Crispin Murray: What’s driving the ASX this week?

Here are the main factors driving the ASX this week, according to Pendal’s head of equities CRISPIN MURRAY. Reported by portfolio specialist Chris Adams

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THINGS remain relatively quiet on the macro front and US economic growth is holding up reasonably well – though it’s still below trend.

We’re seeing early signs of improvement in other economies, possibly as tariff uncertainty begins to diminish at the margin.

US rates are falling in the absence of a dramatic rise in US employment growth. All this remains a supportive context for equity markets.

Overall Australia’s reporting season was okay.

We did not get the kicker to earnings that was seen in the US – and valuation is at the top end of the range.

But the local market remains supported by signs of an improving domestic economy and impending rate cuts from the Reserve Bank.

Volatile price reactions continued last week – notably Coles, NextDC and Qantas to the upside and Woolworths and Wisetech to the downside.

Equity markets were flat in aggregate last week, failing to build on gains made after recent dovish comments from the Federal Reserve chair.

The S&P 500 retreated 0.1% while the S&P/ASX 300 gained 0.2%.

The US yield curve steepened with short-end yields falling as confidence on rate cuts built.

But the 10-year remained anchored by ongoing concerns over supply of Treasuries and the Fed’s potential to shift focus from inflation to growth as the composition of voting members changes.

Metal prices continue to rise on signs the global economy is experiencing a small improvement in growth rates, along with supply discipline in China.

AI chipmaker Nvidia’s result had enough for both bulls and bears to feed off, resulting in a relatively muted reaction.

The key swing factor has been China sales, which is more a stock-specific issue than a reflection of the need to invest in AI.

Nvidia earnings

There were two negatives in the result:

1. 1. The data centre (DC) division, which is the bellwether for the AI thematic, saw sequential sales fall 1%. However this was due to China, where shipments dropped from $US4.6 billion in Q1 to $0.6 billion in Q2 due to the US government restricting sales. While the restriction has been lifted, the Chinese themselves are now discouraging purchases of Nvidia chips as they look to diversify supply chain.
   2. Op-ex growth guidance was lifted from the mid-30% to high-30% range.

Offsetting this were positives:

1. Excluding China, underlying sequential DC revenue growth was 12%. Shipment of Blackwell ultra chips reached $US10 billion – NVDA’s fastest product-ramp ever.

2. The networking unit within DC grew revenue 46% quarter-on-quarter (QoQ). This is becoming a key area for investor interest as it drives the efficacy of chipsets.

3. Overall revenues were 1.5% better than expected at +6% quarterly and +55% year-on-year.

4. Gross margins surprised to the upside, helping drive 4% EPS revisions.

There is nothing in this result to reinforce the negative AI sentiment mentioned last week.

Locally, data centre manager NextDC’s result highlighted significant demand for DC capacity in Australia and the broader Asian region.

 

A lot of this is driven by the need to prepare for AI by moving data to the cloud. Cloud service providers Amazon, Microsoft and Google have seen 39% yearly growth in cloud bookings in aggregate.  

Australian economy 

July’s consumer price index (CPI) was higher than expected, rising 0.9% for the month and 2.8% for the year (compared to expected annual growth of 2.3%). 

The market largely shrugged this off though, since the first month of the quarter is seen as the least reliable of the inflation data points.  

The specific explanation was government electricity subsidies rolling off.  

The core, trimmed-mean measure was also higher than expected at 2.7%, though that was still consistent with RBA expectations. 

This does highlight a risk to the pace of the easing cycle in Australia.  

Credit growth is accelerating, which suggests policy is not that restrictive. We have seen a number of Australian companies reporting improved sales in July and August. 

Markets  

The ASX was flat last week but the Australian market rose 3.2% in August (+12.4% calendar YTD), with small caps leading at +8.4% (+18.7%  calendar YTD).  

Small caps were helped by three factors: 

• More leverage to the China anti-involution theme 
• Better-performing tech names 
• Greater exposure to domestic discretionary 

Resources were the best-performing sector, up 10.3% for the month, which was tied to: 

1. A rally in rare earths as western countries look to underwrite capacity with a guaranteed floor pricing well above spot 
2. Moves in China to reduce lithium supply 
3. Resilience in the iron ore price 

Consumer discretionary, utilities and domestic REITS all outperformed in August, partly due to signals from results but helped also by rates. Banks also outperformed on resilient margins.  

Health care underperformed, partly on a global rotation away from defensive sectors but also due to stock-specific issues at CSL, Sonic Healthcare and Telix Pharmaceuticals.  

