Analysts may have misinterpreted leading market trends, resulting in an overly optimistic outlook for the Australian share market, according to a boutique equities management firm.
Touchstone Asset Management portfolio specialist Ron Sargeant believes forecasts have overlooked the recent trend of stock downgrades and suggested pressure on consumer and corporate spending will likely cast a shadow over market performance between late 2023 and early 2024.
“Despite the large number of downgrades we have seen in recent months, we believe consensus earnings for the market are still at least 5 to 10 per cent too high, with the issue particularly notable in forecast margins for industrial companies,” Sargeant noted.
“Some of the more discretionary areas of household spending, like entertainment, recreation, eating out and international travel, have been resilient, but we expect they will start to weaken in the second half of this year.
“Corporate costs, such as wages, energy and rent, typically come through to corporate earnings with a lag and we expect to see the impact of these higher costs start to pressure margins in the short term.”
He referenced Morgan Stanley data that revealed the average age of consensus forecasts for consumer stocks is around 50 days and at least 45 stock predictions had remained stagnant for an extended span of 80 to 90 days, thereby failing to accurately capture the present market reality.
For a more accurate picture of where the market is heading, investors should turn to external market forces, such as the rate of consumer spending, which he foresees weakening in the immediate future.
“This is due to the high proportion of fixed-rate mortgages meaning that households, on average, are still only paying a mortgage rate of around 4.9 per cent. So there is still another 2 per cent of increase to flow through,” he predicted.
“Even with increasing cost-of-living pressures, consumer spending has been relatively resilient to date as consumers not only feel secure in their jobs, but are also enjoying large pay rises. However, all bets are off if unemployment starts to increase rapidly.
“Wages growth should also peak in early 2024. However, there is a risk that wage rises may be stickier than expected due to Australia’s rigid wage setting mechanism and that unemployment rises more rapidly than forecast.
“Businesses will also be facing challenging conditions as costs increase and the pressure on households will likely broaden out to other sectors, such as the banks.”
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