While Australia is generally expected to avoid a recession this year, Equity Trustees Asset Management head of equities Chris Haynes has argued that it may be too early to be positive.
In a note released this week, Mr Haynes acknowledged that a soft landing for Australia is a possibility but stated that it would be best to be ready for a potential recession.
“Economic headwinds created by the three-month lagged impact of 3.15 per cent increase in variable interest rates on around $1 trillion of home loans originated and refinanced during are now flowing through, but most of this only really gets underway in FY23,” he said.
“We need to be prepared for the full impact of the rate rises we have had — and the possibility of a few more to come. Inflation is an issue and the RBA needs to ensure it gets it under control. We need to be prepared for the pain that is yet to come in the economy.”
While national property prices have already fallen by more than 8 per cent from their peak, Mr Haynes said further declines are to be expected. He noted that borrowing capacity has been reduced with the rate hikes to date, and those with loans will be paying a lot more interest.
With the Reserve Bank’s stress tests indicating that a material portion of the borrowing cohort may go into negative cash flow, Mr Haynes said that this result would not be great for a consumer economy like Australia.
“Consumer spending has held up well outside of housing, but I think we need to prepare for a large decline in that area,” he added.
“The stock market has already marked down the share prices of the discretionary consumer sector, but we have not seen the earnings decline yet. We should expect to see that in 2023, and we should be prepared to pick up some bargains.”
Mr Haynes also warned that investors should be prepared for further energy price increases and predicted that industries that rely on cheap energy will leave Australia.
Furthermore, he said that further centralisation of the economy could take place and that investors should steer clear of industries where the government is set to intervene.
“At the end of all this, be prepared to buy some quality businesses which will be on sale,” said Mr Haynes.
“We may also see a period of below-trend growth and in that environment stock picking becomes important, especially focusing on quality factors such as balance sheet, pricing power and earnings certainty.”
