By Gus McCubbing
The Australian sharemarket is widely expected to rally from the US Federal Reserve’s highly anticipated interest rate cut this week, with fund managers tipping that the heavily beaten-up James Hardie could be among the biggest winners given its exposure to the US housing sector.
High-growth technology stocks, particularly in the smaller end of the sharemarket, are also expected to rally should the world’s most important central bank cut rates for the first time this year on Wednesday (Thursday AEST). Insurers, meanwhile, could be among the biggest losers.
Bond traders have ramped up their rate cut bets after a sharp deterioration in US employment data. At least five rate cuts are priced in over the next year, starting with a 25 basis point rate cut full priced for this week to between 4 per cent and 4.25 per cent,
However, market pundits aren’t convinced that the Fed will cut rates as aggressively as traders have priced in.
Betashares chief economist David Bassanese said he expected the Fed’s so-called “dot plot” of expected policy changes in the coming year to imply just two more rate cuts by the end of next year.
“A rate cut would be good for global equities because it’s effectively the Fed saying to the economy ‘I’ve got your back’,” Bassanese said. He expects Australia’s S&P/ASX 200 Index to reach 9050 by the year-end, having briefly climbed above 9000 for the first time last month.
“The local equity market is likely to be swept along by the risk-on sentiment globally. Our stocks have risen despite patchy earnings performance and a sluggish economy due to optimism about the global outlook.”
Similarly, Schroders head of multi-asset and fixed income Sebastian Mullins said expectations for the Fed to cut rates to 3 per cent by the end of 2026 was “too aggressive” outside the occurrence of a US recession that was unlikely.
He said markets had priced in a more dovish US central bank because of President Donald Trump’s constant pressure on the Fed to lower borrowing costs which risked re-igniting inflation.
“Markets will react positively to rate cuts … but if inflation re-accelerates, this will put upward pressure on longer-dated US treasury bonds, which could put pressure on already expensive US equity multiples,” Mullins said.
“We see rate cuts as positive for risk assets, but with markets across all asset classes priced to perfection, there will likely be a valuation adjustment if and when we see either inflation re-accelerate, or growth confirm a recession.”
Ten Cap portfolio manager Jun Bei Liu said she would be closely watching James Hardie’s share price on Thursday, which collapsed nearly 30 per cent during the earnings season after warning that a housing slowdown had hurt sales in the US.
“Markets right now are in a holding pattern, just waiting for the rate cut,” Liu said. “When they cut, it will support valuations and confidence in the overall market, but the ASX stock most impacted will be James Hardie.”
She said plumbing supply group Reliance Worldwide, whose key markets include the US, Australia and Britain, could also benefit, but warned that the US tech giants could be hit by profit taking as investors rotate into smaller and cheaper tech companies, or home builders.
From small caps to mining giants
Seneca fund manager Ben Richards said small caps should extend their rally given they historically outperform large caps in a rate cutting cycle. He noted the ASX 200 was already up 12.6 per cent in the 12 months versus a 25.1 per cent gain for the Small Ordinaries.
Richards tipped cyber safety and internet monitoring group Qoria, Kiwi transport software business Eroad, mining services provider Emeco, mining tech company Imdex, and Australian Finance Group.
Wilson Asset Management strategist Damien Boey, on the other hand, tipped the ASX resources sector to be among the biggest winners from the Fed’s rate cutting cycle which could increase bond yields because of inflation or because the number of rate cuts falls short of expectations.
“When bond yields rise, both here and abroad, resources tend to do well,” Boey said. “We quite like Rio Tinto and BHP – it’s hard to go past the major miners if you’re going to be overweight resources.”
Atlas Funds Management chief investment officer Hugh Dive, meanwhile, said companies with large amounts of debt, like Ramsay Healthcare or Transurban, could benefit as the cost of debt declines. The losers, he said, could include insurance companies as their earnings could be affected.
Dive also warned that companies with large US operations like consumer packaging group Amcor, or transport and logistics giant Brambles, could be hit by the stronger Australian dollar if the Fed cuts more aggressively than the Reserve Bank.
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