RBA rate cuts to send stocks ‘meaningfully higher’, says Ten Cap’s Jun Bei Liu
Fund manager Jun Bei Liu says dropping interest rates will help boost the sharemarket this year, with sectors such as property and consumer stocks to benefit.
Falling interest rates will help boost the sharemarket this year, with sectors such as property and consumer stocks including retailers JB Hi-Fi and Harvey Norman expected to benefit, fund manager Jun Bei Liu predicts.
Speaking at the launch of her new long-short hedge fund, Ten Cap, on Wednesday, Ms Liu said the Australian market would be “meaningfully higher” by the end of the year on the back of lower interest rates, improving business and consumer confidence, cyclical improvements and record levels of liquidity.
Ms Liu said she was expecting the Reserve Bank to cut interest rates at its February meeting on the back of easing worries about the outlook for inflation.
She said interest rates would be down by 75-100 basis points by the end of the year.
“We started 2024 bullish and maintained our view throughout the year,” Ms Liu said.
“As we head into 2025, we see no reason to adjust this view and are happy to be on the bullish side of a more moderate consensus outlook.
“In Australia, the RBA has not even started to reduce policy rates, and this tailwind can be expected to gather momentum early into 2025.
“The global business cycle continues to expand, policy rates are expected to fall further, and inflation is no longer a concern. Even if inflation doesn’t moderate much further, it should easily sit within key central bank ranges by the first half of the year.”
Ms Liu said there was too much focus on the debate about exactly when interest rates would come down rather than the fact that the trend in rates was down, which would boost sectors such as property and consumer-focused companies.
“We have had a consumer recession and a per capita recession for a very long time,” she said.
“The outlook for consumer spending is still very patchy, but the interest rate cut will continue to drive the price of some companies higher.”
She said this included JB Hi-Fi, and other retailers such as Harvey Norman and Temple & Webster.
Meanwhile, there were signs that the Sydney commercial property market had bottomed with some well-priced stocks in the property market, including Goodman Group.
She said there were also signs that the Chinese economy was not as weak as had been expected last year, which would help the price of some Australian resource companies such as Fortescue.
“The commodity sector is somewhere near the bottom. We are already seeing commodity prices moving a bit,” she said.
Ms Liu said she expected that company profits had “hit bottom” in the last six months of 2024, with an upturn expected this year.
“As the domestic economy picks up and as rates fall, we expect better performance from cyclical areas and/or those exposed to an improving global backdrop who can also benefit from a weaker Australian dollar,” she said. “The consensus appears reluctant to consider yesterday’s cyclical laggards, but we think this is where the stock-specific opportunities lie.”
She said it was normal for sharemarkets to have two 5 per cent corrections each year and a 10 per cent correction every 18 months. But lower interest rates would give the smaller and mid-cap end of the market a boost.
“We think falling risk aversion will support out-of-favour areas within value, such as energy and materials, as well as rate-sensitive areas, such as selected property and laggard consumer plays,” she said. “A steepening yield curve alongside rising capital market activity will benefit some diversified financials.”
Ms Liu is founding Ten Cap with former Macquarie Group executive Jason Todd. Their new fund will start operating from next week, with an initial seed capital of $1.5bn.
Mr Todd said that, while global economic growth was “bouncing around historic lows, the trajectory is firmly higher”.
He said the fact that growth was “in the early stages of a recovery (was) enough to raise the confidence of investors”.
“Off the back of enormous levels of excess liquidity in the system, and easier financial conditions, we think equities will have another strong year as earnings growth begins to pick up and revision momentum improves,” Mr Todd said.
He said there was too much concern in sharemarkets about share price valuations, with analysts arguing that this was a “constraint to further gains”.
“Elevated valuations are more a stock-specific story than a market story,” he said.
“Falling rates, improving earnings and rising animal spirits are positive tailwinds and these should be sufficient to offset political volatility and uncertainty around China’s outlook.”
Mr Todd said concerns that the sharemarket was a “bubble” waiting to burst was “misplaced.”
“The equity market is not cheap, but neither are valuations at self-correcting levels,” he said.
“For every sector that appears expensive – such as tech and financials – there are large market cap-weighted sectors that are trading at discounts, including energy, materials, utilities and staples. In addition, the global policy rate cut cycle is not complete and, while expectations have moderated for the US, we do expect further easing to take place.
“We expect the US to underpin the global growth outlook supported by China which is now doing more to backstop its economy,” he said.
“Optimism in the US – as a result of the US presidential election – together with record levels of cash are underappreciated supports for equity markets. This will provide a floor for any technically driven selldowns.”
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