The Point

TIM HEXT: This week’s modest wages data won’t last

The latest wage data shows surprisingly modest growth in some sectors.

But wages are the ultimate lagging indicator and that will soon change, says Pendal’s Tim Hext.

The latest WPI data shows the price of labour grew a modest 0.7% in the March quarter and 2.4% for the year.

Those numbers may be surprising especially in industries such as construction and retail which face worker shortages.

But the data will change, since we’ve only fully opened up this year, says Tim.

“The RBA expect the WPI to hit 3% by year end and 3.5% by the end of 2023. Chances are we hit these levels sooner.

“This adds to the narrative that inflation will struggle to fall back to target anytime in the next few years. Investors should still be looking to inflation bonds ahead of nominal bonds.

“Inflation will moderate next year but levels above 3% look like being more entrenched over the next two to three years, helped by wages eventually nearing 4% growth”.

ESG: How investors can judge a company’s climate change plan

“Investors need to have confidence that climate risks are being managed well by companies in their portfolios,” says Regnan’s head of research Alison George.

But how can you tell? It’s a complex question, but Alison offers a four-point checklist.

Is the plan credible? Does it comprehensively cover material issues? Is it clearly disclosed, with sources? Does it broadly consider the impact of the net zero transition?

Is it ambitious? You should see clear, comprehensive targets in the short, medium and long term on all material aspects of climate change, including value chain emissions and physical risks.

Is it real? Is it backed by enough resourcing and capability, appropriate organisational structure, cap-ex plans and effective board oversight? Has the plan informed strategy development and decision-making? Is there evidence of progress?

Are they acting against change? Is the company paying lip-service while lobbying against change?

A company that passes all four tests is likely to have a solid climate action plan.

Crispin Murray’s weekly ASX outlook

Aussie equity investors will have noticed a large sector divergence in the ASX300 this year. Our head of equities Crispin Murray rates the sectors from best-performed to worst:

Right now the issue weighing on markets is not so much the rate hikes — which have been well flagged — but widespread scepticism that central banks can tame inflation without causing recession, says Crispin.

Crispin Murray’s weekly ASX outlook

This is a critical juncture in terms of which way markets break, says our head of equities Crispin Murray.

“Signs of stress are building in markets but we are also seeing weak sentiment and some pockets that look to be oversold.”

Crispin points to three areas of concern:

1. The US dollar’s current strength can be a problem for markets since it complicates the ability to contain inflation outside the US. It also leads to potentially significant capital outflows and puts strain on emerging markets. Markets tend to be more volatile when currencies are not stable.
2. Credit markets continue to deteriorate as the US high-yield credit default swap index moves higher. It has more room to go as the economy slows.
3. The correlation between bonds and equities appear to have reversed. Correlation has been low post-GFC, where bonds offered protection against equity sell-offs. It is now high, making it harder for investors to hedge portfolios. This has an impact on the amount of money investors can deploy in equities – as does recent high levels of volatility.