Mr Xiradis believes central banks won’t raise interest rates any time soon, after the last wave of tightening in the US and Europe choked off a nascent recovery.
“Even if we do see a pickup in inflation, interest rates will remain lower than they otherwise would have been in order to ensure that growth is not stalled or slowed,” he says. “That’s a pretty good environment for equities.”
He also expects the trade war between the US and China to subside, giving investors one less thing to worry about.
“I think there’s benefit for both the US and China to have this resolved, or at least part resolved,” he said.
“I think the Chinese would like to get back to supplying components and other things to the globe, so there’s incentive for them to make a deal. Equally, for Donald Trump, who really focuses on the US stockmarket, he would like to see the dispute resolved so he can use that as a platform to get re-elected.
“There’s a fair bit of self-interest here and I think that will mean there’ll be some resolution.”
Boost exposure to cyclicals
So, if Mr Xiradis’ thesis plays out, which corners of the market stand to benefit?
“If our view is right about things improving, or at least stabilising, any sectors or stocks that are focused to an improving environment should benefit. Cyclicals, in general, but you need to be quite selective,” he said.
As a result, Mr Xiradis believes there are several opportunities in commodity stocks. “If we see things recover, we could see commodity prices lift,” he said. He nominates OZ Minerals as one copper pure play with “significant upside”.
Nickel producer Independence Group is another stock he is bullish on. “That’s in part playing the electric vehicle thematic but also the policy change in Indonesia about restricting ore being shifted,” he noted. “The environment from a supply and demand point of view looks interesting, so we could see some further upside in nickel prices.”
He said major diversified miners BHP and Rio Tinto may benefit from firmer base metals prices, but countered that by saying iron ore prices have probably seen their peak
Given his expectation the global growth outlook will brighten, Mr Xiradis also liked the prospects for Lendlease. The construction giant’s shares have performed well this year despite high-profile problems with major projects.
“That’s been one of our better performing stocks this year and we see a significant amount of upside over the next 12 to 18 months as the markets start focusing on them being a global leader of urbanisation projects around the world,” Mr Xiradis said. “They’ve gone out and won just about every major urbanisation project globally.”
The thing that worries me the most is geopolitical uncertainty. That could be something that destabilises things quite dramatically
Ausbil’s Paul Xiradis
And despite ongoing regulatory and legal risks following a string of scandals, Mr Xiradis believed banking stocks could offer opportunities.
“They’re still offering fairly sustainable dividends despite the risks because things have been rebased and prices have come back. There could be some opportunities over the next 12 to 18 months,” he noted.
“If you think about the economy recovering, they are really exposed to an improving economy.”
Time to sell ‘bond proxies’
On the flip side, Mr Xiradis believes more defensive “bond proxy” stocks that offer investors higher yields could suffer.
“We are reducing our exposure to bond proxies, partly because of the rotation that could occur over the next 12 months,” Mr Xiradis said. “Because the market is so heavily positioned one way, the rotation could be quite enormous.”
He added expensive valuations could amplify the unwind of safe-haven positioning.
“We struggle with the valuation assigned to some bond proxies, so if we see the unwind there’s not going to be a lot of valuation support,” he predicted. “If that occurs, you could see them come back quite dramatically.”
‘Tail risks’ remain
Despite expecting better times, Mr Xiradis flagged two potential negative tail risks for the year ahead.
“The thing that worries me the most is geopolitical uncertainty. That could be something that destabilises things quite dramatically,” he noted.
Despite an expectation that interest rates will remain lower for longer, he cautioned that if that doesn’t remain the case, it could lead to a sharp lift in volatility given rich asset valuations.
“Valuations are clearly an area that you need to be concerned about when it comes to equity markets, but so, too, valuations for just about every other asset class,” he said.
“The big risk is if interest rates move up quite dramatically, just about every asset class will be penalised. There will be nowhere to hide other than in cash.”
David Scutt covers markets for The Sydney Morning Herald and The Age