Australian Economy

strategists split on Australia’s sharemarket as ASX 200 inches towards record

That sentiment is echoed by Paul Xiradis, Ausbil Investment Management’s chief investment officer, who said growth – in the economy and in earnings – would be harder to come by this year.

“The market is currently balanced on edge, between a negative view based on high inflation, higher rates, utilities and food costs, and a positive outlook that sees households adjusting because of a relatively resilient economy and a cushion of excess savings,” Mr Xiradis said.

Both fund managers pointed to the lagged effects of the Reserve Bank’s rapid tightening cycle as the primary headwind facing the sharemarket.

“The market’s focus has changed to earnings risk from valuation risk,” Mr Jenneke said. “Cracks in consensus earnings expectations have started to appear in various sectors. We therefore continue to maintain a defensive posture in the portfolio.”

He noted earnings forecasts were already implying 5 per cent to 10 per cent contraction in 2024 in some areas of the sharemarket.

“Even then, risk is skewed more to the downside around this consensus forecast decline,” he said.

Likewise, Ausbil’s Mr Xiradis was expecting earnings growth in 2024 to come in close to 2023’s subdued levels. “If FY23 could be described as a ‘growth pause’ in earnings, we would suggest FY24 will be another flat year of earnings growth that can best be described as a consolidation,” he said.

1990s flashback

At UBS, Richard Schellbach is feeling more positive, despite the economic challenge.

“We see 2024 as a more upbeat year for the equity market, as investors embrace a willingness to look through the cycle,” the Australian equity strategist said. “Despite Australia being on a sub-trend path, its growth trajectory is one of the better among advanced economies, with the US and Europe flirting with recession.”

He added that the “growth-challenged and worry-beset environment” leading into 2024 was reminiscent of the backdrop for global equities in the mid-1990s.

“In 1994, the RBA hiked aggressively through the second half of the year, which caused equities to de-rate sharply. But equity fears over a hard landing proved wrong,” he said.

“Not only did the economy avoid a recession, but Aussie stocks managed to post positive annual returns for the following seven consecutive years between 1995 and 2001.”

Further, while Mr Schellbach conceded that earnings growth looked flat in 2024, the likelihood of central banks easing later in the year could buoy investor sentiment.

Bond traders predict the Fed will ease six times this year.

“The better macro picture which should form through the year will not just ease recession fears, but provide investors with the breathing room required to look through the cycle,” Mr Schellbach said.

As a result, he was forecasting the ASX 200 to reach 7660 by the end of 2024, a modest 0.9 per cent rise from the index’s closing level last year.

Mr Schellbach said the technology sector would continue to outperform this year as monetary tightening from the RBA “becomes a thing of the past”.

“We see scope for tech valuations to firm over the coming six months as long-end bond yields trend downwards in anticipation of the rate-cutting cycle to begin in late 2024,” he said.

The market is currently pricing up to two rate cuts in Australia this year.

China fortunes

Jason Steed, JPMorgan’s chief Asia-Pacific equity strategist, said that while the macro backdrop for the sharemarket remained supportive, the ASX 200’s heavy exposure to the mining sector meant its performance was beholden to the fortunes of China, Australia’s largest trading partner.

With Beijing increasing its focus on stimulating housing, “steel demand looks set to be supported over the next six to 12 months”, Mr Steed said. The broker has an overweight position on mining giants BHP Group and Rio Tinto, the ASX’s iron ore giants.

As for the direction of earnings in 2024, JPMorgan expected growth of around 4 per cent, while its ASX 200 year-end target was 7500.

Morgan Stanley’s 12-month price target for the ASX 200 was 7350.

Under a bear scenario, the ASX 200 could fall to 5720 should more monetary tightening be required and a sharp downturn follow. Morgan Stanley’s bull case of 8580 was a nod to a soft landing and a stronger business cycle.

The broker highlighted risks to domestic industrial earnings, particularly in the first half of 2024.

Watch bond yields

MST Marquee investment strategist Hasan Tevfik, meanwhile, believed the backdrop for the ASX 200 should be “broadly positive” this year, supporting his 7700 points forecast.

He cautioned against betting on growth stocks, and projected bond yields to “inch higher”. The US 10-year Treasury yield, the global benchmark for borrowing, hit 5 per cent in October, sparking a sharp sell-off in equity markets, before easing to 3.84 per cent at the end of the year.

“Tech companies have very high valuations, and they’re not really priced for any disappointment,” Mr Tevfik said. “There should be a headwind for some of those more speculative growth stocks.”

RBC Capital Markets’ Karen Jorritsma, meanwhile, expected more M&A to sweeten valuations after a flurry of deals hit the ASX at the end of 2023.

“It certainly feels like the market is going to see deal flow start up again,” Ms Jorritsma said. “I suspect we will see more equity raising in the small and mid-caps because gearing has changed materially with the interest expense moving up. We’ll be through the worst of the macro (impacts) of 2023, and we can finally go back to the fundamentals of bottom-up stock picking,” the RBC head of equities said.

Shane Oliver, AMP’s head of investment strategy, was optimistic the Australian sharemarket would outperform global counterparts in 2024, after underperforming in 2023. His ASX 200 price target was 7500 by December.

“A recession could threaten this though, so it’s hard to have a strong view,” Dr Oliver conceded. Still, “easing inflation pressures, central banks moving to cut rates and prospects for stronger growth in 2025 should make for OK investment returns in 2024.”

He warned that 2024 would be a “rougher” ride for the sharemarket than the previous 12 months – citing still-slowing growth, the tendency of shares to fall during the initial phase of rate cuts and “very high risk of recession”.

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