Wilson Asset Management

By Matt Bell

A rebound in global economic growth poses an obstacle to potential interest rate cuts, WAM Leaders has warned, saying it could trigger a broader market correction after record gains on equity markets so far this year.

The fund has gone defensive on ASX stocks as households rapidly pull back on spending following rate rises and weakness in China’s economy.

After an 11 per cent rally in the past six months, the ASX 200 was hit last week by reversals on Wall Street and interest rate jitters after a stronger-than-expected US manufacturing survey, higher oil prices and less dovish comments from some Fed officials.

WAM Leaders lead portfolio manager Matthew Haupt said he expected no interest rate cuts this year.

He said Australia was heading in a direction where it could get fewer cuts before the economy “falls in a hole”, sparking emergency rate cuts.

“That’s sort of where we’re leading now,” he told The Australian. “More or less controlled cuts, to a no-cut environment, to emergency cuts is probably the highest probability scenario now.”

He said emergency rate cuts would not be good for the ASX, and that if they were to occur it would be towards the end of 2024.

“Generally emergency cuts are bad for the stockmarket in the short term, but eventually they kick in and the cycle starts over again,” he said.

“Emergency rate cuts will only come in if the labour market fell apart.”

Australia’s unemployment rate fell to 3.7 per cent in February, but the RBA has forecasted it to climb to 4.3 per cent by the end of the year.

Some economists have cautioned in recent months that it could rise to near 5 per cent. Mr Haupt said it was hard to be bullish on domestic equities. He said he was defensive because of a pullback in consumer spending, mortgage pressures and the state of China’s economy.

“The backdrop in Australia is we didn’t raise rates as much, but the impact has been higher given the variable nature of mortgages,” he said.

“Excess savings are gone now. Rents and house prices are higher still, so it’s hard to see a big upside surprise to economic growth in Australia and that’s why we’re a more cautious in Australia, especially the consumer.”

He said that it was a tussle between rate cuts and growth.

Migration had been a positive economic development, but productivity was very poor, he said.

“It’s a bit of a dance between rate cuts and growth, so if we get really strong growth the rate cut argument probably doesn’t matter,” he said.

WAM Leaders has shifted from domestic consumer stocks to utilities and manufacturing companies such as Brambles because of its exposure to the European market, which has shown signs of a rebound.

Mr Haupt said that the pick-up in the global economy could see some of the high price earnings stocks retrace their steps, but added that it would be a very healthy development for equities.

“You’ll get more investment flow back into companies linked to economic growth – those more stable companies rather than the speculative end, which was just off the back of higher P/E and of lower interest rates, so we actually welcome this development,” he said.

With the ASX 200 up 11.5 per cent in the past six months, setting a record high in the past week, Mr Haupt said in the short term the bourse would continue to remain healthy, but there was more uncertainty over the medium to longer term.