Quantitative easing (QE), or put more simply the printing of money, has reversed in the US and the Fed is now shrinking its balance sheet. Other major central banks such as the ECB in Europe or Bank of Japan are yet to turn from QE to QT (quantitative tightening) but have signalled their intentions to scale back their bond purchases.
Alphinity Investment Management principal and lead portfolio manager Johan Carlberg said there have been few places to hide since the equity market turned in the second half of 2018.
“Cyclical stocks have been hurt by global growth concerns, but expensive growth stocks have also come under pressure due to higher interest rates,” he said.
“The Fed slowing its pace of interest rate increases in 2019 and at least some hope of a truce in the trade war may offer some relief, but we continue to see the impact of QT as the greatest risk to equity markets. We don’t think a global recession is on the cards, but profit expectations are likely still too high.”
Global macro trends have dominated the Australian equity market for most of 2018. In addition, we’ve had the fallout from the Hayne royal commission and the cooling housing market.
Alphinity is confident that the global headwinds from the end of cheap money will be with us for most of 2019, and said that investing in companies with a high degree of earnings certainty or already low expectations makes a lot of sense.
“Of course, we have to make sure that we don’t overpay for that certainty,” Mr Carlberg said, adding that Alphinity continued to like the insurance sector for the upside from stronger than expected premium rate increases.
“But other than that, it’s largely a stock specific environment where companies like the ASX, CSL and Goodman Group should do well,” he said.
The fund manager is also cautiously optimistic on the resources sector despite its greater degree of cyclicality.
“China’s growth rate has slowed a bit and the government stimulus initiatives to boost growth look like they will be a bit more measured this time and less targeted at property and infrastructure, the main consumers of Australian resource commodities,” Mr Carlberg said.
“However, most analysts are assuming lower commodity prices in 2019 despite the government stimulus and we think valuations also don’t acknowledge the strong balance sheets of companies like BHP and Rio Tinto.”
