T. Rowe Price is neutral on Australia as it believes there are potential earnings downgrades on the horizon.
In a multi-asset outlook, the firm said it was neutral on Australian equities and overweight on Australian bonds, unchanged from the previous month.
Positives for Australia were an expected moderation of rate hikes by the Reserve Bank of Australia this year, having raised rates consistently from May-December in 2022, which would reduce the pressure on yields. The banking sector had also improved earnings which had benefitted the stockmarket.
However, there were negatives in terms of slowing consumer spending, inflationary pressure and a contraction in the housing market.
It said: “The economic slowdown is pointing towards potential earning downgrades. While a China rebound could soften the slowdown, the housing market and commodity prices are poised to negative surprises in the coming months.
“Anticipating a slower economic growth on the back of this hiking cycle, long term yields are likely to trade in a narrow range going forward, with a downtrend bias. The RBA “pivot” could support lower long-term yields.”
T. Rowe Price said it did expect an earnings recession, however, even if it avoided an economic recession as a result of the lagged impact of interest rate rises.
The average decline in ASX earnings during an earning recession was close to 30%.
“Our base case for 2023 is that Australia is likely to experience an earnings recession even if we do not suffer an economic recession. The reality is that the starting point for earnings is at a historically very high level.
“Although earnings have held up reasonably well until now, that’s largely because the impact of the rate hikes that we’ve seen domestically is really only just starting to bite. The real pain will be felt next year when fixed rate mortgages originated during the COIVID-19 period roll off to considerably higher variable rates.”
