The Point

Tim Hext: Inflation remains stubbornly high — but not as high as you may think

The April monthly inflation data from the ABS showed an annual rise of 6.8%, versus an expected 6.4%.

On the surface that should worry the RBA and markets – and increase the chance of another rate hike in June.

But under the hood, the May number looks closer to 5.5%, which means the RBA should be able to hang on till August and reassess then.

How can we tell? The monthly numbers are published as year-on-year outcomes, and you need to back-solve to gain a sense of the monthly pace, says Pendal’s head of bond strategies Tim Hext.

There’s no underlying inflation data yet, and only half the items in the basket are updated every month at the moment.

Pandemic and energy shock subsidies also need to be taken into account, he says.

“The outlook for inflation here and in the US should be mildly friendly over the next few months,” believes Tim.

What’s driving ASX stocks this week

Do spikes among US chipmakers such as NVIDIA and Marvell mark the start of a multi-year, AI-driven bull cycle?

What might it mean for ASX stocks?

NVIDIA and its rivals are churning out Graphics Processing Units which are in-demand for AI services such as OpenAI’s ChatGPT.

Pendal equities analyst Elise McKay notes that just seven US tech mega caps (Apple, Microsoft, Alphabet, Amazon, NVIDIA, Meta and Tesla) have driven most of the 25% NASDAQ rally this year.

“But valuation metrics for this group do not seem stretched,” she says. “They are growing, making efficiency gains, have strong balance sheets, are buying back stock and may be moving into a more favourable macro and interest rate backdrop.

“While timing and take-up of accelerated computer infrastructure is uncertain, we expect this to be a net positive for ASX-listed data centre player NEXTDC.

“There could also be a positive impact for Macquarie Technology’s data centre business and Megaport on the network-as-a-service side.”

ESG: Regnan launches investor guide to managing biodiversity risks

Most investors are now aware of climate change risks.

But biodiversity loss is fast emerging as the next big concern for investors, as financial institutions grapple with how to measure and manage the ecological systems underpinning economic stability.

“Land degradation has reduced the productivity of nearly one-quarter of the global land surface, impacted the wellbeing of about 3.2 billion people and cost about 10% of annual global GDP in lost ecosystem services,” the UN reported in 2019.

Sustainable leader Regnan has just released an investor guide, Beyond Biodiversity, which outlines a set of guiding principles for effective stewardship of biodiversity, nature and ecosystems.

“We want a stable natural system, a stable social system and a stable economic system,” says report author Oshadee Siyaguna.

“The fewer disruptions there are to business operations and socioeconomic conditions, the better and more predictable the investment outcomes.

ASX midcaps: Why medical imager Pro Medicus has captured our attention

Sam Hupert started as a GP in 1980 and within a couple of years realised the then-nascent world of computing would have a big impact on medicine.

Within three years he’d started Pro Medicus, an imaging software provider working with hospitals, imaging centres and health care groups.

Today the ASX-listed group – held in Pendal Midcaps Fund – is worth more than $6 billion.

The global diagnostic imaging market is worth some $US28 billion globally – and growing at 4.9%, according to Grand View Research.

Growth drivers include an increasing prevalence of lifestyle-related diseases, rising demand for early detection tools, speedier diagnosis, government investment and expansion into developing nations, Grand View reports.

Pro Medicus is mainly in radiology now, but its technology could be used in cardiology, ophthalmology and pathology and all areas of reflected light, says Pendal equities analyst Oliver Renton.

Tim Hext: Where the RBA’s head is at right now

The RBA seems happy with 3.85% for a few more months – and will likely wait for stronger data before considering another hike.

But lagging data like employment – and very laggy data like wages and inflation – is driving decision-making at the moment, cautions our head of government bond strategies Tim Hext.

“This risks a policy mistake of overtightening. As the RBA itself expects, wages won’t peak until later this year.

“I am reminded of the last time this happened in February and March 2008. Credit wobbles had been building all through 2007. Bear Stearns was teetering.

“Yet the high CPI print of January 2008 – on the tail of a mining boom – saw the RBA hike twice to 7.25%. Wage growth didn’t peak til 2009.

“I’m not suggesting another GFC looms. The financial system has been massively redesigned since then.

“But it shows that relying on inflation and wage numbers to set monthly policy can be dangerous, leaving you well behind the current pulse.”