New market views from T. Rowe Price’s Randal Jenneke predict that growth and inflation will peak this year.
“Strong GDP growth this year is already priced into Australian share prices. For 2022, our expectation is that local and global growth will likely begin to fade as fiscal stimulus begins to unwind, after being heavily front-loaded into the first half of this year,” Mr Jenneke said.
“As a result, consensus earnings growth estimates will likely be trimmed and earnings momentum (upgrades less downgrades) may turn negative. Under this scenario, value is unlikely to continue to outperform growth. We expect the value rotation trade to first fade and later reverse.
“Unlike some market strategists, we see limited scope for interest rates to move much higher given the historically high post-COVID levels of domestic household debt.”
Mr Jenneke adds that it’s “not too soon” for investors to think about taking profit on value positions that have done well and to begin positioning portfolios for the return to favour of quality growth in 2022.
“We note that stimulus as measured by the fiscal impulse (the change in the cyclically-adjusted primary budget balance as a % of GDP) is much less in 2021 than it was in 2020,” Mr Jenneke said.
“In 2022 it is set to turn negative (the ‘fiscal cliff’ effect), subtracting from GDP growth in that year.
“Under these conditions – a return to slower growth and sustained low interest rates – we believe growth stocks should return to favour.”
