The Point

What’s driving ASX stocks this week

Moderating inflation is the trend of the year. Here’s what it means for investors 

Moderating inflation is now the trend of the year, says Anna Hong, an assistant PM with Pendal’s income and fixed interest team.

The US CPI increased 3.2% in the year to October – down from 3.7% annualised in September.

While Australia remains higher (we’re probably six months behind the US says Anna), we can see light at the end of the tunnel.

“Across the globe, economies have been seeing inflation come down as the resumption of supply chains eased price pressure on goods.

“This time around the inflation slowdown was much more broad-based, rather than just a goods-fuelled moderation.”

With moderating inflation as the trend of the year, investors can be more assured in their bond allocation, Anna argues.

“On balance, we believe Australian bonds should provide better risk-reward ahead.”

Crispin Murray: What’s driving Aussie equities this week

There are two views on the medium-term outlook, says Pendal’s head of equities Crispin Murray.

The bears expect material weakening or recession in the US next year due partly to the lagging effect of monetary tightening on longer debt duration.

Unemployment might rise materially, affecting consumption and bringing forward rate cuts. Corporate earnings could fall and equity markets de-rate.

The bulls believe the peak in financial conditions tightening has passed and now presents a lighter headwind.

In this scenario, core inflation falls quickly, unemployment stays low and GDP growth resilient, reflecting a cycle distorted by the pandemic. Wages would ease off while consumption remained supported.

Falling inflation could prompt rate cuts, providing protection against a slowdown.

Aussie equities: AI and cloud computing drive data centre stocks

Elsewhere in this newsletter, Pendal PM Brenton Saunders nominates data centre stocks as one of three thematic opportunities in the mid-caps space.

Pendal analyst Elise McKay agrees, having just returned from a US trip where she met with participants across the data supply chain.

Elise believes established data centre (DC) owners with existing capacity are best-placed to benefit from growing demand due to the time it takes to acquire land, undertake construction and manage power requirements and other complexities.

“I’m very bullish on the outlook for data centres,” Elise says.

The accelerating shift to the cloud is driving demand. Global demand is forecast to triple in the next five years, according to research from Cushman & Wakefield. Generative AI is adding to that shift.

“There’s strengthening demand for DCs and supply is tightening,” Elise explains.

In some major DC locations, such as Northern Virgina in the US, vacancy rates are at one per cent. In Australia it’s closer to 17 per cent.

Emerging markets: Where to hunt for opportunities in China

Parts of China’s equity market are showing opportunities at current price levels, says emerging markets portfolio manager James Syme.

James believes the EM equities asset class is dominated by bottom-up investors who, in the aggregate, alternatively underreact and then overreact to top-down developments.

“Sometimes over-reaction can occur to the downside, when groups of stocks within markets sell-off indiscriminately to unjustified levels on top-down concerns.

“We believe that’s happening in parts of the Chinese equity market – and that real opportunities are being presented at these price levels.”

Does that mean Chinese equities are set to outperform the broader emerging market benchmark?

No, he says. “The property sector continues to struggle and the loss of market share in US imports will not easily be regained.”

But there are opportunities, James believes.