By Alice Uribe

Markets worldwide have rallied in anticipation of multiple interest rate cuts through 2024, but one Wilson Asset Management fund has taken a more defensive stance, thinking some traders have run too hard on the theme of looser monetary policy.

Matthew Haupt, lead portfolio manager of WAM Leaders Fund, said investors may have overestimated how quickly rates will come down, particularly in the U.S.

“The speed of rate cuts in the forward curve is probably a little bit too aggressive now,” he said in an interview. “I would have thought there’d be some easing or pulling back of cut expectations.”

Market watchers had expected 2023 to be a pallid year for stocks, given the U.S. Federal Reserve has raised rates at the fastest pace since the 1980s. But signals from the Fed that it would move to cutting interest rates, rather than raising them, sparked a rally in equities toward the end of the year.

Officials have since tried to squelch speculation of a March cut, but futures markets in the U.S. show that traders still expect that cuts are likely to start then. Minutes from the Fed’s December meeting suggested hikes are over, but offered no timetable on cuts.

“Maybe the first one is pushed out, and we probably won’t get as many as implied by the market at the moment,” Haupt said of U.S. rate cuts.

The Fed isn’t alone in turning more dovish. The European Central Bank in December cut its inflation forecasts for 2024, a sign it expects price growth to be tamed soon, and said it would accelerate its exit from a pandemic stimulus program.

The shift is increasingly making an outlier of the Reserve Bank of Australia, which in the minutes of its December meeting continued to send hawkish signals to money markets, keeping the door open to a further increase in the official cash rate next year if its concerns about rising services inflation and strong domestic demand aren’t alleviated.

Haupt said WAM Leaders Fund, which manages around 1.7 billion Australian dollars (US$1.14 billion) and invests in stocks listed on Australia’s benchmark S&P/ASX 200 index, was positioned for some rate cuts. But the fund has adopted a defensive posture, rather than going for higher-risk stocks.

“If we do go into a rate cut environment, they should rebound quite nicely,” Haupt said of stocks that appear to be deeply discounted.

Gold has been a big play for the highly active Leaders Fund, which is different from traditional buy and hold funds because it manages positions on a daily basis. Gold prices hit a record high of $2,081.90 a troy ounce on Dec. 27.

Haupt also likes real-estate investment trusts and utilities.

Among stocks, the Leaders Fund is looking at those which are trading at decade lows and appear to have been oversold, Haupt said. They include property group Mirvac, Star Entertainment, Treasury Wine Estates and Challenger.

The fund is underweight on banks and insurers, and leery of consumer stocks that sell discretionary products. Consumer discretionary stocks on the ASX 200 rose almost 19% in 2023, as household spending held up despite a rising cost of living and higher interest rates.

Haupt said household budgets have been supported by stimulus money offered by Australia’s government during the pandemic. But this tailwind has lessened sharply, and Haupt thinks consumer discretionary stocks could give back some of their 2023 gains even as interest rate cuts look likely.

“In a normal cycle, consumer discretionary starts to do okay during the middle of a rate cut cycle, not at the start,” he said. “I would have thought the first half of next year is quite hard for consumer discretionary.”

Licensed by Copyright Agency. You must not copy this work without permission.