Australia well placed for developed market outperformance

Australia is well placed to outperform most developed markets this year and the next given strong economic momentum, the nation’s position as a commodity exporter, lower inflation pressures and a more accommodative central bank.

Speaking at an Institute of Managed Account Professionals (IMAP) webinar, Morgan Stanley executive director, asset allocation strategist, Alexandre Ventelon, said the investment bank was forecasting Australia’s gross domestic product to grow 4.5% this calendar year and 3.5% next year.

Meanwhile, there could be three rate hikes from the Reserve Bank of Australia which would see interest rates end the year at 1.75%.

Morgan Stanley had downgraded its growth forecasts across most regions on the back of inflation concerns and the war in Ukraine but still expected above trend growth globally of 4.4% this year and 3.8% next year.

“We do not forecast a recession neither this year, nor the next, although there are headwinds to growth especially in the first quarter of this year where the policy is fading and we are still expecting a CapEx cycle to take over from the fiscal stimulus,” Ventelon said.

Looking at the US, Ventelon said the firm saw US 12-month Personal Consumption Expenditure (PCE) inflation to hit 3.4% in Q4 2022, meaning even if inflation fell throughout 2022, a return to ‘normal’ with inflation around the 2% mark would be a 2023 story.

Back home, Ventelon said Australia was witnessing an acceleration in inflation, with Morgan Stanley forecasting core inflation to hit 3.6% year on year for the last quarter of 2022. But he expected Australian inflation to normalise into 2023 towards the top of the Reserve Bank of Australia (RBA) target.

Ventelon said key central banks would start reversing their lowest-ever policy rates and their largest-ever balance sheets with the US expected to deliver a total of 150 basis points of tightening in 2022 and an additional 100bps in 2023.

“Interestingly enough, the markets are of the belief that in 2024 the Fed will have to reverse course because the tightening will have been a bit too strong, by then there will have been a deterioration in demand leading into a contraction in economic activity and the Fed will have to cut price,” Ventelon said.

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