By Gus McCubbing
Fund managers are piling into insurers, gold miners and even some more affordable retailers, betting the stocks will be the biggest winners from the Reserve Bank of Australia’s widely expected interest rate rise this week as it battles an inflation problem exacerbated by the Iran war.
Major banks from Westpac to UBS all expect the RBA to raise the cash rate for the third time this year on Tuesday to 4.35 per cent after data last week showed inflation was at 3.5 per cent, well above the central bank’s target. The bond market is pricing in at least two more rate rises by Christmas.
With the RBA the only major central bank outside of Japan to raise interest rates this year, Australia’s sharemarket has significantly lagged its overseas peers. The S&P/ASX 200 Index has eked out just a 0.1 per cent increase this year, versus an almost 6 per cent rally for the S&P 500 Index and massive double-digit returns across Asia.
“What RBA governor Michele Bullock says in the news conference will be highly anticipated as a hint of how many more rate hikes are coming,” said Richard Coppleson, Bell Potter’s director of institutional sales and trading.
“There is a chance that she may be hawkish enough that the market goes from two more rate hikes to three, which will be a shocker for the economy. So I find it near impossible not to be bearish.”
As a result, fund managers are finding safety in the more defensive areas of the sharemarket where companies are less tied to economic growth.
lphinity client portfolio manager Elfreda Jonker said the team recently upped its exposure to Insurance Australia Group, given insurers tend to hold large amounts of money in cash and bonds that generate more income from higher rates.
They’ve also bought more shares in internet group Superloop.
“We have a more cautious outlook for the Australian market against the backdrop of higher inflation, softer growth, and elevated valuations over the last few months,” Jonker said.
“With uncertainty still very elevated, we have been adding to areas with more defensive earnings streams like consumer staples, telecoms and insurance.”
Buying insurance
Datt Capital’s investment chief Emanuel Datt is bullish on life insurer ClearView Wealth, given its fixed income portfolio stood to benefit from the higher rates. He has also tipped mortgage broker Australian Finance Group, which stands to gain from higher refinancing activity as borrowers shop around to try to reduce their debt repayments.
Sharpbridge Funds Management portfolio manager Jarrad Stuart named Suncorp and health insurer Medibank Private as his most bullish bets.
For David Tuckwell, chief investment officer at ETF Shares, his pick of the insurance sector was QBE, given its investment portfolio was worth in the tens of billions. “Even modest increases in bond yields can translate into hundreds of millions of dollars in additional earnings with no extra risk,” he said.
Tuckwell is also bullish on the country’s largest toll road operator, Transurban, which he said was well-placed to gain from a period of higher inflation.
While the company last month reported slowing growth on some of its major motorways due to the soaring price of petrol from the Iran war, Tuckwell said many of Transurban’s roads were still allowed to increase prices annually in line with inflation.
“These steadily rising tolls annoy drivers in Sydney and Melbourne. For shareholders though, it means revenue can keep rising even as living costs increase,” he said.
Fairview Equity Partners portfolio manager Leo Barry said if Australia slumped into stagflation, meaning a period of high inflation and weak growth, then last year’s hottest trade – gold – could be back.
Economists are increasingly warning that a stagflation scenario is becoming a reality. This week, Challenger chief economist Jonathan Kearns said inflation, on current estimates, could stay above target for about six years, while gross domestic product per person was lower than it was in 2022.
Barry is bullish on ASX-listed small-cap gold developer Minerals 260, whose share price popped nearly 10 per cent on Monday on the release of positive drilling results.
“Stagflation is a very good environment for gold miners because you have negative real rates combined with central bank buying,” he said.
He also likes youth apparel retailer Universal Store Holdings, given its customer base is less impacted by higher rates.
‘Pricing power’
Ten Cap founder Jun Bei Liu named the owner of Chemist Warehouse, Sigma Healthcare, as her top pick. “While the consumer is under pressure, selective names with strong brand and pricing power can still perform,” she said.
And Lazard Asset Management portfolio manager Aaron Binsted’s top pick is poker machine developer Aristocrat Leisure. He said US data showed regional gaming spend had held steady while improving in Las Vegas. “This business has a track record of resilience,” Binsted said.
“It has also seen material multiple contraction, seemingly caught up in the AI fears,” he added, referring to the widespread sell-off in companies that investors believed could be disrupted by artificial intelligence.
Wilson Asset Management strategist Damien Boey named property developer Stockland as a sound investment after the shares slumped 30 per cent this year from the prospect of higher borrowing costs.
He said the shares could rebound strongly if inflation was tamed sooner than expected, allowing for a rate-lowering cycle to begin.
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