While Australia has far less opportunity to see any real leadership out of the AI narrative, we do believe the scope for businesses to vastly improve business processing should provide a meaningful productivity dividend for corporates over the next 2–3 years.
It is a structurally bullish transformation but will ultimately be up to individual companies to transform their way of doing business, but the cost out story for manual processing jobs looks compelling.
Outside this, we have been surprised at the resilience of consumers in the face of rising interests rates and the cost-of-living pressures. The easiest explanation for this is the decline in the savings rate, both in Australia and the US.
It does appear that given the deceleration in CPI data, the hawkish rhetoric favoured by central banks thus far in 2023 will start winding back, but in our view, it will take an acceleration of unemployment numbers to both ease wage pressures and signal a change in policy is near.
The one wildcard in this equation is China, as to exactly how stimulatory their monetary policies will be this year to reignite the economic growth engine. We approach China with caution given the banking system leverage, high property prices, and an ageing demographic, while still being heavily reliant on export markets (their manufacturing base) to generate GDP growth, aggressive stimulus may well be needed if the current deflationary forces in China continue.
Our view remains that real assets (property, agriculture, commodities, gold) will outperform capital light or long-duration assets over the coming period, where we still see a broad valuation dispersion that needs to unwind.
We believe inflation decelerates over the next six months but remains somewhat embedded due to localisation of supply chains, decarbonisation capital investment, and a reversal of cheap labour arbitrage from emerging markets over the past 20 years.
We are also mindful of the relentless deficit spending in the US, which is accelerating, and needs to be funded, somehow. Our thesis leads itself to see continued pressure on the USD, combined with strong energy transition tailwinds and an underfunded energy sector, which we believe, sets this decade up for an outperformance of commodities relative to financial assets, which again ties into the notion of real assets providing strong returns.
From a strategic perspective, we see far more reason to be allocating capital to essential services than discretionary sectors over the next 12 months, as EPS pressure on discretionary spending we think will intensify.
We are also of the view that PE re-ratings are a thing of the past, hence earnings will be the only driver of stock prices going forward, meaning a far more fundamental investment process will provide superior returns over the next 2–3 years.
We believe Australia is well placed to benefit from this trend over the coming decade, with an enviable lifestyle and strong (if somewhat flawed) democracy. As a primary producer of agriculture and commodities, we are well set up to continue to prosper as a nation, which should all else being equal, attract global capital and labour via both skilled and unskilled migration. While this may appear contradictory (relative to our positive stance on Australia), we remain cautious on China in spite of the likely stimulus packages post COVID-19 lockdowns. Hence our commodity exposure is energy, battery materials, and agriculture over iron ore.
At a sector level, we see merit in the idea that insurance is looking attractive from a valuation perspective, energy and healthcare should see earnings resilience in this environment while golds look fascinating from a sentiment perspective.
Bull markets historically follow bear markets, and in that context, small caps tend to perform better as risk appetite increases. Perhaps this is too early, but we do try to prepare for outcomes, rather than predict outcomes.
Rob Tucker, portfolio manager, Chester Asset Management