Commodity shock...Australia's outperformance

CIO MONTHLY | APRIL

In early March, the decision to adjust our regional equity tilts was viewed particularly through the lens of relative exposure to sustained higher energy prices. This month, we dig a little deeper into why Australia is a relative beneficiary of a commodity shock, reflecting its status as a net energy exporter (and why domestic equities deserve an overweight status). We also take a look at how the commodity-led income boost is transmitted to the economy, which includes the just-released 2022-23 federal budget.


  • We are comfortable with our central case outlook, which sees the global economy continuing to recover strongly in 2022 and inflation eventually subsiding into mid-year. This should pave the way for a more constructive equity market environment in H2 2022. However, in the short term, the probability of a ‘tail risk’ event has increased – particularly, persistent inflation, central bank action that materially slows global growth below trend, or a broadening in the Russia-Ukraine conflict, creating further upward pressure on energy prices.
  • Australia is a relative beneficiary of a commodity shock. The spike in commodity prices is likely to push Australia’s terms of trade to a new record high, pushing up the income we earn as an economy.
  • A sharply rising terms of trade, or export income, feeds through to the overall economy via a number of channels. Resource company earnings can feed into resources capex, they can also flow to shareholders, and resources tax revenue can be distributed to the economy via government budgets.
  • Within the context of the commodity shock, currency market moves are an important consideration. While the Australian dollar has already strengthened somewhat, our expectation is that elevated commodity prices will maintain upward pressure on the currency, reducing returns of unhedged foreign currency exposures.
  • In the 2022 Federal Budget, the Government’s decision to add stimulus to an economy that is already growing strongly above trend is not without risk in terms of contributing to higher-than-expected inflation and rates over the coming year. Nonetheless, the extra stimulus is consistent with our expectation that the economy will continue to grow strongly, that consumer spending will likely continue to be buoyant, and corporate earnings will be relatively resilient.