Fitch Affirms Australia’s Rating, But Flags Mounting Budget Risks

SYDNEY—Fitch Ratings affirmed Australia’s AAA sovereign credit rating with a stable outlook, even as it highlighted that the country’s high debt relative to countries with similar ratings.

Fitch said the country retains a commitment to the same rules for fiscal sustainability that helped to underpin close to 30 years of economic expansion before the pandemic.

“Australia’s rating is underpinned by the country’s high income per capita and sound medium-term growth outlook, as well as strong institutions and an effective policy framework,” Fitch said in a statement on Monday

It warned that Australia’s fiscal metrics are set to weaken modestly in the next two years. But it anticipated deficits and overall debt would be contained over the medium term, supporting the stable outlook.

The affirmation of the top rating comes despite ongoing concerns about the pace of spending over the past year as the federal government deals with an explosion in costs linked to the national disability insurance scheme while at the same time cutting income taxes.

Government spending measures aimed at cushioning the rising cost of living on households, and falling commodity prices, will put pressure on the budget, Fitch said.

Australia’s general government deficit, which consolidates federal, state and local governments, will reach 2.6% of GDP in the 12 months through June, 2025, from 1.6% in fiscal 2024 and 0.8% in fiscal 2023, Fitch said.

“Aggregate state deficits have been high over the past couple of years, offsetting surpluses at the federal level,” Fitch said. “We also forecast deficit reduction at the state level to be gradual, given a still-large infrastructure development pipeline.”

Rising aged care and the NDIS will continue to pressure the budget, though efforts are under way to contain these costs, it added.

Fitch forecasts economic growth to slow to 1.1% in 2024, from 2.0%, but expects a gradual acceleration in activity from late this year, driving growth to 1.7% in 2025 and 2.1% 2026.

“A recovery should be supported by income tax cuts, probable monetary easing in 2025 and a healthy labor market, which should buoy household balance sheets,” the ratings agency said.

Fitch expects the Reserve Bank of Australia will start to cut interest rate cuts in February, with the policy rate reaching 3.50% by the end of next year, after being on hold at 4.35% since November 2023.

Underlying inflation appears set to trend down to the RBA’s 2%-3% target band by end-2025, from 3.5% in the third quarter, the ratings agency said.

“Still, risks tilt toward delayed cuts given persistent services inflation and a still-tight labor market, with brisk employment growth, low 4.1% unemployment rate and a record participation rate in September 2024,” it added.

Wall Street’s hottest trade has gone ice cold.

For years, it paid off to buy stocks that were rising in price—and bet against struggling shares. The momentum trade was especially profitable this year, as investors piled into hot stocks including Micron Technology, Nvidia, Advanced Micro Devices and other artificial-intelligence darlings while wagering against those likely to be hurt by the embrace of AI.

The S&P 500 Momentum Index soared 44% in the second quarter, its best quarterly performance on record, and it surged 133% over the past five years, nearly double the broad market’s performance.

Mega funds and rookie investors alike piled into the trade, some using leverage and options contracts in an effort to amplify their returns, propelling the underlying shares higher.

“It is a self-fulfilling prophecy,” said Matthew Tym, managing director at Cantor Fitzgerald, of the trade.

Suddenly, the trade is a loser. The momentum index has tumbled more than 9% since July 1, lagging behind the S&P 500’s 2.8% gain. The index—which tracks stocks in the S&P 500 based on a “momentum score”—is on track for the biggest quarterly underperformance in 25 years. July was the second-worst month for the momentum trade in around 40 years, according to Bank of America estimates; the only month worse was April 2009, in the teeth of the global financial crisis.

Hedge funds that bought momentum shares while shorting low-momentum stocks suffered even more. At the same time, a basket of the most popular stocks held by hedge funds tracked by Goldman Sachs recorded its biggest one-month underperformance in July relative to the S&P 500 in more than 20 years, according to the bank’s analysts.

Momentum trading is based on a rather simple observation: Investments that go up tend to keep outperforming; those that underperform often remain laggards. This kind of trading might seem too simple a stock-picking strategy to work. Yet it often has.

“For decades, it didn’t take a lot of sophistication to run a momentum strategy and make a decent living at it,” says Agustin Lebron, senior researcher at EquiLibre, a trading firm.

Part of the reason: It takes a while for corporate and other information to spread to various investors, so they slowly build positions, producing buying momentum.

“A huge pension fund can’t flip around its positions in a day,” says Lebron. “Behavioral biases also account for some of the effect, as well—people tend to sell their winners too early and hold losers too long.”

Fans of the strategy point to the human tendency to extrapolate from past results—and chase investment returns—noting that momentum patterns have been evident in markets for decades, even centuries. They also say that some of the worst months for momentum strategies are during longer periods of outperformance.

Some have been doing the trade by buying the strongest investments in a sector while shorting the weakest; others lean in to rising markets or asset classes. Still others use a quantitative approach or turn to banks or others who sell ways to make distinct wagers on momentum as a “tradable factor” or a “thematic basket.”

The fans remain believers. “Any strategy has disappointing periods,” says Antti Ilmanen, global co-head of the portfolio solutions group at AQR Capital Management.

The surge in Moderna and other biotech stocks helped crush the momentum trade. These shares were among the most heavily shorted in recent years, but positive news on a cancer vaccine from Moderna and Merck sent those stocks flying, crushing some quant and other hedge funds. Moderna is up around 150% so far this month.

These traders had an especially rough day on Aug. 19, which Goldman Sachs told its clients was the worst day for “systematic long-short managers” in more than two years. About half of the losses were because of momentum trades, the bank said.

Some traders have begun to short, or bet against, the very stocks that propelled the momentum trade earlier this year. Net short positions in futures tied to the Nasdaq-100 index among speculators recently climbed to some of the highest levels of the past two decades, according to data from the Commodity Futures Trading Commission.

The about-face is a sign of how markets have become more treacherous for investors, even as indexes keep climbing. Part of the issue: the recent meltdown of Situational Awareness, a hedge fund that had piled into some of the most popular momentum shares, including chip stocks. After a period of market tumult, Nvidia shares rocketed almost 9% after its earnings, showing how quickly sentiment can shift.

Some investors say the run-up in share prices driving tech stocks higher reminds them at times of the dot-com frenzy decades ago.

Mike Ogborne, the founder of San Francisco-based Ogborne Capital Management, said he has grown more cautious on technology stocks and is keeping more of his portfolio in cash than he typically does.

And he is nervous about the surge in spending by technology giants and quarterly capital expenditures that keep rising.

“It is a little bit like Cinderella and the clock striking midnight. You don’t know when midnight is going to come around,” Ogborne said. “They don’t send a memo around telling you when the capex cycle is over.”

Fitch Affirms Australia’s Rating, But Flags Mounting Budget Risks

General government deficit will reach 2.6% of GDP in fiscal 2025, Fitch said

Wall Street’s hottest momentum trade has reversed sharply, as former winners tumble and heavily shorted stocks surge.