Market May Be Too Optimistic on Fed Rate-Cut Outlook

That is the view of Catriona Burns, the lead portfolio manager of a listed investment company run by Wilson Asset Management. Burns thinks the market may be getting ahead of itself by pricing in as many as six rate cuts in the U.S.

“If the expectations are for ‘too many,’ then that’s going to be a headwind to equity markets as they come back out,” said Burns, from WAM Global, which is one of WAM’s eight listed LIC’s.

“We’re probably a little cautious banking that you will get that many cuts into 2024.”

Global markets were under pressure for the earlier part of 2023, rallying toward the end on the expectation of rate cuts. But when and how large these reductions will be remain unclear. The U.S. Federal Reserve last month left its target at a range equating to a 23-year high, but is likely to start lowering this in the next several months. Interest rate futures now imply a May start for rate cuts.

In Australia, the Reserve Bank of Australia has moved to a more neutral stance on interest rates, but hasn’t ruled out the prospect of a further rate increase if inflation remains sticky.

For Burns, inflation numbers look to be trending the “right way,” with economies looking “pretty resilient.”

WAM Global, which has around 800 million Australian dollars (US$519 million) in funds under management, has outperformed despite a volatile 2023. The LIC’s investment portfolio beat the market in the six months to end-December, increasing 5.8%, while the MSCI World Index (Australian dollars) was up 4.9%.

Through 2023, the LIC liked investments into small- and midcap companies across the global including the U.S., Germany, Australia and Japan, and firms which it sees are “navigating an uncertain operating environment well.”

Companies that WAM Global called out as contributing to its investment portfolio to the recent outperformance were tax software provider Intuit and fixed income trading platform provider Tradeweb, both of which benefited from the “artificial intelligence thematic,” Burns said.

While large-caps “Magnificent Seven” companies like Microsoft and Nvidia were headline grabbers, Burns sees that there were a range of businesses that had been beneficiaries of AI making for good investments.

“There were a lot of other companies that are using generative AI within their businesses or that have really unique data sets that are crucial to making generative AI models,” she said.

According to Burns, German software maker SAP, a top five holding for WAM Global, often viewed as a more traditional IT business, had done a good job of integrating AI. WAM Global sees ongoing opportunities in technology, defense, healthcare and information services sectors into the future.

“From a markets perspective…we’re really excited because of the opportunities we see,” Burns said.

“It has been a very concentrated market in terms of returns, but we think that’s thrown up lots of opportunities, beyond those…those few names.”