By Grace Lagan
Investors’ expectations for global growth plummeted in April by the most in four years due to the Iran war, with local fund managers warning that a downturn could be even more pronounced in Australia.
The latest Bank of America fund manager survey showed the outlook for the global economy had dropped by the most since Russia’s invasion of Ukraine in 2022, while expectations for higher inflation had jumped to the highest level since the depths of the pandemic.
More than two-thirds of investors in the survey, who oversee a combined $US5111 billion in assets, are now bracing for stagflation to hit the global economy in the next 12 months. That’s up from 51 per cent a month ago.
Matthew Haupt, a lead portfolio manager at Wilson Asset Management, said a downgrade to economic growth was “definitely” on the cards. While he said the global economy could bounce back if the conflict was resolved relatively quickly, any rebound would be “a bit tougher” in Australia
“It feels like we’ve worn [the Iran war] a bit more than other countries as far as sentiment goes, but I think our spending hasn’t deteriorated too much,” Haupt said.
“If we can come out of it relatively quickly, we should have reasonable levels of growth, but just not the same levels we had before the conflict.”
The bearish investor outlook echoes that of the International Monetary Fund, which warned this week that a prolonged closure of the Strait of Hormuz – through which about a fifth of the world’s energy supply is shipped – could plunge the global economy into its third recession this century.
The six-week war has already wreaked havoc on investor portfolios, with the closure of the strait – first by Iran, and now by the US – pushing up the prices of everything from fuel to fertiliser. Strategists have warned that a stagflation episode, when inflation rises as growth falls, could cause equities to slide by as much as 30 per cent.
David Allen, head of long-short strategies at Plato Asset Management, said the plunge in global investor sentiment in the April survey to a reading of 3.7 from 5.6 in March was particularly notable.
“This is one of the sharpest monthly drops in the survey’s 25-year history,” Allen said. “Plato analysis shows that drops of this magnitude historically have preceded meaningful market corrections.
“While we always stay fully invested, believing that time in the market beats timing the market, there is short-term risk to the downside,” he warned.
The deteriorating economic environment has already prompted local portfolio managers, including Blackwattle long-short deputy portfolio manager Elan Miller, to reposition their holdings.
“We think the consumer is really at risk,” Miller warned. “Especially the mortgage belt as they get squeezed from both fuel prices and interest rates, and therefore we are cautious on the discretionary consumer names.”
The money manager has tilted the portfolio towards defensive stocks that are less tied to the economy, investing more in healthcare and lottery providers. He’s also added Ampol to the portfolio, which has benefited from a spike in oil refining margins.
“We view the refining assets as exceptionally critical, and we forecast that Ampol will potentially do a deal with the government to underwrite these assets in some form,” he said.
Meanwhile, Haupt said WAM had made “a little bit of a contrarian play” by investing in real estate investment trusts, on the basis that a short-term conflict in the Middle East would prompt a moderation in interest rates.
That’s after the Reserve Bank of Australia raised interest rates twice this year, with the market pricing in at least one more increase by Christmas.
Haupt said WAM had also spotted an opportunity in miners Lynas Rare Earths and Iluka Resources.
“The US cruise missile stockpiles, the air defences, the radars in the Middle East will have to be rebuilt,” Haupt said.
“They use up a lot of rare earths, and there’s also a security angle around getting supply ex-China,” he said. “So companies like that are going to be beneficiaries as the world – as sad as it is – rebuilds their weapons stockpiles.”
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