By David Rogers
Don’t let the Santa rally in stocks distract from the fact that the nation’s monetary policy outlook is now diverging significantly from that of the US.
That will make it difficult for the local market to match any year-end rise in US stocks. Perhaps more importantly, it will crimp the earnings outlook for domestic-facing companies.
For Wilson Asset Management lead portfolio manager Matthew Haupt, this hawkish divergence in Australia’s monetary outlook combined with elevated valuations in Australia’s banking sector and a positive outlook for global growth means investors should focus on resources.
After falling as much as 8 per cent from a record high of 9115.2 points in October, Australia’s ASX 200 index broke a four week losing streak last week, rising 2.3 per cent. That was primarily from riding a 3.2 per cent rise in the US S&P 500 as Federal Reserve officials strongly hinted at a December interest rate cut.
The economic news from Australia was actually quite negative for the local sharemarket.
CPI data for November showed Australia’s underlying inflation rate hit a 13-month high of 3.3 per cent, which was well above the Reserve Bank’s 2 to 3 per cent target band.
Expectations of further rate cuts evaporated as economists predicted a rate rise as soon as the December quarter of 2026. One gets the feeling they were being conservative.
By the end of the week, money market pricing implied the possibility of rate increases starting by June 2026.
The difference, or spread, between Australia and US 10-year bond rates has gone from zero to about 53 basis points in the past three months, which is another reason to back the Australian dollar and be cautious about stocks exposed negatively to a higher exchange rate.
At the same time, there could be some major stimulus coming from China.
Haupt’s recent trip to China reinforced his view that China was ready to embrace the private sector, run higher fiscal deficits, promote the domestic bond market, swap local for central government debt and catch up to the US on artificial intelligence over the next five years.
“So there will be a huge amount of investment in AI infrastructure,” he says. “What I did off the back of this trip is I bought a whole lot of aluminium stocks, because aluminium looks pretty good. So we got Alcoa. Coal looks good, so we bought Whitehaven.
“We did a lot of work on steel, so Fortescue, BHP, Rio Tinto – all positive on those names as well.
“Resources have done pretty well but we still think they look pretty good for 2026.”
At the same time, Haupt is bearish on Australian banks. Banks have certainly dominated for the past two years. The ASX 200 Banks index rose about 70 per cent versus about 17 per cent for the materials sector until the market’s record high last month.
But with Commonwealth Bank down about 20 per cent from its June peak and the outlook for monetary policy flipped from easing to tightening, the sky-high bank share price valuations of the past two years may be starting to normalise.
“The reason why banks and a whole lot of our (major) stocks went crazy was a lot of offshore money was hitting the ASX and also our debt capital markets; basically China was seen as uninvestible,” Haupt tells The Australian.
“What we’re seeing now is China’s getting better and capital is flying back. Capital is flying out of Australia, so some of those crazy valuations that we saw are in reverse.”
WAM follows commodity trade advisers’ positioning which indicates capital is exiting Australia at a decent clip. “So some of those silly valuations we saw, particularly in CBA and the rest of the banking sector and Wesfarmers, are in reverse now and we expect that to continue.”
After China started cracking down on its private sector from late 2020 and the global tech sell-off hit the Chinese stock market hard in 2022, regional asset allocators are thought to have piled into Australian banks to replace the Chinese stocks that were being kicked out of the MSCI regional benchmark index.
“That was definitely happening,” Haupt says. “It was a flow of money and we saw it again after the ‘Liberation Day’ tariffs in the US.
“Everyone was saying, ‘US exceptionalism is over’. Australian stocks got another leg post that. But it was happening before that because of people’s views on China. Everyone we talked to in the US was like, ‘I can’t invest in China’.”
Australia’s major banks were the world’s natural parking spot, while resources companies were seen as just another play on China.
And CBA was the standout because of its liquidity, dividends and earnings growth.
“The funnel was very narrow for a handful of stocks and that’s why we saw such crazy valuations,” Haupt says.
The upshot is that with domestic interest rates potentially rising within six months, investors should be wary of loading up on banking stocks simply because the sector has fallen 10 per cent, enough to justify a correction, and CBA has fallen 20 per cent, a bear market.
Valuations in the sector continue to be stretched, Haupt says.
“We’ve got the conditions in place for stronger global economic growth, which should see a further flow to diversify out of some of these crowded positions.”
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