There is ‘no stopping in sight’ for growth in the Australian economy, according to T. Rowe Price, thanks to improved business activity and high consumer spending.
The company remained overweight on Australian equities, as well as Japan and emerging markets, while being underweight on global equities, US and Europe. Meanwhile, it was underweight on Australian bonds while being overweight on global bonds and global high yields.
In an update, the firm said: “The domestic backdrop [in Australia] is supportive with accommodative policies and pent-up demand. Economic data is surprising on the upside. A steep earnings recovery should be supportive in 2021.
“There is no stopping in sight for the domestic recovery (stimulus, confidence and pent-up demand). While the Reserve Bank of Australia remains dovish, long-term rates should likely rise to reflect the economic momentum.
“The Australian dollar is benefitting from a weaker US dollar and a rebound in risk appetite. There is upside potential based on commodity prices.”
On the flip side, however, the company pointed out there was inflationary pressures on the housing market and bond yields had risen which was challenging the central bank. The valuation gap between equities and bonds was also less attractive than it had been previously.
Looking at the asset allocation as a whole, T. Rowe Price had shifted to a modest underweight to equities relative to bonds and cash as it felt the risk/reward of equities looked less attractive. It had also moderated its overweight position to small-cap stocks following strong returns, acknowledging small caps would continue to benefit from aggressive fiscal and consumer spending but that valuations in some sectors were getting rich.
“As investors grew more optimistic late last year about the global economic recovery, small cap stocks took off with a parabolic snapback, up over 100% since the lows of last March. While smaller companies tend to lead early in an economic recovery given their higher sensitivity to growth, the fast and furious pace of performance stands out,” the firm said.
“Meanwhile, cyclically-orientated value stocks, which are also highly reliant on the trajectory of economic growth, have just begun to make up ground from the sell-off. While smaller companies may continue to benefit from reopening and stimulus in the US, a lot of outperformance may be behind small caps.”
