The Global Catalyst: Fed, China, and M2 Growth
Three key factors are currently converging to create a pontentially new economic environment for investors:
Federal Reserve's Dovish Stance: The Fed has made a dramatic pivot, now "120% committed to growth over inflation." This aggressive dovishness signals a shift from disinflationary growth to inflationary growth. The Fed is projecting 135 basis points of further cuts to December 2025, and another 50 basis points to December 2026, despite a robust economy.
China's Surprise Stimulus: China has unveiled a raft of economic measures targeting the real estate sector, including lower rates, reduced reserve requirements for banks, and direct buying support for the stock market and mortgages.
Accelerating G4 M2 Growth: For only the fourth time in 25 years, we're seeing a marked acceleration in G4 M2 (money supply) growth, indicating that global central banks are prioritizing growth protection.
Key Issues to Watch
Shift to Inflationary Growth: The combination of Fed stimulus, China's surprise measures, and accelerating G4 M2 growth is likely to support "inflationary growth" in the short term. This marks a significant change from the disinflationary growth environment we've seen since September 2022.
Bear Steepener: We're likely to see a steepening yield curve, with the U.S. yield curve turning positive and continuing to steepen. This could boost U.S. lending growth and bank margins.
Commodities Rally: The current environment is particularly bullish for commodities, especially copper and oil in the short term. Historically, copper rallies last until the Fed rate bottoms convincingly or the yield curve hits 150 basis points.
Sector Rotation: We may see outperformance in cyclical sectors and value stocks, potentially at the expense of growth and technology stocks. The S&P 500 (excluding tech) has started outperforming, supported by upgrades to Banks and Health sectors versus Tech and Discretionary sectors.
Inflation Risks: While growth is likely to dominate in the short term, there are enhanced inflation risks for 2025 and beyond. Key factors include services inflation due to labor market demand, high rents from housing undersupply, and the end of goods deflation.
China's Structural Challenges: While China's stimulus is likely bullish in the short term, structural issues in the property sector remain a concern. The effectiveness of lower rates and lending stimulus may be limited in addressing debt deleveraging and weak asset prices.
Valuation Considerations: Many sectors are trading at above-average price-to-earnings ratios, making stock selection crucial. However, some sectors like ASX Resources are trading at relatively cheap valuations compared to their historical average and the broader market.
Investment Implications and Opportunities
Given these developments, these are some current ideas we are considering for portfolios:
Increase Exposure to Resources: Companies exposed to copper, like BHP Group (BHP) and Sandfire Resources (SFR), could benefit from the current environment.
Short-term Energy Trade: Consider adding to energy positions like Santos (STO) and Beach Energy (BPT) as a short-term trade. Maintain core positions in New Hope Corporation (NHC) and Paladin Energy (PDN) for longer-term exposure.
Trim Gold and Insurance: Consider slightly reducing positions in gold stocks like Newmont (NEM) and Northern Star Resources (NST), and trimming overweight positions in insurers like IAG and Suncorp (SUN).
Reduce Exposure to Banks and REITs: These sectors may face headwinds in the current environment. Australian banks, in particular, are trading at historically high valuations.
Be Cautious with Tech: The technology sector may face valuation pressures in an inflationary growth environment.
Look for U.S. Exposure: ASX-listed companies with significant U.S. exposure could benefit from the Fed's growth-supportive stance.
Consider Cyclicals: With the shift to inflationary growth, cyclical sectors could outperform. Look at companies in the materials, energy, and industrial sectors.
Monitor China-exposed Stocks: While being cautious of long-term structural issues, companies with exposure to Chinese consumers or infrastructure could benefit from the short-term stimulus effects.
Conclusion
The global economic landscape is shifting, with major central banks and governments prioritizing growth. This creates a complex but potentially rewarding environment for investors. The shift towards inflationary growth, while bullish for certain sectors in the short term, also brings risks that need careful management.
It's important to note that this outlook is not without risks. The Fed's aggressive stance could lead to inflationary pressures earlier than expected, possibly by early 2025. Moreover, while the short-term outlook for growth is positive, we must remain vigilant about the potential for a "hard landing" scenario, even if its probability has decreased.
Royce Advisory Pty Ltd (ABN 43 622 402 706) is a Corporate Authorised Representative (CAR) of MB Capital Partners Pty Ltd (AFSL 536053). This article, commentary and discussion is general information only and is not intended to provide you with financial advice as it does not consider your investment objectives, financial situation or particular needs. You should consider whether the information is suitable for your circumstances and where uncertain seek further professional advice.
This communication is based on information from sources believed to be reliable at the time of its preparation (October 2024). However, despite our best efforts, no guarantee can be given that all information is accurate, reliable and complete. Any opinions expressed in this email are subject to change without notice and neither Royce Advisory or MB Capital Partners is not under any obligation to notify you with changes or updates to these opinions. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.
Comments