Australia in ‘good place’ in ailing global economy, says David Paradice

The founder of Paradice Investment Management says Australia is ‘in a reasonably good place’ compared to global markets, helped by its weighting to commodities.

Ahead of US inflation data expected to back another big interest rate increase by the Federal Reserve next month, the founder and managing director of Paradice Investment Management says Australia is “in a reasonably good place” compared to global markets, helped by its weighting to commodities.

“There’s been underinvestment in commodities, especially energy, palladium and other particular commodities, and Australia is proving to be a beneficiary of that,” David Paradice says.

“But there are a number of things that benefit Australia compared to the Asian region – in terms of tourism, health care and education – and if Australia continues to focus on that, as well as the commodity side, I think in the long-term Australia’s is a good place to be.”

In his view, the recent downward pressure on the Australian dollar has been driven by global uncertainty pushing up the US dollar, rather than concern about the Australian economy.

An almost 10 per cent fall in the Australian dollar to a 2½-year low of US62.36c offers a potential tailwind for companies with US dollar earnings if it’s sustained this financial year.

In a webinar with Future Generation CEO Caroline Gurney, Paradice says inflation – now running at about 10 per cent in Europe and the UK – is “concerning”, but there are early signs that the impact of supply bottlenecks and reopening demand after the pandemic are easing, with shipping costs falling sharply.

“So we have a view that although there are a lot of people who are very nervous at the moment, that probably says it’s not a bad time to start sniffing around (buying shares).”

Inflation is running at the fastest pace in 40 years due to supply shortages caused by the Ukraine war and China’s Covid-19 lockdowns, and reopening demand in most other parts of the world.

But the situation isn’t as bad as the tech wreck or the GFC.

“It’s not like major economies are broken at the moment,” Paradice says. “We have got this inflation, but in a year’s time – you would hope – that has come back a bit, and you are seeing it happen a bit at the moment as the rate of increase is slowing down.

“Labour shortages aren’t as great as they were during the Covid crisis, and the cost of transport is winding down. Demand for IT workers is going down a bit.

“So there are signs that inflation is not going to keep on going up by 10 per cent year-on-year, and that has ramifications for interest rates and equity markets.”

While the International Monetary Fund downgraded its global growth forecast again this week, and recessions are now expected in the UK, Europe, Japan and possibly the US, Paradice sees a good opportunity for investors to increase their exposure to the sharemarket in the December quarter.

In his view, this is a chance for contrarian investors to take a long-term positive view on shares.

Based on his expectation that inflation will start to fall, with positive implications for the interest rate outlook, he favours cashflow positive growth companies which have suffered a valuation effect from the jump in interest rates rather than a change in their fundamentals.

“You can see their growth, they’re entering new markets, and it’s not like they’re relying on the economy to turn, but those kinds of companies like Amazon – have been marked down quite considerably over the past few months. There are some good things to buy.”

He says a prolonged period of underspending on commodity supply and a structural shift up in demand linked to decarbonisation favoured the resources sector, but stock selection was critical.