Executive summary
The Australian equity market performance has been soft year to date. Despite the largest sectors, resources and financials, showing strength following solid February earnings updates, implications of the RBA tightening cycle and US Iran conflict have weighed on overall sentiment.
Looking ahead, sticky inflation, faltering consumer and business confidence, low private investment, and weak productivity pose a threat to growth and could see the RBA keep rates on hold in the coming months. Changes to capital gains tax and negative gearing announced in the recent Federal Budget could shift investment preferences across property and shares.
However, we see opportunities in sectors offering growth at a reasonable price and pricing power which include materials and select industrials. An equal-weight approach is also compelling, capturing higher mid-cap forward earnings growth while diversifying away from stretched large-cap valuations. These segments also outperformed during the last three hiking cycles. We are cautious on technology, where software-heavy names face AI disruption risk, and consumer discretionary, where rising living costs and limited pricing power could see profit margin pressure.
The potential for a prolonged Middle East conflict is a wildcard. It could exacerbate inflation pressures and lower economic growth.
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