T. Rowe Price has cut its exposure to Australian bonds as it believes the RBA’s next monetary policy move will lead to higher yields.
In a monthly multi-asset update, the firm said it has moved underweight on Australian bonds and from an overweight position on cash from neutral.
The RBA has held rates at 4.35 per cent since November 2023, but there are concerns there will be another rate hike before seeing a cut. There was no meeting in July under a new meeting schedule, which was implemented this year, so the next meeting of the monetary policy committee will be held on 5–6 August.
At the previous meeting, governor Michele Bullock acknowledged that the central bank had considered hiking interest rates.
“The board did discuss the case for increasing interest rates at this meeting but in the end it decided its current strategy of staying the course and trying to bring inflation down by bringing supply back to demand was the right way to go,” she said in June.
The firm said: “Within fixed income, we added to cash at the expense of Australian bonds as we think the RBA will have to tighten more to bring inflation down. We also added a long Aussie dollar versus the Euro position to benefit from the divergence in monetary policy.
“Risks for the RBA to be more hawkish than market pricing given sticky inflation.”
At the start of 2024, the multi-asset team was overweight to Australian bonds but has been gradually reducing the exposure.
It continues to favour high-yielding sectors, including high yield bonds, floating rate loans and emerging market bonds, as it believes fundamentals are supportive for those assets. The firm is overweight on global high yield, US inflation-linked bonds, EM dollar sovereigns and EM local currency.
The move means T. Rowe Price is now both underweight Australian equities and Australian bonds. In the equity space, it remains cautious in the short term due to weak earnings prospects where earnings have been revised lower. This move, it said, does not bode well for earnings in the second half of the year.
Instead, its equity preference goes to cyclical markets like Japan.
“We remain overweight equities, as valuations beyond narrow leadership remain reasonable and economic growth, while slowing, is still supportive for earnings. Within equities, our preference goes to cyclical markets like Japan and value sectors and to markets exposed to the AI theme like the US.”
However, there are some positives for Australia from the multi-asset team, which is led by Thomas Poullaouec. The government support to the economy continues to be net positive, housing market supports the wealth effect, and commodity prices could rebound further.
