Morningstar’s Matt Watcher says the RBA will be the first central bank to cut interest rates

The central bank has already raised interest rates by 3 percentage points from May 2022 to 3.1% to curb inflation.

Mr Wacher believes the RBA does not need to raise interest rates further because consumers, especially mortgage holders, have yet to feel the full impact of the fastest tightening of monetary policy in a generation.

And that’s before what’s often referred to as the “mortgage cliff” – where around $500 billion worth of fixed-rate mortgages will expire by Easter and move to a more expensive variable-rate loan structure.

This will deal another blow to household finances and is why Morningstar believes the RBA could be the first among its peers to begin an easing cycle.

“I’m sure the RBA would like to keep interest rates higher for longer, but that could put significant pressure on the economy here, more than in other regions, given the levels of personal debt,” said Mr n Wacher.

He expects to see the first rate cut from the RBA later this year – earlier than financial markets forecast for Easter 2024.

Amid a sharply slower economy, Morningstar favors Australian government bonds over international government bonds and favors maturities over seven years.

Foreign appeal

In terms of equities, Morningstar is slightly underweight Australian equities because they have become expensive relative to their international peers.

The benchmark SandThe P/ASX 200 climbed to a nine-month high last week, putting it within reach of a record high.

Morningstar, which has $US239 billion ($336 billion) under advice and management globally, likes emerging markets and in particular Chinese technology stocks such as Ali Baba.

It also benefits companies in Brazil and South Korea because they are offering attractive prices after last year’s sell-offs.

Morningstar owns major US banks, such as Citi and Wells Fargo, and European financial companies such as BNP Paribas, Banco Santander, Lloyds, Barclays, ING, Swiss Re and Julias Baer.

Mr. Wacher is convinced that their value “has room to grow” and their balance sheets are as good as they’ve ever been.

In Australia’s financial sector, the fund manager is positive on Westpac and ANZ, rather than Commonwealth Bank, which is seen as too expensive.

Mr Wacher is underweight the materials as prices at major integrated miners are “stretching” despite possible strong demand from China as the Asian giant reopens its economy. He prefers Brazilian miners.

He is also cautious about Australia’s resources sector because of international competition and downplays the belief that Chinese and Indian demand for Australian iron ore, copper and other materials will be strong.

Instead, he favors gold mining companies such as Newcrest Mining and logistics company Brambles because of its exceptionally strong balance sheet and consistently stable cash flows.

As for the local tech sector, he says stocks aren’t cheap, despite falling sharply, and are “perfectly priced.” Instead, Morningstar increased its holdings in the US communications services sector, specifically Google parent Alphabet and Facebook owner Meta.

“All Way Bet”

Mr Wacher believes the RBA could push the economy into recession as consumers tighten their belts sharply due to higher borrowing costs and lower purchasing power.

Already, the fund manager has seen evidence of companies looking at their balance sheets in an environment where inflation is expected to fall but is unlikely to return to around 2 percent before the pandemic.

He predicted that companies’ profits would begin to decline in the first half of the year as they would have to cut prices while facing higher costs from inflation and wage increases.

“Profits and margins will be under pressure. And that’s a recipe for, if not an outright recession, at least an earnings recession.”

While Mr Wacher thinks “forecasting is nonsense”, he believes the likelihood of a recession is an “any-way bet” with China in the balance.

As the world’s second-largest economy reopens, it is expected to boost demand for Australia’s resources, particularly coal and iron ore.

“But at the same time, China is also looking elsewhere, like Brazil and Africa, so maybe it won’t be the same tailwind that we experienced in 2008-2012.”

Growing up, Mr. Wacher loved to run and wanted to be a physical therapist or sports doctor — his father was a doctor.

But at university, where he was good at math, he began to consider financial markets. He got his first job on the Sydney Futures Exchange, wearing a “funny jacket” as a bond trader for a merchant bank in New Zealand, where he traded options on government bonds and bank bills.

On his first day on the floor, the first thing he was told was “all you have to do is buy low and sell high.” It was 1994, the year bond volatility “went through the roof.” It will have to wait nearly 30 years for the next spike in volatility.

Mr. Wacher manages an unconstrained portfolio, meaning it is not tied to a strategic asset allocation where a certain percentage is allocated to stocks, bonds and alternatives.

Instead, the fund manager actively sells and buys assets in small amounts depending on market movements.

For example, Mr Wacher took profits when he sold Alibaba Group shares bought at around $60-$HK70 and currently trading around $116.

In addition to his role as Chief Investment Officer, where he oversees Morningstar’s Australian assets, Mr Watcher manages a $300 million portfolio of real income multi-asset funds, where he has the freedom to allocate up to 100 per cent in stocks and bonds and up to 25 percent in alternatives.

Right vs left brain

It currently has 44% invested in growth assets, 40% in defensive assets such as government bonds and high-rated credit, and the rest in alternatives, including hedge funds, emerging market debt and foreign currencies such as the yen.

What sets him apart from his peers is his decision to return to university full-time right in the middle of his career to study media and communications, which includes philosophy and cultural theory.

I remember people thought he was crazy and didn’t understand why he had to do it. “I knew there was more to life than options strategies, and I wanted to find out what it was,” he recalls with amusement.

He admits that he was passionate about learning and completed an MBA. The studies of French philosophers such as Michel Foucault, Jean Baudrillard and Roland Barthes left a big mark on him.

“I use it every day. It gave me a lot more breadth in my life,” he says. “There’s so much gray in trading, but people are looking for so much precision. In philosophy everything was gray and without precision.

“I think we fool the markets into thinking they can be more precise than we are,” he explains. “What the markets really require is the understanding that you have to be humble.”

Mr. Wacher also emphasized the importance of investment protection. “We have to build that margin of safety into our thinking, because even if we’re right, we need a buffer because we’re unlikely to be right very often.”

Mr Wacher still enjoys running (when his knee isn’t hurt) and has completed marathons in Sydney and Tokyo and dreams of doing more.

“I’d like to run fast enough to qualify for some of the majors, Chicago or Berlin, but there’s an atmosphere in London and New York,” he says.

“My wife, who is not a runner, assures me that she will accompany me for ‘support,'” he adds wryly.

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