Quarterly Australian Equity Market Outlook

January 2019
Randal Jenneke , Head of Australian Equities

Jonathon Ross: Today I'm joined by Randal Jenneke, head of Australian Equities and portfolio manager for our high conviction Australian equity strategy. Randall, can you run us through the last quarter, which ended up being quite volatile and into 2018.

Randal Jenneke: Thanks Jonathan. Yes, it was a volatile last quarter and it was quite interesting because we really went into a very risk off mode in markets. So the Australian market fell a little over eight percent and the two key factors that really drove that were, one, we really saw the impact of trade and tariff and how it played out in markets. And that was best seen in the pull forward in activity that a whole lot of companies engaged in over the course of 2018. So what that meant was that it created uncertainty around for ordering and sales activity. So we kind of hit this air pocket in economies and markets reacted to that. So that was one key concern.

Randal Jenneke: The second concern was around interest rates principally in the US. So interest rates have increased by over 100 basis points in the US and there were concerns that the Fed would continue to aggressively raise rates and markets were concerned about the impact that that was going to have on the US economy. I guess when we think about both those issues, we think the markets have overreacted to those issues. We do think that growth will slow this year and that will mean that corporate earnings will also slow but still remain at very healthy levels.

Randal Jenneke: So when we think about 2019, we agree with markets that things will slow, but where we disagree is that we think the markets have too aggressively priced in downside risks. So we think in a sense that's actually a good opportunity to take advantage of some really oversold positions, particularly in the hard quality growth part of the marketplace that we build our portfolios around.

Jonathon Ross: And can you run us through some of the major factors that have been driving the markets and how you see that playing out through 2019?

Randal Jenneke: I mean, the key factor really has been the trade and tariff tensions between the US and China. So really this started in the middle of 2018 and accelerated towards the end of 2018. So that's saw the US imposed 10 percent tariffs on Chinese goods in September with the threat of that going to 25% from the first of January 2019. But the US and China obviously want to come to an agreement here. So they've agreed to pause on the next increase in tariffs as they try and negotiate an acceptable outcome to both parties. So that's a key factor that's really driven markets over the last six months and particularly the December quarter. And the others just about you know, the earnings changes that we've seen a part of that reflects tariffs, part of that reflects a bit of a slowing US economy as well.

Randal Jenneke: So we've seen earnings trends turn negative over the course of the last three months. And so that's been a key factor driving markets in the short term.

Jonathon Ross: And so with that in mind then potentially markets being oversold to a degree, can you run us through some of the key positions and why you've got them in the portfolio at the moment?

Randal Jenneke: It's quite interesting. So when I looked at our portfolio, we saw a number of stocks where there might've fallen by 15 to 20%, but there haven't been any change in the earnings or in the fundamentals. So part of what happened during that December quarter as well was that you kind of went through this period where your stocks that had done well over the course of 2018, really struggled in the December quarter and the stocks that had lagged going into the December quarter actually did better. Now, part of that was just, I guess how owned stocks were but also I think people wanted to liquidate or de-risk portfolios, those players in the market who needed to do that.

Randal Jenneke: So there's a whole, a really good quality stocks that got sold down. So when we look at it, names like Aristocrat, names like James Hardie, names like Wally Parsons got hit quite hard during that December quarter. But we look at the fundamentals and we actually really positive and excited on the future of all these businesses going forward. So it's those sorts of names that we've been adding to and topping up in our portfolios.

Jonathon Ross: And how are you seeing the domestic economy for Australia in 2019?

Randal Jenneke: It's a really good question. I mean, I think this year there are two key issues to navigate when we think about that the domestic economy. The first one is house prices are declining and so what's important here, I guess is the degree to which house price declines and how it spreads and impacts of broader economy in terms of a slow down in overall activity. So it's something that we're watching very closely.

Randal Jenneke: The second one is we're going to have elections this year, so we have a New South Wales state election in March and we're going to have a federal election by the very latest in May. So that's got the potential also to, I think, create a bit more uncertainty in the domestic economy, particularly if we have a change of government and we have a raft of new policy and tax changes.

Randal Jenneke: So those are two key issues that we're very focused on and we are a bit more cautious on the domestic economy. We think that global economies are more positively exposed to growth going forward. So that's how we tried to think about, the domestic economy factors and also how we want to position our portfolios given those risks.

Jonathon Ross: Well thanks Randall. And thanks for tuning in. If you've got any further questions about T. Rowe Price and our capabilities and how our Australian Equity Fund can play a role in your client's portfolios, please feel free to reach out to your local T. Rowe Price representative. Thank you.



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