In an asset allocation update for its multi-asset funds, the firm said there is a risk of earnings disappointing due to a lack of pricing power from companies. It also has concerns about extended valuations, headwinds from a stronger Australian dollar, and depressed levels of consumer confidence.
In the fixed income space, the Reserve Bank of Australia (RBA) is “marginally more hawkish” than other global central banks due to elevated wage inflation, which T. Rowe Price said indicates a monetary easing cycle is more distant than in other markets.
Earlier this month, the RBA opted to hold rates at 4.3 per cent and indicated there may yet be another interest rate hike.
This is in contrast to the US Federal Reserve and European Central Bank, which are both moving closer to rate cuts this year.
As such, the multi-asset team has retained its underweight to both Australian equities and Australian bonds for a second month.
However, there are some positives in that the labour market is resilient, fiscal stimulus is expected to alleviate the loss of real income, and the Australian dollar could benefit from an increase in commodity prices.
Last month, the firm moved underweight on Australian equities and Australian fixed income after months of neutral positioning as it was concerned about short-term earnings. The team had previously held neutral exposure to Australian equities for more than a year.
“We initiated an underweight Australian equity relative to global stocks due to earnings disappointment risk, elevated valuations after the late year rally and a headwind from a stronger Australian dollar,” it said in January. “Our preference remains for Japan, the US, emerging markets and finally Europe in that order.”
In February, it has since opted to reduce the overweight to Japan after a strong rally in January but reiterated Japanese stocks remain a favourite, thanks to the country’s reflationary and governance improvements.
Despite its optimism, it posited two scenarios which could cause concern in the country: how would earnings be affected if the Japanese yen appreciated and whether political turmoil could derail economic policy agenda.
