T. Rowe Price moves underweight on Australian equities and bonds

18 January 2024
| By Laura Dew |
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T. Rowe Price has moved underweight on Australian equities and Australian fixed income after months of neutral positioning as it is concerned about short-term earnings. 

In an asset allocation update for its multi-asset funds, the firm said it has moved down on Australia and increased its global exposure from neutral to overweight. 

The team has held neutral exposure to Australian equities for more than a year.

“We initiated an underweight Australian equity relative to global stocks due to earnings disappointment risk, elevated valuations after the late year rally and a headwind from a stronger Australian dollar.

“Our preference remains for Japan, the US, emerging markets and finally Europe in that order.”

In particular, Japan is offering “superior fundamentals” thanks to its reflationary story and governance improvements, and earnings remain attractive.

However, the firm is not entirely negative on Australia as it highlighted its housing market remains resilient, wage growth is elevated and supported by consumer confidence, and the government has firepower to add fiscal stimulus if the economy deteriorates further.

On the fixed income side, T. Rowe Price moved its Australian bond exposure down from neutral to underweight, and its global fixed income exposure up from an extreme underweight to a moderate one.

Higher interest payments are likely to have a negative impact on consumer spending, it said, and a pivot to monetary easing by the Reserve Bank of Australia (RBA) will be delayed.

“The RBA may be more hawkish given the resilient consumer, solid job data and continued wage pressure. Even with market pricing being more realistic on future rate cuts, the risks are still on the upside for yields.

“Global central banks [are] past peak tightening as inflation shows signs of slowing. Yields look attractive but in a narrow range.”

It remains overweight on global high yield, emerging market dollar sovereigns and local currency, and moved up from neutral to overweight on US inflation linked bonds. 

“We added to US Treasury Inflation-Protected Securities (TIPS) on more attractive valuations and as a hedge against inflation, in a reversal of recent favourable trends. 

“We remain overweight high yield and emerging market bonds on still attractive absolute yield levels and reasonably supportive fundamentals.”

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