The firm said that in February, Australian investors demonstrated a preference for companies with lower volatility, better valuations, higher quality, and larger capitalisation.
According to Bruce Apted, head of portfolio management – Australia, active quantitative equities at State Street, the economy is delicately balanced with larger than normal uncertainty in the future path of company earnings and interest rates.
“Central banks are walking a fine line with risks of being either too tight or too accommodative. While uncertainty remains for these key elements, we should expect more wild swings in equity prices,” Mr Apted said.
“Historically, periods of economic slowdown have seen increased economic uncertainty and higher levels of volatility. The more uncertain the calculation of fair value, the greater the role for investors’ animal spirits of fear and greed to influence price determination and further exaggerate volatility.”
He said investors have become more bearish in February as they digested earnings trends, adding that there have been “wild swings” in the MSCI World Index this financial year, which have coincided with a downward trend in earnings.
“Equity investors are trying to look through the current earnings slowdown but the longer the trend remains negative and the more uncertain the economic outlook, the harder it becomes,” Mr Apted said.
“The S&P/ASX 300 Index has also given up ground in February. We have seen Australian investors favour companies with lower volatility, better valuations, higher quality, and larger capitalisation.”
He added that while investors are trying to look through the current earnings slow down, “it is getting more difficult”.
“With the increased economic uncertainty, we should expect continued volatility. The preference for value, quality and less volatile securities is likely to remain an investor preference whilst these concerns persist.”
In State Street’s Global Market Outlook: Navigating a Bumpy Landing, published in December, the asset manager foretold that next year “will not be a straight path” as global economies continue to grapple with inflation, tightening, and expectations of lower economic growth.
“We expect market uncertainty and volatility to persist for some time, leading to a bumpy journey ahead with a wide range of possible outcomes,” the report said.
