The Head of Australian Equities at T. Rowe Price, Randal Jenneke, forecasts globally exposed cyclical stocks to perform well in contrast to “expensive defensives” - sectors including consumer staples, telecoms, infrastructure and real estate investment trusts - which “might struggle in 2018”.
“The good news for the Australian economy is that the mining sector is expected to make a positive contribution to growth,” Jenneke says in an outlook for Australian equities.
“Stronger commodity prices and a recovery in capital expenditure are driving this sector improvement.
“Rising demand for higher-quality, ‘cleaner’ commodities, of which Australia is a leading producer, is also a key influence,” he says.
Valuation levels of Australian companies “do not appear particularly stretched” at the moment, which he describes as “encouraging”.
Inflation and housing
The main risk to any positive outlook, however, would be if global inflation started to build rapidly, “causing interest rates to rise at a faster-than-anticipated pace”.
Jenneke says the maturity of the current housing market cycle “could also leave the Australian economy vulnerable to a slowdown during 2018”.
“It appears that we have reached a peak level in housing construction in Australia and we see this slowing trend gathering pace into 2018. Housing prices also appear to be falling from their highs, and the knock-on effect of this will be a negative for consumption in our view.”
Jenneke says the impact might not be dramatic, “but the fact remains that the housing market has been a key source of growth and, indeed, confidence for Australians in recent years”.
More broadly, the Head of Multi-Asset Solutions APAC at T. Rowe Price, Thomas Poullaouec, says equity returns in 2018 are likely to be driven by earnings growth.
“Further earnings upside for equities could come in the form of potential major US tax cuts, or growth in Europe and Japan,” Poullaouec says.
“However, potential risks to equities could include a rise in geopolitical or trade tensions, or central bank policy missteps as interest rates and inflation both appear poised to rise from current low levels.”