Market uncertainty is making for an increasingly difficult investment environment, according to T. Rowe Price – but ‘pockets of opportunity’ remain for investors who know how to navigate the ambiguity.
Recent geopolitical and macroeconomic events, such as the Brexit vote and Australia’s return to a minority government, have created “a ‘wall of noise’ that is increasingly difficult for investors to see through”, said T. Rowe Price head of Australian equities Randal Jenneke.
Mr Jenneke cautioned that uncertainty is beginning to “feed through” to the economy and to have a negative impact on growth and activity, leaving investors with a diminishing pool of attractive investment options.
“The negative effects of this uncertainty are beginning to show on economic growth and activity, and as this impact becomes more pronounced, the areas of opportunity are narrowing,” he said.
The result of the recent federal election was also of significance to Australia’s investment outlook, and Mr Jenneke described the return to a minority government as being “unequivocally bad for the country”.
“Passing sensible policies and delivering economic reform will be very difficult to achieve, while various minor party interests will be pandered to, and this will also be detrimental to growth,” he said.
Mr Jenneke said Parliament’s current structure would lead to “little interest in delivering necessary spending cuts” to improve the budget deficit, which he warned could see Australia lose its AAA credit rating.
“We anticipate that Australia is on a path to higher debt and, ultimately, to losing its AAA rating within the next two years. This will likely mean higher funding costs for Australian banks, which we expect will be passed through to the entire economy,” he said.
Nevertheless, said T. Rowe Price, investors can still "navigate the heightened uncertainty", with Mr Jenneke saying "there are two ways to tackle this".
Investors can navigate the current climate of uncertainty by focusing on companies enjoying structural growth stories, such as health care, or by taking a “more defensive, higher-yielding” position, investing in utilities, REITs and infrastructure, he said.