A rebounding economy combined with low rates should be supportive for stocks in the year ahead, T.Rowe Price says.
And the Australian investment committee of the global asset manager has tilted its portfolio toward stocks with direct exposure to the domestic economic rebound.
In their March investment note, the T.Rowe Price team analysed the recent tension in markets between the upward pressure on interest rates and underlying economic strength.
Their view is sector-based, in that while higher rates could weigh on some areas of the market, other areas will benefit.
Specifically, “the high-flying technology sector’s extended valuations may become harder to justify amid rising rates”, they said.
That’s arguably been borne out so far by Australia’s own high-flying tech sector — BNPL — where valuations have come off since yields started rising in February.
That being said, Australia’s central bank (as well as the US Fed) been adamant in their communication that rates aren’t going anywhere for the next three years.
“For this reason we are skeptical about the ability for interest rates to derail the recovery,” T.Rowe Price said.
In response, the T.Rowe Price portfolio has tilted towards domestic stocks aligned with the reopening trade, that doesn’t come at the expense of a complete rotation out of growth stocks — the 2020 market darling.
“We also expect growth stocks to continue to do well in a contained yield environment,” T.Rowe Price said.
While that broadly equates to ‘buy everything’, T.Rowe Price repositioned its portfolio by taking profits on ‘defensive growth’ stocks and rotating out of companies with more offshore earnings (due to strength in the Australian dollar).
The AUD is “benefitting from a weaker USD and a rebound in risk appetite”, they said, with “upside potential based on commodity prices”.
Despite jumpy bond yields at the longer end of the curve, markets are still “far from yield levels that have negatively impacted stocks” in the past.
But what is unique is that yields have also never climbed from such a low base, with equity valuations at all-time highs.
So if rates do rise faster than the current forecast (2024), it may prompt a more rapid rotation out of high-growth tech stocks in cyclical sectors, which in turn “could challenge broad markets”.
T.Rowe Price is also leaning towards a view in favour the “commodity super cycle”, as oil prices rise in line with economic activity while the clean energy and electric vehicle thematics drive medium term demand for resources such as copper, platinum, and lithium.
“As inflation expectations continue to rise amid evidence of increasing demand, real assets equities could be poised to outperform broader markets,” the analysts siad.