Has the equity cycle moved to a ‘new phase’? T.Rowe Price thinks so (and says tread carefully)
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Since the calamitous COVID-19 selloff in March 2020, post-pandemic markets have provided plenty of investment opportunities in markets awash with fiscal and monetary stimulus.
18 months on, the question of positioning has become a bit more complex.
At current levels near 7,400, the ASX 200 is now trading around 4% higher than its pre-pandemic high of 7,139, after slumping to a low of 4,546.
Looking ahead, “a new phase of the market cycle has begun”, asset management firm T.Rowe Price says.
The analysts reckon stocks are entering a “deceleration” phase.
Economic growth has slowed, as the world’s major economies grapple with a post-COVID hiccup in the form of the Delta variant.
That’s not necessarily a bad thing for stocks — as evidenced last year when economic growth tanked at record levels in the June quarter and outright deflation took hold, while equities continued to climb.
But the key question for T.Rowe Price is how this slowdown will flow through to earnings growth.
Companies across multiple industries have reported a surge in earnings over the last 18 months, whether through rising commodity prices or the unique aspects of pandemic markets that saw money pour into sector-specific beneficiaries such as tech and ecommerce.
However, with stock valuations at new all-time highs, there’s a better chance that this economic slowdown will flow through to earnings downgrades, T.Rowe Price says.
“The prospect of earnings downgrades — which we are already seeing in the Australian market due to the lockdowns on the Eastern seaboard — is an adverse combination which could lead to equity market weakness”, the analysts said.
At the same time, the dominant communication narrative from central banks such as the US Fed and the RBA has shifted to how they plan on dialling back ultra-easy monetary policy stimulus.
The latest commentary from both banks has still leaned to the dovish side, easing market fears about a faster-than-expected taper.
However, it’s unlikely investors will be able to rely on the historic levels of stimulus that were deployed amid the pandemic.
“In the absence of any further meaningful fiscal or monetary stimulus, we are cautious on markets in the near term,” T.Rowe Price said.
The analysts also touched on the US ‘stagflation’ theme doing the rounds in markets, where the Fed will be forced between a “rock and a hard place” as economic growth slows (more stimulus) while inflation remains sticky through the end of 2021 (less stimulus).
Weighing it all up, T.Rowe Price recommends adding a degree of caution to stock portfolios.
“We favour quality and more defensive sectors such as healthcare, consumer staples and utilities,” the analysts said.