Noting that different stocks and sectors are at different stages of the cycle in a gradual economic slowdown, Tribeca’s Jun Bei Liu has picked three sectors in Australia to be potential winners.
Speaking at a GSFM media briefing in Sydney, the portfolio manager outlined the firm’s expectations of a short, contained economic slowdown rather than a prolonged one.
“We don’t think central banks or governments need to solve all the world’s concerns. Incremental gains are enough to allow many stocks that are discounted for a more severe downturn to trade higher particularly within the cyclical space or in areas where higher inflation and rates remain priced as structural rather than short term,” she said.
“Furthermore, because the economic slowdown has taken its time to unfold (rather than via a large shock), different stocks and sectors are at different stages of the cycle. This provides some resiliency when viewed across the market as some stocks can perform well while others come under pressure.”
Liu observed equity markets had gone through “treacherous times” in the last couple of years, and the uncertain path ahead could lead to interesting opportunities for investors.
“In 2020, there was COVID, then there were vaccinations, and then we were worried about supply chain disruption and inflation. In 2024, where do we go?
“It’s a good thing for the share market because when you think about it, we’ve gone through all these treacherous times. In the last couple of years, inflation and then rising interest rates were a horrendous headwind for equity markets. It was something we knew would happen, but we didn’t know how hard or how high it would go,” she elaborated.
“And yet, in 2023, we didn’t have a recession and the share market delivered a very strong response because this recession didn’t come through. In 2024, I think it’s likely to be a soft landing.”
Liu added: “We don’t think there will be a recession, we think there will be a discussion about rate cuts for Australia. Whether we’ll start this year or not, we’re a little behind compared to the US, but at least discussion of it will affect some of the cyclical companies’ stock price quite aggressively.”
Presently, across the broader Australian equity market, many stocks are trading at their cheapest levels in many years, she noted.
While areas of softness lie in sectors like hotels and restaurants where consumers are becoming more mindful of spending, benefactors from the trend include cyclical sectors, like retail.
“The building material business will do well; retailers will do well. Yes, you might have volatility, you will see the consumer [spending] slowing down because there’s no denying the economy has to slow down for the rate cut to take place, but it’s not a collapse,” Liu said.
The portfolio manager outlined that, despite an expected weaker first half, underlying earnings should begin to reflect economic reality while heading into a better environment within six months or so.
“The resource sector is also going to be another outperformer – with China turning the corner after substantial policy stimulus that is targeted at housing and the consumer,” she said.
She also observed that insurance stocks present an “interesting” opportunity in 2024, given strong performance feedback so far and double-digit increases in premium rates.
“So when interest rates start going higher, they take a couple of years to start washing through and get high earnings. Right now, the operating environment is fantastic for those companies,” Liu said.
However, the emerging challenge for the industry will be cost-of-living pressures putting consumers under the pump, she pointed out.
According to the latest Consumer Price Index (CPI), insurance and financial services delivered some of the most significant price increases of 8.8 per cent in the 12 months to November, alongside housing (6.6 per cent), food and non-alcoholic beverages (4.6 per cent), and alcohol and tobacco (6.4 per cent). The monthly CPI indicator rose 4.3 per cent during that time period.
“There’s been discussion about how much premiums have gone up and the churn is going to pick up quickly from potentially regulators and others,” she said.
“In the next 12 months, you could see insurance potentially disappoint on a lot of those increases they want to push through. But right now, it looks good.”
Presently, Tribeca’s Alpha Plus Fund, of which Liu is the portfolio manager, holds on average 60–70 long positions and 30–40 short positions. Since inception in 2006, it has delivered 9.35 per cent per annum.
It delivered 8.95 per cent as at 31 December 2023 against the S&P/ASX 200 Accumulation Index benchmark of 12.42 per cent.
