T. Rowe Price expects a sluggish economy in 2024, due to weak global growth and the lagged effects of RBA tightening, with wage inflation predicted to remain a key issue for investors.
The rise in the cash rate, escalating from 0.1 per cent in April 2022 to 4.35 per cent in November, is contributing to the economic deceleration, while the ongoing rollover of fixed-rate mortgages, constituting the last 30 to 40 per cent, is expected to further dampen residential property market activity.
“With per capita GDP falling, the Australian economy is well and truly into the slowdown phase, though high post-COVID immigration numbers have been enough to prevent a recession,” said Mr Jenneke.
“Australia is entering the second phase in the battle against inflation in which the Reserve Bank of Australia has been lagging behind the US Fed. The easy wins against inflation have been made and hard yards lie ahead in moving from around 5 per cent inflation closer to 2-3 per cent. You can’t add between 500,000-600,000 people in a single year without adding to inflation pressures,” he continued.
“Progress towards the RBA’s inflation target (2-3 per cent) expected by late 2025 is likely to be slow. It may be well into 2026 rather than late 2025 before the target is reached”.
Reflecting also on the Albanese government, Mr Jenneke said that as it nears the midpoint of its first term, urgency is required to deal with the rising cost of living crisis following a May 2023 budget devoid of new policies to mitigate inflation.
Turning to earnings forecasts for 2024, Mr Jenneke expressed caution, stating, “Most (earnings) forecasts in 2024 are for a decline of 5 per cent to 10 per cent. In our view, the out-turn will likely be closer to 10 per cent than 5 per cent.”
He highlighted a shift in market focus from valuation to earnings risk, prompting T. Rowe Price to maintain a defensive posture while actively seeking opportunities in oversold growth names.
Fortunately, amid economic uncertainties, Mr Jenneke remains optimistic about Australia’s relative positioning, stating, “We believe that Australia is relatively well-positioned for the new global investment regime that is unfolding. There are many good long-term investment opportunities even if the short-term macro environment remains challenging.”
“We remain cautious toward businesses with low pricing power, those with significant cyclical exposure or that are vulnerable to higher yields, and the more extreme growth, long-duration stocks. We have more confidence in some of the ‘growth at a reasonable price’ names with strong fundamentals, in quality, reasonably valued defensives with pricing power and in defensives that are not well-owned.”
Mr Jenneke also said that T. Rowe Price is encouraged by the recent improvement in Australia–China relations following Prime Minister Anthony Albanese’s visit to Beijing, which reached an agreement to review and likely remove China’s import tariffs on Australian wine and other agricultural exports.
