Australian stocks are set to see relative outperformance in the second half of the year, according to T. Rowe Price, despite difficulties in the first half.
The ASX 200 had lost 15.3% since the start of the year to 17 June, reflecting a global downward trend where the S&P 500 had lost 23% and the FTSE 100 had lost 6%.
In a mid-year equity outlook, Randal Jenneke, head of Australian equity, said he was optimistic this trend would reverse in the second half thanks to several macro factors.
“We believe Australian stocks look set for further relative outperformance in the second half of the year. Australia will likely benefit from increased exports of liquid natural gas and coal to Europe due to tighter sanctions on Russian energy. At the same time, more fiscal stimulus to support growth in China could help to support the price of iron ore, even as the global economy slows.
“We think it is better to prepare for slowing growth and rising recession risk in 2023 rather than dwell on what stares us in the face today (higher inflation).”
He said value stocks were likely to feel the most pressure and that quality growth stocks were the ones likely to perform better.
T. Rowe Price had increased its exposure to consumer staples and healthcare at the expense of other cyclical parts. Attractive stocks included US-dollar earners ResMed, Aristocrat and commodity firms like Rio Tinto and Allkem. On the other hand, it was underweight Australian banks which it felt it had the potential to weakly sharply in six to 12 months.
“We expect quality growth stocks to come back into favor later in 2022 as policy rates stabilise and long term yields decline. Having reduced exposure to many of these growth companies in 2021, we have considerable scope to take positions higher. In our view, this could help the portfolio to strive to perform well as markets move beyond their current inflation and interest rate fears to refocus on the issue of slowing growth, both domestically and globally.
“After a period of stagflation, we believe recession risks will come to dominate equity markets in 2023. We believe it is better to prepare for what is likely to come in 2023 (slowing growth and rising recession risks) rather than to dwell on what stares us in the face today (higher inflation).”