ASX outlook: what's next for equities?
Earnings season results indicate a positive outlook for the Australian economy. That’s good news for stocks, says Pendal’s head of equities Crispin Murray in his latest webinar
A DIMINISHING threat of recession in Australia and the looming prospect of US rate cuts will support Australian stocks over the next 12 months, says Pendal’s head of equities, Crispin Murray.
Australian equities have performed strongly since March, adding 6.7 per cent — compared to a 7.1 per cent gain on the S&P 500 and an 11.9 per cent lift in the UK — driven by ratings increases and growing confidence in the economic outlook.
Strong spending from older Australians and a growing population should see Australia avoid recession, even as younger generations come under increasing cost of living pressures, says Murray.
“We think the economy is OK — doesn’t mean it’s strong, there’s still going to be plenty of challenges, but we don’t believe we will see recession. That’s important, because that helps ensure that earnings in the equity market hold up and are supported,” he says.
Murray was speaking at the bi-annual Beyond the Numbers webinar after the August ASX earnings season.
US outlook positive
The outlook for the US economy is an important influence on markets, with concerns growing about the effect of cumulative interest rate rises, ongoing high fiscal deficits, and the uncertainty of the impending elections.
“But I think it is important to keep in mind that the US economy has held up better than pretty much everyone was expecting,” says Murray.
“We have a Fed who feel that they have done the job on inflation, and they have a clear easing bias.”
Murray says financial conditions in the US are easing — as measured by an index of credit spreads, mortgage rates, equity market moves, and currency — indicating the US has already entered a moderate easing cycle.
“The key message here is that even if the US economy turns out to be somewhat weaker … we will see more rate cuts, so that will be supportive for equity markets, knowing that there is this safety net in terms of much more aggressive easing, if required.”
China structural issues
China, another big influence on Australia’s fortunes, looks more problematic, says Murray.
“The issues in China are structural” as the economy deals with the unwinding of a multi-year property bubble, he says.
“The government has decided that they need to address that, and they continue to avoid stimulating the economy.
“But the trade-off is to what extent those structural issues begin to gather steam and China goes into even lower growth trajectory — or will government policy continue to be able to ensure that we get moderate growth.”
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Murray says China has traditionally relied more on investment than consumption and the longer-term hope is that domestic demand becomes a more important driver of growth.
“We believe that this sort of sluggish growth will continue, but we do also believe that the government [wants] to underpin growth — that they will continue to come through with a series of policy measures that will help prop up growth.
“So, while we remain wary and cautious on China, we do not believe that it’s going to spiral further down.”
That would indicate upside for markets, where investors are pricing in further negative outcomes in China.
Positive market outlook
What does this mean for potential market outcomes?
Murray says the profit season reports showed earnings revisions remain resilient, particularly in industrials, offsetting declines in resource sectors.
Unlike in previous periods of economic weakness, such as the Global Financial Crisis and the pandemic, the monthly rate of earnings revisions for the next twelve months indicates no sign of material economic deterioration.
As a result, Murray says he anticipates positive returns for the ASX over the next twelve months.
About Crispin Murray
Crispin Murray is Pendal’s Head of Equities. He has nearly 30 years of investment experience and leads one of the largest equities teams in Australia.
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.
This article has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426. It is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. You should consider, with a financial adviser, whether the information is suitable for your circumstances.
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