‘I think we’ll see a recession’: Market veteran worries the RBA has gone too far
By Clancy Yeates
Some investors may be breathing a sigh of relief that interest rates appear close to their peak, if they are not already there. But veteran strategist Gerard Minack says that even if rates don’t climb any higher, this may not spare Australia from taking an economic hit, which would be negative for major sectors of the local sharemarket.
So far 2023 has been a year of surprising resilience for the world economy. The long-forecast recession in the United States has so far failed to eventuate, and some analysts have compared their predictions of a US recession to Waiting for Godot.
Strategist Gerard Minack believes the RBA has tightened interest rates too aggressively in its quest to dampen inflation.Credit: James Brickwood
Minack, a well-known strategist to institutional investor clients, says he’s recently become more optimistic the US may pull off a soft landing, last week saying this was a 50/50 bet.
But regarding Australia, he’s been getting more bearish. He believes the Reserve Bank has tightened interest rates too aggressively in its quest to dampen inflation, and says a domestic recession is “more likely than not” – or roughly a 60/40 chance.
While households have so far weathered the storm of rapid interest rate rises and the higher cost of living, he worries the RBA has gone too far in seeking to squeeze consumer spending.
“The reason it’s not been felt yet, although we’ve started to get some weak data … is we came into this with an enormous buffer of unspent cheques, and very unusually, with a large buffer of fixed-rate mortgages,” he says in an interview.
“As those two protective shields start to wear thin, we are going to face, I think ... a recession. I’m not saying it’s necessarily going to be severe, but I think we’ll see a recession.”
For the Australian stockmarket, he says this would be “clearly negative”. A recession, commonly defined as two quarters in a row where the economy contracts, may have less effect on export giants such as Rio Tinto or Fortescue Metals Group. But domestic-focused sectors such as banks and discretionary retailers would be more exposed.
“Domestic banks – the mortgage market is their bread and butter, and they’re a huge part of the market. Domestic-facing industrials and consumer-facing stocks would all find it tough going and indeed we’re starting to see discretionary retailers warn about the consumer starting to turn cautious,” he says.
Minack, who worked at Morgan Stanley before starting Minack Advisers, has a mix of institutional investor clients, many of them based overseas.
While at Morgan Stanley, which he left in 2013, Minack developed a reputation for being bearish, after warning about the build-up of risky debt before the global financial crisis of 2008. He says that while he may have had a reputation for pessimism, on the issues that made him bearish – such as credit bubbles and the like – he was ultimately right.
Besides, he is notably more upbeat about parts of the market over a longer timeframe of two to three years.
Over the longer term, Minack believes the financial world is on the cusp of a “massive change” – a turning point in the era of “secular stagnation” over the last 20 to 30 years, during which interest rates generally fell.
Coal companies, in particular, I reckon are going to be the Camel Unfiltered of the next cycle.
Gerard Minack
The investment implications of such a turning point are widespread, but he says that on a three-year view, he likes sectors and markets dominated by companies that make things, such as industrials, mining stocks, and energy companies. Over a three-year horizon, his favourite market is Japan, which he says is the most cyclical major market in the world.
Looking beyond the short-term ups and downs in the domestic economy, he also believes Australia’s sharemarket is fairly well-placed over the longer term, pointing to the big role of miners and carbon-based energy companies on the ASX.
While some view fossil fuel producers as risky investments, Minack argues these companies will benefit as governments limit their competitors by preventing new fossil fuel developments. He draws a parallel with tobacco stocks, which he says have been a highly lucrative investment because governments outlawed their biggest expense: marketing and advertising. Carbon-heavy energy businesses are likely to prove to be “the tobacco stocks of the next 20 years,” he says.
“Coal companies, in particular, I reckon are going to be the Camel Unfiltered of the next cycle. They’ll do very well.”
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