RBA done hiking? 8 ASX stocks UBS likes as a rate-relief play

Both headline CPI, down to 3.8% for the 12 months to June, and trimmed mean inflation, which was steady at 3.6%, are still higher than the central bank would like. The question is whether this marks the end of rises or if it is merely a pause.

Depending on the economist you ask, the answer will be very different.

According to UBS, there is a “reasonable probability” that another rate hike is on the way, it has simply been delayed to November.

“The outlook for inflation remains too high. UBS still expect the RBA to assess, at some point, monetary policy needs to be restrictive to ensure inflation returns to 2.5% y/y,” UBS Economist George Tharenou says.

However, falling home prices could put an end to the hiking cycle before the November meeting.

“The alternative view – which is now the broad consensus – is the RBA is done hiking, and the next move in rates is down.”

In a recent note, UBS Strategist Richard Schellbach says that even if that consensus view is on the money, the path forward for equities is uncertain.

“RBA easing cycles have typically had mixed outcomes for equity prices. A rate-cutting cycle did not help Aussie equities through the GFC as deep recession fears overwhelmed investors,” Schellbach says.

“By contrast, stocks continued to charge higher through the late 1990s as economies improved and Tech themes flowed through markets.”

Consumer over real estate

Under most historical circumstances, the real estate and banking sectors are usually prime to outperform when the RBA looks set to cut rates. According to Schellbach, this cycle looks different thanks to the government’s CGT and negative gearing changes, which have “structurally changed the game for property investors”.

“Historically Banks have been the best performing Australian equity sector in the 12 months following the first RBA cut of the cycle. But the rapidly cooling sentiment on house price growth at the moment could mean that this usual credit growth response Banks have to lower rates may fail to materialise.”

Instead, there is another trend that UBS is more convinced will play out. Looking at previous cycles, Consumer Discretionary stocks have typically experienced a roughly 10% rally in the two months leading into the first RBA cut of a cycle. Over two months following the first cut, share prices fell back and underperformed the market.

So, if the hiking cycle is indeed finished and rate relief is on the way, what stocks would fit the mould? To find candidates, UBS screened for stocks that could see outperformance on “rate relief sentients”.

“These stocks are all domestically exposed and have underperformed the market by more than 10% over the last 12 months,” Schellbach says.

“Given our reluctance toward Real Estate being able to sustain a recovery from relief that rates may have peaked, we have a relative preference towards the Consumer-exposed names.”

ASX stocks for the “rate relief trade”

Source: UBS, Factset, * share price relative to ASX200 price performance