Despite solid performance over the past two years, the Australian equity market has lagged behind the global rally, and a similar trend is expected to persist.
Citi remains overweight on the US and, more recently, Europe, while maintaining an underweight position on Australia due to its reliance on resources and concerns about future growth prospects.
Speaking on Ausbiz on Tuesday, Citi strategist Beata Manthey elaborated on these concerns: “We’re overweight the US for now and Europe, which we have just upgraded. Australia and Japan are underweight.”
She pointed to the shift in China’s stimulus strategy as a key factor impacting Australia’s outlook.
“Australia is a cyclical market, but it is very resource-driven. We worry that the news flow out of China – the stimulus they are going to provide – is not going to be as infrastructure-driven as before. Therefore, you don’t need as many basic resources to drive the stimulus or benefit from the stimulus.”
Manthey also highlighted Australia’s high valuations and lacklustre growth prospects compared to other cyclical markets.
“Australia is a hard comparison versus other cyclical markets. It’s very expensive, and the growth outlook because of the downbeat commodities is not particularly strong. So, it performs poorly versus other more cyclical markets in our allocation model,” she said.
On Tuesday, the S&P/ASX 200 Index surged past 8,300 to reach a new record high, driven by strong performances from heavyweight mining and banking stocks. Australian shares mirrored Wall Street’s gains, where the Dow and S&P 500 reached fresh highs.
However, investors are closely monitoring the economic outlook in China, Australia’s top trading partner, as they await further details on Beijing’s recently announced fiscal stimulus plan, with announcements made to date lacking specifics on its scale.
Speaking to ABC News over the weekend, AMP’s Shane Oliver stated that as long as China doesn’t “fall off a cliff”, it poses “no major threat to Australia”.
Economists had previously flagged the need for larger fiscal stimulus after the People’s Bank of China (PBOC) announced a monetary stimulus package last month, which included cutting reserve requirement ratios and policy interest rates.
What followed were two disappointing announcements, leaving the world awaiting clarity on the cost of China’s fiscal stimulus, with details expected to emerge when China’s legislature convenes in the coming weeks.
In the latest announcement, Finance Minister Lan Fo’an pledged to issue more debt to support the struggling property market and recapitalise banks; however, the measures did not signal an urgency to combat deflation and boost consumer spending, both seen as crucial for revitalising China’s economy.
Oliver emphasised that while the policies may provide China with a cyclical uptick in growth, without structural reform, this growth is “likely to peter out”.
On Friday, in his most recent market outlook which predated China’s most recent announcement and global market gains, Oliver said the combination of stretched valuations, the still high risk of recession in the US and Australia, the expansion of the war in the Middle East to potentially impact oil supplies, and the US election mean that “the risk of another correction and ongoing bouts of volatility is high”.
"On a 6–12-month view though shares are likely to head higher on the back of the success in getting global inflation down, central bank rate cuts – with the RBA getting closer to joining in – and China ramping up policy stimulus. October can often see high levels of share market volatility, but beyond that, we are coming into a positive time of the year for shares from a seasonal perspective,” the chief economist said.
