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Portfolio manager issues warning on market trends

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By Rhea Nath
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4 minute read

While equity investors seem to “live in the land of hope” amid surprising resilience from markets, a portfolio manager has suggested the road ahead might not be as smooth as expected.

As investors attempt to navigate their portfolios for a promising soft landing, WAM Leaders’ lead portfolio manager, Matthew Haupt, has suggested they may have thrown caution to the wind a little too soon.

Appearing on an episode of the Relative Return podcast, he noted that 2023 was probably the most confusing period in the market for many people, including himself.

Namely, despite a tightening environment, the economy demonstrated remarkable resilience, sparking debates about the future trajectory.

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The fund manager highlighted the prevailing optimism in equity markets, attributing it to a smooth landing scenario with baked-in interest rate cuts in the forward market.

“The resilience of the economy in spite of a tightening environment and just overall the debate around where we go from here… At the moment, it’s a very smooth landing, the soft landing. All those interest rate cuts in the forward market are baked in, but the economic data we’re getting is still very resilient,” Mr Haupt explained.

He observed that the current market reflects a notable case of equity optimism, however, he cautioned that this optimistic scenario is not immune to change with concerns arising regarding potential hits to earnings if rate cut expectations materialise.

“Equities always live in the land of hope and that’s very much where we’re living at the moment,” Mr Haupt said, adding that if the forward market is correct, “there’s going to be a big hit to earnings”, with almost all economists pricing in interest rate cuts later this year.

The manager noted the contrasting views between the equities and bond markets, with the latter still grappling with uncertainty and relying on interest rate cut expectations for tail event protection.

“I guess equities are taking the glass half-full approach, whereas bonds, you look at the volatility within bonds and they are very confused as to where we go from here,” he said.

“The interest rate cut expectations is really around positioning on a tail event which pulls down the forward curves, and equity market people are saying, ‘Oh, that there’s X amount of cuts put in’, but it’s really tail protection in the bond market, which is giving the expectations of interest rate cuts around the probability curves of cuts.

“I think that’s a big confusion, that the bond market is still very much assessing where we go, because, as we said at the start, it’s still very uncertain. But equities are full steam ahead at the moment, they’re saying we’re going to get all these cuts and earnings are going to hold together.”

The portfolio manager told InvestorDaily he remains “more on the cautious side” and emphasised that real tightening has only recently occurred. These evolving conditions have led central banks to pivot in recognition of the tightening landscape.

Despite his lack of a definitive stance on equity positivity, the manager highlighted WAM’s active portfolio management approach, adjusting positions daily based on incoming data rather than making long-term forecasts.

“The way we manage money, we adjust the portfolio daily. We are very active. So, I don’t really care where the market is at the end of 2024, I care about what happens between now and the end of the year and we’ll adjust the portfolio based on the incoming data,” he said.

“Forecasts are really tough and rarely right, so the thing we’ll do is adjust the portfolio as the data comes in.”

The Reserve Bank of Australia (RBA) is set to announce its first interest rate decision of 2024 on Tuesday, 6 February, which most economists have forecast as a hold in light of the recent favourable Consumer Price Index (CPI) data.

In January, the Australian Bureau of Statistics reported that CPI lifted 0.6 per cent during the December quarter, much lower than the 1.2 per cent rise in the September 2023 quarter and the smallest quarterly rise since the March 2021 quarter.

Last week, the US Federal Reserve also held the rate steady in its first meeting of 2024 and hinted at future rate cuts later this year.

To hear more from Mr Haupt, click here.

Portfolio manager issues warning on market trends

While equity investors seem to “live in the land of hope” amid surprising resilience from markets, a portfolio manager has suggested the road ahead might not be as smooth as expected.

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