Major Australian fund managers are strongly reducing their exposure to local equities, instead pivoting towards international markets. This shift is primarily driven by concerns over persistent inflation and a challenging housing downturn, which are placing pressure on small-cap stocks. Bell Potter data reveals that only 23 of the 200 stocks on the S&P/ASX Small Ordinaries Index have traded higher in the year to October 1, indicating investor avoidance. Ray David, a portfolio manager at Airlie, confirmed this trend, stating his firm is “underweight the domestic economy – underweight the banks, underweight consumer discretionary,” and prefers exposure to the US economy.
Airlie avoids major supermarkets like Coles and Woolworths, and Wesfarmers. David is also significantly underweight the big banks, forecasting a challenging domestic economic environment with slowing conditions. While he sees potential for a rebound in Seek and SGH, David more favourably views ASX-listed companies with higher US exposure. These include BlueScope Steel, gaming machine manufacturer Aristocrat, hearing device maker ResMed, and CAR. CAR is the company behind Carsales, an online marketplace for vehicles.
This domestic underperformance is stark compared to global markets; the S&P/ASX 200 Index is down 0.2 per cent this year, contrasting with a 12.6 per cent gain for the S&P 500. Limited local tech exposure partly explains this disparity, but domestic factors are paramount. The Reserve Bank of Australia recently raised the official cash rate to 4.6 per cent, pushing borrowing costs to their highest since 2011. Annual inflation accelerated to 4 per cent in August, propelled by rising petrol and building material costs, placing Australia with one of the highest underlying inflation rates. The housing market also faces its steepest downturn in four decades, with Sydney’s median property value falling over $112,000 since February. Bell Potter’s Richard Coppleson warned that investor sentiment would remain poor if excessive government spending, rather than external factors, wasn’t addressed as a key inflation driver.
