Australia poised to be the lucky country again in 2023

Arian Neiron, CEO and Managing Director, VanEck Asia-Pacific said, “Australia on balance, is much better positioned than most countries to manage economic headwinds in 2023. Australia also has abundant natural resources in short supply globally and with borders reopened we expect the return of immigration to offset labour inflation.”

“We favour resources, REITs and consumer staples, are neutral on banks and underweight consumer discretionary. This dynamic bodes well for taking an equally weighted approach to Australian equities.”

“With mortgages being mostly variable we expect a quicker transmission of monetary policy to the economy. We forecast the RBA cash rate to peak at 3.85% with the Australian 10 year yield to remain around the current 4% level, and we may see an inversion of the curve which could support bond proxies like REITs, infrastructure and utilities.”

2022 was a remarkable year. Australian equity and bond markets are both down for the first time since 1994. The poor performance is a function of three major themes; multi-decade high inflation and central bank rate rises, Russian invasion of Ukraine and China’s COVID-zero policy. While almost every major asset class took a sizeable hit last year, Australian equities offered relative defense. Australian equity, as measured by the S&P/ASX 200, was one of the better performing equity markets in 2022.

This performance was largely due to the Q4 resources rally and Australia’s higher ‘value’ exposure relative to other country equity benchmarks. Australian resource stocks rallied over the past few months on China re-opening optimism.

“Chinese President Xi Jinping has cited infrastructure spending as the government’s main lever to rescue economic growth. The Australian resources sector could be a major beneficiary of this investment, as it was during the GFC. The reopening of a country with 1.4 billion residents offers investment opportunities, particularly within Australian sectors that have high revenue exposure to China.”

“We see Australia being the lucky country again in 2023, with Australia likely to avoid recession. Australia has lower headline inflation than the US and many European nations. This means the task of the RBA containing high inflation without triggering a recession, aka ‘hard landing’, will be easier relative to other nations. The majority of Australian mortgages are variable which means cash rate increases immediately impact budgets and corresponding spending. This allows the RBA, if warranted, to pivot and impact the economy faster based on changes in inflation.”

According to the latest VanEck Australian Investor Survey, Australian equities is the preferred investment destination in 2023 with 70% of investors planning to start or increase their allocation. One in two investors indicated ETFs are their preferred investment product, while 57% plan to start or increase their allocation to ETFs in 2023.

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