What’s driving ASX stocks this week

Here are the main factors driving the ASX this week according to portfolio manager OLIVER RENTON. Reported by portfolio specialist Chris Adams

MARKET sentiment continued to pick up last week despite a big sell-off in US mega-cap tech names last week.

About 71% of S&P companies have beaten EPS estimates in US Q3 earnings season and 63% have beaten on sales.

S&P 500 earnings have beaten expectations by 5.8% in aggregate so far — slightly ahead of the historical average of about 5%. Though FY23 earnings estimates have been revised lower in recent weeks.

The S&P 500 gained 4% last week and the S&P/ASX 300 lifted 1.7%, capping a strong month of gains.

The S&P 500 returned 8.9% for the month (with a day to go), and the S&P/ASX 300 was ahead 4.8%. That leaves the US index down 17.1% for 2022 to date and the S&P/ASX 300 off 5.7%.

US GDP rose 2.6% (annualised). The core Personal Consumption Expenditure price index — a key measure of underlying US inflation, excluding food and energy — held firm at 0.5% month-on-month. But the data showed reduced breadth.

The market is pricing in a 75bp hike in the Fed Funds rate later this week.

China

Equity risk premiums for offshore-listed Chinese equities rose following President Xi Jinping’s consolidation of power at the National Party Congress last week.

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Hopes that the meeting might signal an inflection in policies such as Covid-zero appear to have been dashed.

Entrenched support for Xi may signal further development of the current policy direction.

This suggests no near-term policy relief for property markets. Growth stimulus may be used more sparingly and surgically going forward.

Geopolitical risk has also increased. As a result, the market-implied equity risk premium for Chinese equities is at levels not seen since 2008, according to research firm CLSA.

Cyber security

Cyber security is in focus after news that Medibank Private’s (ASX: MPL) data breach was more serious than first thought — following the Optus breach several weeks ago — and coupled with news that Australian Clinical Labs (ASX: ACL) had also suffered an attack.

MPL experienced a sharp decline in share price, which seems driven more about the risk of customer losses than the cost of addressing the breach. Whether this eventuates remains to be seen.

Historical analysis by Sustainalytics suggests companies that experience data breaches typically see most of the stock downside in the first couple of weeks after an announcement. Most of the impact is recovered within three months on average.

Federal Budget

The Budget did not contain much of relevance to markets.

But the focus on energy pricing and policy was important. The Budget highlighted the potential impact of high electricity prices on cost-of-living pressures — and by implication, inflation.

There was little detail on how it may be addressed, but the risk of intervention is material.

The future of more than a dozen carbon capture and storage projects is also up in the air after the government cut $250 million in funding in this area.

Europe

The energy situation in Europe is better than many fared, with storage near full and a mild start to the winter. Natural gas futures have plummeted in response.

The situation could change. But it implies some of the steam may come out of coal and LNG prices.

This in turn is beneficial for inflation, bond yields and potentially equities.

Markets

There’s been an interesting divergence in US quarterly earning season.

Some $250 billion in market cap disappeared after softer results from Microsoft, Alphabet, Meta and Amazon. Meta was down 24% last week.

But Visa and Mastercard noted no discernible impact on spending patterns. Traditional industrials such as Caterpillar, McDonalds and General Motors all delivered strong results.

There was a big move in bond yields last week as US 10-year Treasury yields fell 20bps to 4.02%. The Australian equivalent fell 46bps to 3.74%.

The market’s best performers were generally driven by macro considerations. Gold miners such as Evolution (EVN, +15.5%) and Northern Star (NST, +12.2%) did best.

Asset-based bond-sensitives such as REITs and infrastructure did well as bond yields came off.

Miners were generally weaker, which may be in reaction to the outcome from China’s National Party Congress.

About Crispin Murray and 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 an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

Find out more about Pendal Focus Australian Share Fund here.  

Contact a Pendal key account manager here.

Drawing on more than 25 years of experience investing in top-performing Australian companies and a background in accounting, Jim manages our Long/Short Fund and co-manages our Imputation Fund. He is a Chartered Accountant with membership of the Australian Institute of Chartered Accountants.

Pendal Focus Australian Share Fund is managed by Crispin Murray. The fund has beaten its benchmark in 14 years of its 18-year history (after fees), across a range of market conditions. Find out more about Pendal Focus Australian Share Fund here.

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

Contact a Pendal key account manager here