Morgan Stanley is not expecting the RBA to cut rates this year. Here's where they are investing

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This interview was filmed on Wednesday 10 April 2024.

It’s looking increasingly like we’ve escaped a global recession. Global equities have surged in the past year, courtesy of the AI theme and the Magnificent Seven, while economic data points like inflation have actually eased and employment has stayed strong.

It’s far from the scenario most commentators would have tipped early last year, but then, it hasn’t been a typical cycle either, says Morgan Stanley Wealth Management’s Head of Wealth Management Research Alexandre Ventelon.

“We are in the downturn phase, but some indicators like the PMI (purchasing managers index) on the manufacturing side in the US have started to turn around and we could be getting out of this downturn phase in the month ahead and going back into expansion,” he says.

He notes that typically the downturn would precede a recession, but there is enough to suggest a soft landing globally, and that is likely to extend to the Australian economy.

The key factors to bail Australia out of recession

Australia has lagged the world when it comes to the market cycle of the past few years. Inflation peaked later. The RBA started hiking interest rates later. Cooling in the economy started later. Ventelon expects a similar trend of falling inflation to occur here.

He also thinks Australia will escape a recession for two key reasons.

1. Migration

“The big offset we’ve had in the economy has been migration, which has been running at 2.5% above population growth last year. It should cool down to around 1.8% this year, but still be well above the pre-COVID trend,” says Ventelon.

2. Fiscal support

“We are seeing the stage three tax cuts push around $20 billion into the economy, and in addition to that, we see about $6 billion more of fiscal impulse in the next budget,” he says.

Ventelon believes Australia is unlikely to see a recession and is likely to see a soft landing.

Don’t get too confident about rate cuts

The US Federal Reserve is tipped to start rate cuts in September, even though inflation hasn’t cooled to its target range. Ventelon cautions investors not to expect Australia to follow too quickly – he thinks the timing of the RBA’s first cut is closer to February 2025.

He argues there’s no need at this point for central bankers to even consider aggressive intervention, given the resilience of the Australian economy.

“It will be important for (the RBA) to see how the rate cuts are going in the rest of the developed markets, the impact they have on the economy and the inflation backdrop, but also take their time to look at the real impact of all the fiscal impulse into the economy in the second half of the year,” Ventelon says.

While for some this may feel like bad news, it’s worth remembering that rate cuts are usually a result of a downturn rather than strength in the economy so don’t wish for cuts too early.

Other themes discussed

Ventelon also explores the key opportunities for equity investors – think AI, cybersecurity and healthcare and the market risks to watch. He also shares how his portfolios are positioned to take advantage of the current environment and why Morgan Stanley Wealth Management is overweight international equities versus Australia. 

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