Aussie investors cannot be saved by “tyranny of distance”

Oksana Patron

3 March 2023

Australian investors might want to reconsider their stance on local equities in a move to minimise exposure to companies which might be more affected by global recession at times when market is expected to correct further and Australia will not remain immune, US value-based asset manager Ariel Investments said.

New York-based, Ariel’s chief investment officer and portfolio manager, Rupal Bhansali, warned that the worst was not over yet and many investors overlooked an important regime change of the US Federal Reserve of Quantitative Easing (QE) turning into Quantitative Tightening (QT) and remained instead focused on rate changes.

“Make no mistake: the Fed lost the battle, so it is determined to win the war on inflation,” Bhansali said.

“The Fed is likely to keep rates higher for longer even if this entails inducing a recession. As markets wake up to this reality, both earnings expectations and valuation multiples are likely to deflate, which could result in double-digit corrections in major indices worldwide.”

At the same, Ariel’s CIO warned that “the tyranny of distance” was unlikely to insulate Aussie markets from the trifecta of risks emerging from the US which were: a rise in rates, an increase in risk premiums and a recession.

“Many Australian equity market darlings are in cyclical sectors such as commodities and real estate, which are more vulnerable to these risks. We are finding more compelling investment opportunities elsewhere in the world and have no exposure to Australian markets in our global strategies,” she added.

While the US market was still the most expensive in the world, Bhansali said global investors should turn their attention to markets where equities came with higher dividends yields, such as Europe and Brazil, as a dividends were expected to help cushion the blow of market selloffs.

“In fact, this thesis is already playing out as the local European market outperformed the U.S. market in 2022, but people did not notice because the euro depreciated in dollar terms so headline performance appeared weaker. Brazil was one of the rare markets in the world to go up in 2022 and enjoy a strengthening of the Real to the U.S. Dollar, allowing foreign investors to generate even stronger dollarized returns,” she said.

As far as sectors were concerned, Bhansali said she preferred big pharma with established products in the market, as they offer steady growth prospects at reasonable valuations.

“Healthcare is the new Consumer Staple as aging societies create inexorable and inelastic demand. There is also a lot of innovation occurring in the sector which can prove beneficial to society at large,” she concluded.