Technology also lagged. There was significant divergence within the sector, but the biggest names drove the downside: Wisetech had a poor result; Xero was caught up in the “AI-may-kill-software” narrative; and there was an overhang from the cap raise for the Melio deal. 

Five major ASX reporting season themes 

Here is an overview of five themes Pendal’s team identified during reporting season: 

1. Overall earnings were okay 

Earnings overall were reasonable, with similar overall trends to February in terms of misses and beats.  

A third of companies beat by 5% or more and 22% missed.  

FY26 revisions came down more than they did in February, mainly driven by issues at offshore-exposed companies.  

Consensus EPS growth for FY26 dropped marginally through August and is now indicating around 6% higher than FY25.  

This was in contrast to the US where FY26 expectations rose. But Australia does not have the same drivers from tech and financials. 

2. Stock responses were volatile  

Stock price volatility on the day of results reached new highs, driven by the tone of messaging and revisions.  

Some 30% of companies experienced stock moves more than three standard deviations away from their average on reporting day.  

It’s interesting that the strength of reaction was almost as material for earnings variances of 2.5% away from consensus, as for 5% away.  

This means volatility is not tied to greater unpredictability in reporting. Rather it is a new market feature linked to an acceleration of investors shifting position in response to events.  

This has become somewhat circular. Quant strategies and high-turnover investment pods led the way, but are now reinforced by long-only investors who anticipate such moves and are beginning to reinforce them. 

Of the biggest downside daily moves, James Hardie (-28%), Woolworths (-15%) and South32 (-7%) were tied to earnings. But most of the other underperformers such as CSL (-16%), SGH (-9%) and JB Hi-Fi (-9%) were due to valuation de-rating, reflecting a lack of confidence in the business or management.  

On the outperformers, Qantas (+9%), Stockland (+7%) and Westpac (+6%) can be understood on the basis of earnings. But most of the rest reflected a company establishing itself as a safe haven in a challenging environment. For example, Brambles (+12%) was one of the few international industrial stocks not seeing downgrades. 

3. Ratings changes drive returns 

Reinforcing point two, rating changes were the most material driver of returns, and the beta to earnings changes has risen.  

The biggest re-ratings were generally either:  

1. Stocks beginning to stabilise or turn the corner after a tough period (eg Guzman Y Gomez, IDP Education, Tabcorp, ARB Corporation, Seek, Kelsian, Worley), or 
2. Stocks that established or reaffirmed their status as relatively predictable safe havens (eg CAR Group, Coles, REA Group, Brambles) 

On the downside there were a few significant de-rates tied to earnings (eg Dominos Pizza, Reece, Amcor). But most reflected large sentiment shifts, particularly on higher value stocks (eg CSL, HUB24, Netwealth, Woolworths, Commonwealth Bank). 

4. Disappointing large caps hit harder than small caps 

The average two-day relative return for industrial large caps which missed consensus EPS by more than 5% was -7.2% for the ASX 100, versus -3.8% for small caps.   

This probably reflects the facts that higher active trading is concentrated in the more liquid stocks. 

5. Domestic outperforms international 

This reporting season, domestic stocks generally performed better than internationally-exposed companies. 

Australian-focused consumer discretionary names Tabcorp, Nick Scali, Super Retail, Qantas and Scentre all signalled the consumer was stabilising and showing signs of improvement.  

Financials (excluding insurers) outperformed, with bank margins better than expected as they pulled the deposit pricing lever. 

Contractors such as Ventia, Downer, Monadelphous and Worley also saw gains, with an improved industry structure leaving the environment for pricing as good as it has been for many years.  

Residential housing sector names such as Aspen, Stockland and Lifestyle Communities did well, boosted by the declining interest rates and the early extension and broadening of the federal government’s First Home Buyer Scheme –now uncapped in volume and with increased price caps.  

Global industrials such as James Hardie, Amcor, Reliance Worldwide, Reece and BlueScope Steel underperformed.   

Sentiment around the resilient domestic consumer was reflected in ratings changes.  

The consumer discretionary sector saw a 3.8x P/E expansion in August, beating energy (3.2x) and materials (2.5x). Healthcare was the only sector to see a multiple contraction (0.3x).  

Stepping back and looking at the ASX valuation, we are now at the top end of our historic range, leaving the market largely reliant on earnings for further support. 

Earnings growth is expected to be mid-single digit.  

This all leaves the market vulnerable in the event of an economic shock.  

However the picture at the moment looks benign, particularly with interest rates likely to come down. 

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About Crispin Murray and the Pendal Focus Australian Share Fund

Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management. 

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