By Tom Richardson
Equity investors should be preparing for interest rate cuts in 2024 as central banks respond to an economic slowdown and rising unemployment, said Wilson Asset Management’s portfolio manager Matthew Haupt.
The lead portfolio manager for Wilson’s Leaders Fund said the US Federal Reserve was likely to cut interest rates by the second quarter of 2024, with the Reserve Bank of Australia to follow towards the end of next year.
Even so, Mr Haupt said it was too soon to pile into interest rate-sensitive or consumer-facing stocks that traditionally benefit from an easing cycle as the dominant narrative in 2024 would be heavy job losses and a soft economy.
Data on Thursday showed Australia’s unemployment rate rose from 3.7 per cent to 3.8 per cent in October.
“The way you position now is buy high quality, and don’t go up the risk curve,” he said. “Target companies that benefit from interest rate cuts, but with revenues not too exposed to the consumer. So, healthcare is one area; CSL, Ramsay, Sonic, Cochlear we like.
“Utilities is another area, although a lot have been taken private, there’s Telstra, Transurban, APA Group.”
New economic cycle
Earlier this week, US traders raced to fully price a 25 basis point rate cut from the Federal Reserve by June, with 70 basis points of easing priced in for 2024, after data showed US inflation fell to 3.2 per cent, from 3.7 per cent, in the 12 months to October 31.
Mr Haupt argued that the markets in the US and Australia may still be underestimating the timing and pace of rate cuts as a new economic cycle emerges.
“I think we’ve moved past fighting inflation,” he said. “The [economic] slowdown will accelerate over the next few quarters – that’s the cycle now – and it’s going to get worse over the next 12 months.”
US retail giant Target added to evidence of a near record-breaking consumer slowdown on Wednesday after reporting same-store sales for the September quarter fell by 4.9 per cent. The drop was the second-largest since 2009 and trails only the 5.4 per cent same-store sales fall in the prior quarter.
“You don’t want high fixed input and labour cost bases in companies in a falling revenue environment,” said Mr Haupt.
“Ultimately, interest rate cuts will be positive for the equity market, but it’s a case of how you transition. During the actual cuts you could look at more traditional beneficiaries like housing, financials, but for now, you’ve got to go with a defensive, high-quality mindset.”
In Australia, other investors are already betting rate cuts will fuel a better year for the S&P/ASX 200 real estate sector in 2024. In the past month, the stocks have climbed 13.1 per cent.
However, the fastest pace of interest rate increases in a generation has still seen the sector slump 18.9 per cent over the past two years.