Jack Gabb: What’s driving Aussie equities this week?

Here are the main factors driving the ASX this week, according to Pendal investment analyst JACK GABB. Reported by portfolio specialist Chris Adams

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LAST week was all about China, after a raft of coordinated policy measures signalled a major pivot in the outlook for the economy.

The move triggered a rally in risk assets globally and, in Australia, the major unwinding of bank outperformance versus resources.

Add to that a swathe of positive economic data in the US and a further drop in oil, and it couldn’t have been much better on the macroeconomic front.

Chinese stocks had their best week since the GFC, with the CSI 300 up 15.7% and the Hang Seng up 13.0%. If past stimulus reactions are any indicator, this market has a lot further to go.

The S&P 500 rose 0.64%, led by materials and consumer discretionary, while Japan also posted further gains (Nikkei up 6.2%).

The S&P/ASX 300 rose 0.16%, with materials up 9.34% and financials down 4.38%.

Treasuries were subdued, though there was a milestone moment, with yields on China’s 30-year bonds poised to fall below Japan for the first time in two decades.

China pivot

Two months after disappointing at the Plenum, Chinese policymakers made a material pivot towards providing more support.

The range of measures, both monetary and fiscal, represent the most significant stimulus package announced since Covid. Key measures include:

• a 0.5% cut to the Reserve Requirement Ratio (RRR) and guiding to a further potential 0.25-0.5% cut by end 2024
• a 10% cut in down payment requirements for second mortgages to 15%
• a 0.5% cut in existing mortgage rates
• a potential US$142bn capital injection into banks
• more than US$100bn of funding from the People’s Bank of China (PBOC) to brokers, funds and insurers to purchase equities
• a potential 2 trillion RMB ($285bn) fiscal injection (1.6% of GDP).

While credit has not been the problem, the messaging from an unscheduled Politburo meeting was clear. Specifically, it called for the government to:

• strengthen employment for college graduates
• provide sufficient fiscal spending support and to stabilise the real estate market
• consider the forceful implementation of the recently announced rate cuts
• vow to complete the country’s annual economic goals (GDP target = 5%)
• improve policy to support the birth rate.

Trick or treat?

With another Politburo meeting scheduled for the end of October, expectations remain high that we will see incremental stimulus support – particularly given it appears China’s policymakers will do whatever is required to meet economic goals.

However, there is no doubt that the scale of the challenge remains huge given the collapse in property prices and associated plunge in consumer confidence.

Rate cuts have not, thus far, been sufficient to stem challenges here.

Therefore, the focus has been on the fiscal element of any stimulus.

Assuming the RMB 2 trillion flows through, that is half the RMB 4 trillion announced post-GFC (equivalent to 10% of GDP), which saw the CSI rebound more than 100%.

A GDP-equivalent level of stimulus today would be more than RMB 10 trillion. It’s also worth noting a RMB 1 trillion package announced last October failed to trigger a sustained rebound. 

While we now head into a quieter period for the Golden Week holiday, history suggests that market support will continue through to year’s end, with the impact of past major stimuli (2008, 2015, 2020) lasting roughly six months. We also note that the market is very underweight China.

A key unknown is the outcome of the US election.

Trump has flagged tariffs of up to 60% on Chinese goods. If delivered, that could drive 2025 growth 2% lower (from around 4% to 2%). Offsetting that would require material additional stimulus and/or RMB devaluation.

Pivot repercussions for Australian equities

The China pivot has broad implications across risk assets, however, one of the most immediate beneficiaries is the resources sector which recouped some of its year-to-date underperformance on the back of rebounding commodity prices.

Banks were the main funding source, with ASX 300 Materials up 9% for the week and Financials down 4%. 

Banks had reached extremely overbought levels, trading four standard deviations above their 20-year average PE.

There had been some fundamental support, with an improved competitive backdrop, conservative provisions and potential buybacks, but the banks would have required 30-40% upgrades to justify share prices at the peak.

There is scope for a further unwind, but it is contingent on China in the short term and rate cuts or bad debts in the medium term.

While the major miners had been trading at relatively cheap levels prior to the stimulus, this seemed justified by weak commodity prices against a backdrop of rising capex.

The China stimulus has provided immediate relief on the price side (for iron ore, if not lithium) but long-term concerns on supply–demand imbalances have not changed.

Commodity prices

Iron ore (up 12.3%) and base metals (copper up 8.7%, aluminium up 5.5%) led gains. Oil posted further declines (Brent crude down 4.1%).

