The Point

Crispin Murray’s weekly ASX outlook

This is a critical juncture in terms of which way markets break, says our head of equities Crispin Murray.

“Signs of stress are building in markets but we are also seeing weak sentiment and some pockets that look to be oversold.”

Crispin points to three areas of concern:

1. The US dollar’s current strength can be a problem for markets since it complicates the ability to contain inflation outside the US. It also leads to potentially significant capital outflows and puts strain on emerging markets. Markets tend to be more volatile when currencies are not stable.
2. Credit markets continue to deteriorate as the US high-yield credit default swap index moves higher. It has more room to go as the economy slows.
3. The correlation between bonds and equities appear to have reversed. Correlation has been low post-GFC, where bonds offered protection against equity sell-offs. It is now high, making it harder for investors to hedge portfolios. This has an impact on the amount of money investors can deploy in equities – as does recent high levels of volatility.

Crispin Murray’s weekly ASX outlook

Concern about Chinese economic growth remains a major factor influencing equity and bond markets.

Five factors have caused a rapid deterioration in sentiment on China’s outlook, says our head of equities Crispin Murray:

• Lockdowns choking demand and supply chains
• Currency appreciation relative to competitors
• Global slowdown
• Weak consumer confidence
• Property market remaining fragile

It’s estimated that a quarter of China’s population — in 44 cities and accounting for 38% of GDP — are in some form of lockdown.

Chinese growth could slow from 4.8% in Q1 to less than 2% in Q2, he says.

“The policy response so far is regarded as too limited.

“We think the structural story in commodities remains attractive. But there is a sense it is a very long position among investors at the moment.”

Crispin Murray’s weekly ASX outlook

The recent recovery in equity markets looks to be ending as the S&P 500 fell -1.2% and the NASDAQ -3.9% last week.

Australia remains more defensive in this environment, falling just 0.3% for the week. More hawkish comments from the Fed prompted the fall.

It signalled a 50bps hike in rates for May, absent any major new shock. It also reinforced the message that quantitative tightening is on its way. While this was known, it triggered a further sell off in long-dated bonds.

US 10-year Treasury yields rose 32bps for the week. It also took the yield curve back into positive territory.

This reinforces the key message that the Fed needs overall financial conditions to tighten sufficiently to cool wage inflation.

Surging equity markets loosen overall conditions, and the Fed is likely to try and prevent this.

Crispin Murray’s weekly ASX outlook

“The environment we are in today is different to the post-GFC era — what worked in the last six years won’t work going forward,” says Pendal’s head of equities Crispin Murray.

“We see corporate cash flow and consistency as critical. We do not expect high growth, speculative and profitless tech to resume market leadership.

“We see Australia as a relative safe haven given the economy is in good shape and skews to commodity and financial stocks.

“The near-term market is likely to remain weak, but we don’t expect stagflation and the start of a bear market.

“Current drawdowns tend to be indiscriminate, thereby creating significant stock opportunities.”

Crispin Murray: Australia is a good place for investors right now

Australia is as good a place as investors can be in this tough environment, says Pendal’s head of equities Crispin Murray.

Four major challenges are hitting markets simultaneously, says Crispin: the crisis triggered by Russia’s invasion of Ukraine, the re-emergence of inflationary pressures, impending interest rate rises and the pandemic.

“It’s not a great short-term message — we think markets are going to continue to struggle,” Crispin said this week in his bi-annual Beyond the Numbers webinar.

“There are however, two silver linings. The first is that Australia is perhaps the most defensive market in the environment we’re in.

“The second is that when you see this sort of drawdown in financial markets, there tends to be an indiscriminate nature to those sell-offs.

“They often lay the foundations for some of the best investment opportunities that we will be able to take advantage of over the next few years.”

Crispin Murray’s weekly ASX outlook

Here are the main factors driving the ASX this week according to our head of equities Crispin Murray. Reported by portfolio specialist Chris Adams.

RUSSIA’S invasion of Ukraine is creating second-order effects which the market is struggling to read, leading to dislocations.

We can see two ends of the spectrum in commodities which are “melting up” and European equities (banks in particular) which are plunging.

The markets are facing a four-way collision: the pandemic, a geopolitical crisis, an interest rate tightening cycle and an inflation shock. This is a unique combination.

Historically a geopolitical crisis such as Ukraine and the resulting supply side shock would be partly managed through a reduction in interest rates — as was the 1998 Russian default.