T. Rowe Price holds off increasing Aussie weighting

T. Rowe Price remains neutral on Australia as it believes there are still risks to its earnings outlook and further rate increases from the RBA.

Positive tailwinds for Australia, it said, are a tight job market and early signs of a housing rebound which could make the economic cycle for longer, ample room for the government to ease conditions of living, and a higher pain trade for Australian equities given low expectations have been reset.

However, headwinds include the fact that consumers are feeling the effects of the tightening cycle, further rate hikes from the RBA could be possible and the base case is for an economic slowdown and margin headwinds.

In an asset allocation update, the multi-asset investment team, led by Thomas Poullaouec, said: “The earning outlook is still at risk with mounting pressures on margins. But valuations look fairly priced assuming a recession is avoided.”

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The only geographic area where it is overweight is emerging markets as it believes valuations and currencies are attractive, central bank tightening may have peaked, and Chinese growth momentum has stalled pending further stimulus.

Looking globally, the asset manager said the global macro backdrop is “uneven” as some regions are proving more resilient than others in the face of tighter financial conditions.

The US economy is surprising to the upside, it said, but Europe could be at risk of a mild recession as inflation remains elevated. With this in mind, T. Rowe Price is underweight on Europe and neutral on the US.

“We maintain a cautious stance with an underweight to equities in favour of fixed income assets. A slowing economy and weaker earnings could weigh on equities, while persistent inflation could keep government bonds vulnerable to further central bank tightening. Credit-sensitive assets still offer attractive yields and an option on a potential rebound should the market prove to be more resilient.

“Within equities, we closed our underweight the US markets sourced from Europe. Despite still favourable relative valuations outside of the US, slower economic momentum in Europe and less stimulus from China could weigh on markets outside the US, while US markets could benefit from their less cyclical, more defensive growth bias and recent trends in AI.”