In a macro context, we see many similarities between 2019 and our outlook for 2023, although with some key differences. Given these parallels, we believe using parts of 2019 as a potential playbook for our equity strategy in the current year is appropriate.
| Our Macro View 2023 | 2019 Events |
| Slowing economic growth. | Global growth and PMIs slowed over the course of 2019. |
| Close to the end of rate hikes. | In 2019 the US Fed started to cut rates after a period of hiking in 2018. |
| Bond yields continuing to trend lower. | AU and US 10 year bond yields fell in 2019 as the Fed and RBA cut rates. |
Source: Refinitiv, Wilsons.
Similarities to 2019
Growth concerns followed by a slowdown
In 2018, equities had a weak end due to concerns about the global economy. While the reasons for global growth concerns differ, they remain persistent factors driving equity markets in 2022 and 2023.
The global economy slowed in 2019, but no downturn eventuated. In a similar vein, our base case remains that the US and domestic economy can avoid a recession, but a slowdown appears likely.
Central banks cutting?
The US Fed and RBA cut rates in 2019 after economic growth slowed.
While the motives for cuts this year will be different, the market is now pricing cuts to the Fed and RBA after a fall in confidence in the global banking system.
In comparison to genuine "crisis" periods such as the COVID dislocation of 2020 and the GFC, our analysis suggests most market stress indicators are still a long way from "extreme" levels. Therefore, while cutting in the latter part of this year or next year seems likely, we don't think it will be due to a sharp downturn like during the pandemic or the GFC.
We currently view the market as too aggressive with its cutting profile. However, we believe some easing later in 2023 (for the Fed) and late 2023 or early 2024 (for the RBA) is plausible.
Bond yields have scope to fall further
Bonds tend to preempt falls in the Fed funds rate and RBA cash rate, but cutting rates typically leads to further declines in bond yields. This was the case in 2019, and 2023 may be similar.
What Sectors Performed in 2019
In 2019 the best sectors were:
- Non-cyclical growth – Tech and healthcare performed well as bond yields fell.
- Cyclical growth – Media, consumer discretionary and financial services performed well as bond yields fell and the economic outlook improved.
- Materials performed well as China-US relations concerns faded. Gold also performed well after the Fed pivoted and heightened uncertainty.
Banks had a tough 2019, with slower economic growth, lower interest rates and some idiosyncratic issues (the Royal Commission's fallout still impacting sentiment).
Positioning Towards Growth, With a Preference to Non-Cyclical Growth
One of our key portfolio overweights is to growth, with a preference for non-cyclical growth such as healthcare, tech and stocks like IDP Education (IEL) and Lotteries Corporation (TLC). We see these stocks, like in 2019, to be key beneficiaries of lower rates/bond yields and a slowdown in economic growth.
Cyclical growth stocks should also benefit from a valuation perspective and an improving outlook on certain aspects of the economy if rates fall.
Nine Entertainment (NEC) should benefit from lower rates and improving housing market sentiment owing to its 60% ownership of online housing classified Domain (DHG). Macquarie (MQG) and James Hardie (JHX) will likely rerate when rates fall, while earnings prospects would improve on investment banking and US housing respectively.
There Are Some Differences
- Rates hikes in 2022 were more extreme than Fed hikes in 2018.
- The RBA did not tighten in 2018.
- Inflation backdrop is very different relative to 2018/19.
- Even after cuts, rates will likely remain high relative to the lows in 2019.
- Persistent inflation is still a risk to the rate cut scenario.
- Tail risk event probabilities are heightened in 2023 vs 2019 due to the fast pace of monetary tightening.
- China reopening in 2023 could be a key support for global GDP.
In Light of These Differences, How Are We Safeguarded?
Recession risk mitigation
We hold stocks in the portfolio that should provide downside protection if the worst was to happen. Although our preference is for defensive growth stocks, these should provide a shield against a worsening outlook.
Persistent inflation risk
We believe the best defence against persistent cost inflation is pricing power. High quality companies with resilient customer demand through the cycle and dominant market positions operating in attractive industry structures are best placed to protect their margins by raising prices.
China reopening
We have increased our exposure to the China reopening by adding IDP Education (IEL) at the beginning of the month, with Chinese students providing a tailwind for earnings growth over the next 12 months. We also hold Goodman Group (GMG) and Qantas (QAN), who should benefit from the increased economic activity in China and domestically.
Healthcare Stocks Cover a Number of Scenarios
We think healthcare gives us protection in many different scenarios, hence it is our biggest overweight in the portfolio.
We think the sector performs well if:
- Bond yields continue to fall (which should happen in a slowdown or a recession) – supporting valuations.
- Economy slows or goes into a recession – earnings should hold up in this scenario (fewer downgrades than cyclicals).
- Pricing power protects against inflation (if more persistent than expected).
Our key healthcare names are CSL (CSL), ResMed (RMD) and Telix (TLX).
Written by
Rob Crookston, Equity Strategist
Rob is an experienced research analyst with a background in both equity strategy and macroeconomics. He has a strong knowledge of equity strategy, asset allocation, and financial and econometric modelling.
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