Quarterly Australian Equity Market Outlook
Jonathon Ross: Hello. Today I am joined by Randal Jenneke who is head of Australian equities, and the portfolio manager for our high conviction Australian Equity fund. I think I say this each quarter, but it looked like another quite tumultuous quarter. A lot was happening. What have been the highlights for you over the last three months?
Randal Jenneke: I think there are three key things that have happened over the last three months. The first one is that the US-China trade talks continue. We've had some ups and downs with those discussions. We do think that we get a resolution, but definitely during the last three months we had some backward steps there, so that continued to weigh on markets. The second thing that was a real factor during the last quarter is that the RBA is really cutting rates in quite an aggressive way. The RBA cut rates twice, and we think that they'll continue to provide further support to the domestic economy and cut further.
Jonathon Ross: And during the quarter there seemed to be quite a strong bounce in some of the domestic cyclical names. Has that been overplayed? What are the prospects for those types of names going forward?
Randal Jenneke: There was a strong bounce in those domestic cyclical names, and I think for good reason. I mean clearly the market's trying to preempt a stronger domestic economy because we saw in the last quarter GDP number that growth really slowed to a 10 year low. But with the RBA's cutting rates, also the government has been able to pass its tax package. I think things actually start to look pretty good as we get into 2020. because those interest rate cuts I think will start to gain some traction. We can start to see that in the housing market now. So the auction clearance rate has obviously picked up quite a lot.
Randal Jenneke: And I think the other thing which is going to happen is that I think when we get into 2020 we should expect that we're going to see more action on the fiscal policy front because the budget position is actually in very good shape. So I think that the markets try to get ahead of that domestic improvement. So I think a large part of the movement that we've seen in those domestically exposed stocks is actually the right type of movement.
Jonathon Ross: And last quarter we talked about a little bit of cautiousness on your side, increasing the quality of the names in the portfolio, cash holdings are a little bit higher than they normally are. Have you changed positioning over the last few months, and what's your outlook for Aussie equities?
Randal Jenneke: I mean the way that I described it is to say we still remain cautious in the short term, mainly because we think that earnings are probably going to continue to be under pressure. I don't think we've really seen the full impact of the trade issues reported in corporate earnings. So I think that occurs over the next probably three to six months. But I think when you get beyond I guess that short term concern, we actually become much more positive, and we think that's because the domestic economy is going to improve for, and valuations look attractive to us. I mean, given that we've seen this big collapse in bond yields over the last three to four months, equities actually looks really attractive. And again, playing to that improvement in the domestic economy, we do think that that part of the market is going to improve going forward.
Randal Jenneke: It's what we've done in the portfolio is actually to increase our exposure to some of those names. But again, in the higher quality part of the market. So names like an REA, names like a JB Hi-Fi, names like a Wesfarmers, some of those domestically exposed names we've added to or brought into the portfolio over the quarter. But we still maintain a high cash waiting currently because we do think that the next two or three months are probably going to be a challenging period for markets, and we still maintain a strong focus in the higher quality part of the marketplace too.
Jonathon Ross: Well, thank you Randal, and thanks very much for your interest. If you've got any further questions about our Australian equity capability, the role we can play for your client's portfolios or any of other capabilities, feel free to reach out to your local T. Rowe Price representative. Thank you.
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