Morning Expresso – Australasia

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Morning Expresso – Australasia

Australian Equity Strategy - No rate relief till Nov-27. Staying underweight sectors

exposed to domestic housing/consumer

Some headfakes we don't buy Australasia

Over the past week, the market has breathed a sigh of relief that high oil prices are behind us and that

domestic inflation risks are moderating. We are sceptical on both, and see not only the prospect of

prolonged oil price headwinds remaining, but a domestic inflation picture that still dictates the need for

higher rates from the RBA (our economists expect +25bps in August with rates then on hold until

November 2027). Furthermore, the negative sentiment towards property looks set to remain for the

foreseeable future given the Government has shown no signs of backing down on its taxation policy

changes.

All sectors outside of Resources now seeing earnings downgrades

Outside of Resource equities, all the other sectors in Australia are now in earnings downgrade mode.

Given we expect downgrades to continue over coming months, the ability of equity prices to 'look

through' the cycle may be challenged. The stagflationary signs coming from the domestic economy

combined with the broad-based earnings downgrades in equities are placing Australian equities in an

uncompetitive position. We expect the underperformance they have shown vs global markets over

recent months to continue.

History shows that rate cuts don't always save the day

Although we don't see the RBA cutting until the end of 2027, some others in the market believe that

the bank's next move down will be much sooner. Historically, the reaction of equities to the first rate cut

of the cycle has seen mixed outcomes. This counters the somewhat widely held perception that equities

rally hard into, and through, rate cutting cycles.