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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THE market finished November on a high, helped by falling bond yields and a lower US Dollar.

The S&P 500 returned 1.1% for the week and 5.9% for the month, while the S&P/ASX 300 was up 0.6% and 3.7%, respectively.

President-elect Trump’s threat of 25% tariffs on Canada and Mexico as well as 10% on China did not illicit a durable negative reaction in either bonds or equities – probably due to the attached conditionality and a timeframe that is still almost two months away.

The pre-conditions for a continued rally into year-end remain in place, with positive macro data, flows good, confidence high, and the supportive technicals.

There was strong divergence within Australian equities last week; tech and healthcare outperformed while energy and banks lagged.

The market’s favourite high-momentum growth names are melting up, with Life360 (360) up 20.5%, Pro Medicus (PME) up 13.6%, Sigma Healthcare (SIG) up 13.3%, Guzman y Gomez (GYG) up 12.7% and Telix Pharmaceuticals (TLX) up 9.6% week on week, with flows the main driver.

Our broad-cap portfolio positioning is generally skewed to growth, with Technology One (TNE) and Xero (XRO) underpinning performance in November. This was combined with quality industrials such as SGH (SGH) – formerly Seven Group – and James Hardie (JHX), as well as insurers which benefitted from higher bond yields over the month and the rotation to financials.

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US tariffs: hard to know where they land, so not factored in by the market for now

Trump posted that he intends to impose 25% tariffs on Mexico and Canada on day one of his administration.

While these are higher than the market expected, he conditioned them on action relating to immigration and drugs.

We have subsequently seen Mexican President Sheinbaum have a call with Trump, while Canadian Prime Minister Trudeau popped in for dinner at Mar-a-Lago.

Trump also spoke to imposing an additional 10% tariff on China.

The impact, if applied, is material.

The percentage of import value collected as tariffs would rise from low single-digits to roughly 10%, before factoring in anything additional for Europe.

So far, the market is sanguine on this on the belief that they will be watered down in both size and scope.

The other issues to consider with tariffs are:

• suppliers absorb part of the impact in their margins
• that the inflationary effect is diluted as trade flows adapt to avoid them

• currencies may adjust to dampen down effects (e.g. USD strength reduces the inflationary effect)

US economic outlook: looks fine, persistent inflation is one area to watch

This week’s monthly payroll data is an important signal for the US Federal Reserve.

The signals are constructive, with claims data coming off post the hurricane-induced spike. While continuing claims are picking up, it is gradual and still low in historical context.

Consumer confidence – reflected in the Conference Board Expectations Index – has seen a post-election increase tied to the election outcome.

History indicates that this may not result in higher spending, but it doesn’t hurt and reduces risks to the downside.

An encouraging component of the Conference Board measure is the confidence in jobs, which has improved and is a positive read on the outlook for employment.

Overall, the growth outlook remains encouraging according to the Atlanta Fed GDPNow indicator, which still has Q4 2024 GDP at above 2.5% growth.

There is a concern among some that inflation is not coming down sufficiently for the Fed to cut rates much below 4%.

In this vein, the latest Personal Consumption Expenditures (PCE) data – the Fed’s favoured inflation indicator – saw Core PCE up 0.27% month-on-month, in line with expectations.

However, the three-month annualised rate increased to 2.8% year-on-year.

Some of the services components are proving sticky; the concern is that the PCE won’t be able to break below 2.5% next year before we begin to get the effects of tariff increases and the potential impacts of lower immigration and tax cuts supporting the economy.

This could leave the Fed in a difficult position in terms of predicting the outlook, which may make them more cautious of further rate cuts.

The market is currently pricing 3.3 cuts by the end of CY25.

Australia: inflation data provides no help for case to cut rates

October’s Consumer Price Index (CPI) was lower than expected at 2.1% year-on-year, but this was all down to government subsidies.

Underlying inflation measures remain stubbornly high and the trimmed mean was 3.5% for the 12 months to October, up from 3.2% in September.

This provides no cover for the RBA to cut rates.

Inflation in areas such as rents and new dwelling purchase costs remain high, driven by structural issues in the economy.

We continue to see limited risk of a material slowdown in Australian GDP, but confidence is muted and growth seems likely to remain below trend for the next few quarters.

Markets: short-term signals remain positive

November was a good for equity markets, triggered by the decisive US election outcome.

The S&P 500 returned +5.9% for the month and the S&P/ASX 300 3.7%, with the bulk of the move from valuation re-rating.

Short-term market signals are positive:

1. The US dollar has not broken above its range and retraced in the last week.
2. Bonds yields have also rolled over and didn’t get back to the April highs.
3. Market technicals like breadth and seasonality are positive. For example, 77% of the S&P 500 is trading above its 200-day moving average.
4. Earnings revisions have been positive. This has been driven by mega-cap tech, where FY25 earnings have been revised up 11% over CY 2024. The rest of the tech sector has been revised down 1.6% and the rest of the S&P 500 down -3.8%. However, this is well within the normal range of zero to -5% earnings downgrades over the course of a year.
5. Flows into US equities remain strong, with a large spike following the election result.

The challenge is US equity valuations are full. There appears little catalyst to change this currently, but if there was a shift in liquidity or in the economy, then valuations could reset.

The S&P 500 is on the top decile in terms historical market valuation going back to 1999.

There is an argument being made that the market structure is now dominated by mega-cap tech companies which have low capital intensity, high rates of return on investment and incremental return, as well as strong revenue growth rates which may suggest that valuations aren’t as extended as simple historical analysis suggests.

We do note that credit spreads are low by historical standards, which suggests that the liquidity environment remains supportive.

Australia

Information technology (+10.2%), banks (+7.1%), consumer discretionary (+6.6%) and industrials (+5.6%) led the S&P/ASX 300 higher in November. Energy (-0.7%) and resources (-3.4%) lost ground.

Growth momentum performed best; results from TNE, XRO and Block (SQ2) were good, while PME won a key contract.

With limited revisions, the banks’ earnings season was neutral, with CBA performing the best.

Insurers outpaced the banks, helped by bond yields.

Resources continue to fall and have given back more than 50% of their China stimulus rally.

Battery materials remain the worst of the sector, despite lithium prices stabilising. BHP continues to be burdened by the fear of it re-bidding for Anglo American now that the six-month lock period is up. Finally, copper and gold have retreated post the US election.

Portfolio positioning

Generally, across our broad-cap portfolios, we have kept our sector skews relatively limited:

• We have been underweight defensives/bond sensitives, though this has been reduced somewhat with the addition of Scentre Group (SCG) in recent months.
• We also have a small underweight to resources.
• The bank underweight has increased in recent weeks. We see reduced risk of valuations breaking higher for the bank sector given the strong run and current rating. This exposure is also partly offset by the overweight in insurers. 
• We are underweight consumer defensive – notably supermarkets – which we see as expensive, low-growth stocks.
• Against this we are overweight growth, mainly through technology companies where we see earnings growth underpinning the higher valuations.
• We have also benefited from an overweight in cyclicals industrials, with stocks in good industries and/or strong market positions such as Aristocrat Leisure (ALL), SGH (SGH), James Hardie (JHX) and Qantas (QAN) all performing well in November.

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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