Pockets of opportunity are still available in certain sectors of the stock market, according to portfolio managers at Fidelity, despite the impact of rising rates and inflation.
The firm has suggested that Australia will most likely manage to avoid a recession, unlike many other developed markets around the world.
“In Australia, there are indications we are getting close to the peak for both interest rates and inflation. The real test for whether we go into a recession or not is consumers and how they adjust. Consumer behaviour is lagging behind the interest rate cycle and there is still some pain yet to be felt,” commented Paul Taylor, head of investments at Fidelity International.
“While there are a number of risks in the market, this also creates a great opportunity to buy the market at a much better risk-adjusted price, which will likely deliver much better longer-term returns.”
Maroun Younes, co-portfolio manager of the Fidelity Global Future Leaders Fund, pinpointed the tech sector as delivering strong earnings and having positive prospects.
“It is benefiting from ongoing structural growth in areas such as data centres and the cloud, networks and connectivity enablers, software to create productivity or critical information management, artificial intelligence, and content platforms,” he stated.
Meanwhile, commodities and building materials, the insurance sector, and small cap equities were also highlighted as potential opportunities in the Australian market.
Zara Lyons, portfolio manager for Fidelity’s Australian Equities Fund, drew attention to the banking sector, which she said was well prepared to weather a downturn. However, she also noted that the market would likely focus on asset quality in the banks’ upcoming results.
“Since the RBA paused hiking rates in July, market expectations for two 25 basis point increases in the cash rate have eased slightly to one 25 basis point increase, following a weaker monthly inflation figure,” said Ms Lyons.
“This, combined with a slight softening in competitive dynamics across both mortgages and deposits, has led to a share price rally in banks, which have outperformed the broader market over the last few months.
“However, we think this rally may be short-lived if the economy deteriorates further from here. The yield curve continues to be inverted implying that the market expects slowing economic growth in the future and potential easing in policy rates.”
Mr Taylor concluded: “History teaches us that when significant risks are priced into equity markets, they’re more likely to provide better longer-term investment returns. There’s plenty to worry about, but that also creates better opportunities for the future”.