The Point

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.

Equity markets bounced last week after overselling — but underlying news flow indicates further tightening, which remains a headwind for markets.

Both the European Central Bank and the Bank of England signalled a more hawkish policy direction

US employment and average earnings growth were far stronger than expected

Oil prices continue to rise as “OPEC Plus” nations signalled they were sticking to their plan despite high oil prices

US bond yields hit new cycle highs; the 10-year government bond yield reached 1.92%

The S&P/ASX 300 gained 2% and the S&P 500 1.6% last week.

So far this year the latter is now down 5.5% and the NASDAQ has lost 9.8%. The S&P/ASX is down 4.5%, reinforcing our view that the Australian market should be more defensive in this environment.

Crispin Murray’s weekly ASX outlook

“We remain cautious in the near term,” says Pendal’s head of equities Crispin Murray.

“The withdrawal of liquidity combined with the Fed’s aim of slowing economic growth suggests there may yet be more downside.

“But we also expect markets to be punctuated by sharp bounce-backs. This is partly because selling is amplified by the effect of investor hedging, which then unwinds.

“It’s important to keep a close watch on the trifecta of rates, oil prices and the US dollar. When all three are rising it usually means a stiff headwind for equities.

“However the underlying growth environment remains strong and supportive of earnings. The selling has also been largely indiscriminate, ultimately driving good alpha opportunities.”

Crispin Murray’s weekly ASX outlook

The recent volatility does not mean the market’s run is over, says our head of equities Crispin Murray.

“But it is the first meaningful correction, coinciding with a shift in monetary policy and highlighting the importance that liquidity has played in the Covid era.”

Four major issues are influencing markets at the moment, says Crispin:

– Rising rates and the withdrawal of liquidity

– The disruptive effect of the Omicron wave

– The potential for conflict between Russia and Ukraine

– Chinese policy easing

“Of these, only the fourth is positive. As a result we have seen equities weaken in the year to date. At this point the outlook for rates and inflation is the most important issue.”

Power-hungry AI a watch-out for equities investors

Big US tech stocks are soaring on a wave of new, advanced AI applications.

But similar to Bitcoin’s early days, excited AI investors may be overlooking the technology’s extremely  high power costs and potential associated sustainability issues, says Pendal equities analyst Elise McKay.

That puts a question mark over the industry’s prospects – and the long-term investment case, says Elise.

“Estimates are that every time you query ChatGPT, it is 300 times more expensive than a Google search.”

A Stanford study found that training OpenAI’s popular GPT-3 generative AI system contributed almost 10 times the lifetime emissions of an average car.

The newer GPT-4 model was an estimated eight times more power intensive again, she says.

Aussie equities: Small business changes bring opportunity for Xero

Small businesses are under pressure to shift their accounting systems online as a global regulatory push to e-invoicing and real-time tax gathers speed, says Pendal Aussie equities analyst Elise McKay.

E-invoicing — pushed by the ATO and other regulatory bodies globally — aims to reduce security issues and fraud and speed up payments.

Elise has just returned from digital accounting platform Xero’s annual conference in the UK, where the big topic was the push to digital tax.

From 2024 British businesses and landlords with £10,000 turnover will have to report digitally, impacting some 4.2 million taxpayers.

“Regulatory tailwinds are very supportive for cloud accounting adoption,” says Elise.

“I spoke to one UK accounting firm with more than 3000 clients who are going to have to adopt cloud accounting solutions.”

That’s good news for ASX-listed Xero, which is part of Pendal’s Focus and Horizon Aussie equities portfolios.

How ASX miners are creating opportunities for sustainable investors

The mining sector probably doesn’t spring to mind as a source of inspiration for sustainable investors.

But companies such as Fortescue, BHP and Rio are investing billions to achieve net zero carbon emissions, creating new opportunities across the mining supply chain, says Pendal Aussie equities analyst Elise McKay.

“We visited 15 different companies across the mining supply chain in Perth last week and one of the key standouts was the extent to which there’s a huge focus on getting to zero emissions,” says Elise.

“It’s a broad generalisation, but companies that tend to be the most forward-thinking in terms of ESG are typically the ones with the biggest problems to solve.”

For example, a number of investable solutions are emerging to reduce haulage emissions — pollution from big mining trucks — at mine sites.

Caterpillar (distributed locally by Westrac, owned by ASX-listed Seven Group), is testing zero-emission mining trucks due for sale by 2027.