We note that iron ore seasonality should also provide a further tailwind as we approach the end of 2024. Over the past five years it has averaged a 4% gain in November, 14% in December and 8% in January.

Commodity trading advisor (CTA) strategies – a systematic approach to investment – continue to be “max long” in both gold and silver and now have been signalled to move to “max long” copper on the metals rally. CTAs are “max short” oil.

Oil fell on news that Saudi Arabia may abandon its US$100/bbl target as it plans to increase output to regain market share.

News of an agreement in Libya between eastern and western administrations also drove higher supply expectations, with estimates it could result in an increase of up to 500,000 barrels per day (bpd) which is roughly 0.5% of global supply.

The move came despite increasing conflict in the Middle East, but further escalation over the weekend could yet trigger a rebound.

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US macro and policy

It was a quieter week in the US following the Fed’s rate cut, with interest rate expectations largely unchanged.

Data continues to show the US economy is in good shape, with 2Q annualised GDP coming in at 3.0% versus the 2.9% expected, and initial jobless claims at 218k versus the 223k expected.

The annual update of National Economic Accounts also showed upwards revisions to a whole range of data, including GDP and gross domestic income (GDI).

Savings were also marked up hugely – the 2Q savings rate increased to 5.2% from 3.3% (excess savings increased from US$400bn to US$570bn).

This goes some way to assuaging consumer spending fears, particularly given disposable income (up 3.1%) is tracking ahead of spending (up 2.7%).

Lastly, core Personal Consumption Expenditures (PCE) beat expectations, coming in a 0.1% month-on-month versus expectations of 0.2%, which may bolster the argument for another 0.50% cut in November.

Weaker datapoints were hard to find, though there was a note of caution in the University of Michigan survey of inflation expectations of 5-10 years, which rose to 3.1% – the highest since November 2023.

The Richmond Fed Manufacturing data also printed its lowest level since early 2020. The data tracks manufacturer sentiment across Virginia, Maryland, North and South Carolina, most of West Virginia and the District of Columbia.

Of its three component indexes, shipment decreased from -15 to -18, new orders increased from -26 to -23, and employment fell from -15 to -22.

The US Presidential Election will take place on 5November, with the next Fed meeting on 8 November.

Rhetoric during the week was primarily directed towards laying out plans to boost US manufacturing.

Trump’s approach is primarily via lower taxes, lower energy costs and less regulation (like mass exodus of manufacturing from China and so on), while Harris is focused on federal incentives (like investing in biomanufacturing, aerospace and artificial intelligence).

Polls were largely unchanged.

Australia macro and policy

September might have been the biggest month of global monetary easing since April 2020, but for the RBA it was business as usual – with the central bank holding rates steady at 4.35%.

The statement made clear that while inflation has fallen, it remains some way above the midpoint of the 2-3% target.

The trimmed mean CPI measure was 3.4% in August (from 3.8% prior), but the RBA has described this as temporary given finite cost-of-living relief (mostly on energy) and has a 3.5% projection for year-end.

However, relief appears likely to be extended given the timing of the Federal Election – offsetting an estimated 47% increase in out-of-pocket household electricity expenses between October 2024 and September 2025.

With headline inflation falling (2.7% in August), growth slowing (the RBA noting a slightly softer outlook versus August), oil down, the AUD up, and most central banks cutting, pressure on the RBA to cut is likely to increase.

Where to from here?

In the US, growth is still slowing and likely bottoming in Q4.

The unknown is whether the Fed can continue to cut rates without inflation rebounding.

Consensus has inflation continuing to fall. However, with rates moving lower, the dollar dropping and hard assets inflating, the risk is inflation rebounds quicker than expected.

Shelter, for example, is one-third of the CPI and growing at 5% per annum. 

Australia is six months behind the US in terms of when inflation peaked. Its outlook is also more heavily influenced by China – thus, whether the latter’s pivot can be maintained will be key to offsetting Australia’s deteriorating growth outlook. 

About Jack Gabb and Pendal Focus Australian Share Fund

Jack is an investment analyst with Pendal’s Australian equities team. He has more than 14 years of industry experience across European, Canadian and Australian markets.

Prior to joining Pendal, Jack worked at Bank of America Merrill Lynch where he co-led the firm’s research coverage of Australian mining companies.

Pendal’s Focus Australian Share Fund has an 18-year track record across varying market conditions. It features our highest conviction ideas and drives alpha from stock insight over style or thematic exposures.

The fund is led by Pendal’s head of equities, Crispin Murray. Crispin has more than 27 years of investment experience and leads one of the largest equities teams in Australia.

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

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