportunities. Across a number of sectors, quality leaders with relatively low elasticity of demand and could pass on the costs of inflation were offering earnings growth across the cycle. 

“Finally, as the economy slows, there are opportunities in businesses that can deliver earnings growth across the economic cycle, be they in consumer staples, health care, specialist real estate or in companies with relatively unassailable global businesses for which there may be little competition, but significant pricing power.”

Moving into the new year, Xiradis added: “There are also quality leaders whose earnings are immune to the vagaries of the cycle. This is where we are seeing the potential for outperformance in FY23".