The Point

Crispin Murray’s weekly ASX outlook

Here are the main factors driving the ASX this week according to our head of equities Crispin Murray. Reported by portfolio specialist Chris Adams.

Equity markets bounced last week after overselling — but underlying news flow indicates further tightening, which remains a headwind for markets.

Both the European Central Bank and the Bank of England signalled a more hawkish policy direction

US employment and average earnings growth were far stronger than expected

Oil prices continue to rise as “OPEC Plus” nations signalled they were sticking to their plan despite high oil prices

US bond yields hit new cycle highs; the 10-year government bond yield reached 1.92%

The S&P/ASX 300 gained 2% and the S&P 500 1.6% last week.

So far this year the latter is now down 5.5% and the NASDAQ has lost 9.8%. The S&P/ASX is down 4.5%, reinforcing our view that the Australian market should be more defensive in this environment.

Crispin Murray’s weekly ASX outlook

“We remain cautious in the near term,” says Pendal’s head of equities Crispin Murray.

“The withdrawal of liquidity combined with the Fed’s aim of slowing economic growth suggests there may yet be more downside.

“But we also expect markets to be punctuated by sharp bounce-backs. This is partly because selling is amplified by the effect of investor hedging, which then unwinds.

“It’s important to keep a close watch on the trifecta of rates, oil prices and the US dollar. When all three are rising it usually means a stiff headwind for equities.

“However the underlying growth environment remains strong and supportive of earnings. The selling has also been largely indiscriminate, ultimately driving good alpha opportunities.”

Inflation: nowhere to run, nowhere to hide

What impact will this week’s extremely strong inflation numbers have on next Tuesday’s RBA meeting?

New dwellings, food and fuel were the main drivers of the spike, but the real surprise came from a wider range of goods that normally see little if any inflation, says Pendal’s Tim Hext.

“Clothing, footwear, furnishings and a wide range of everyday items are going up by around 3% to 5% annually. Some of that is supply related and might come down if things normalise later in the year. But for now that is all speculation.

“The RBA once again has been railroaded on its forecasts and will need to address this number in next week’s meeting.”

Four rate hikes are priced for 2022 with the first in May. The RBA would have thought that too aggressive, but now may be forced to admit the market has been better at reading the economy, says Tim.

“Although the numbers support inflation concerns, we still don’t expect an unhinging of inflation from the medium-term 2% to 3% band.

“That’s still considered low — and business investment and the economy in general can easily handle that.”

Crispin Murray’s weekly ASX outlook

The recent volatility does not mean the market’s run is over, says our head of equities Crispin Murray.

“But it is the first meaningful correction, coinciding with a shift in monetary policy and highlighting the importance that liquidity has played in the Covid era.”

Four major issues are influencing markets at the moment, says Crispin:

– Rising rates and the withdrawal of liquidity

– The disruptive effect of the Omicron wave

– The potential for conflict between Russia and Ukraine

– Chinese policy easing

“Of these, only the fourth is positive. As a result we have seen equities weaken in the year to date. At this point the outlook for rates and inflation is the most important issue.”

Are we still catching cold when America sneezes?

Last week Pendal’s Samir Mehta argued that the US regional bank turmoil shouldn’t discourage investors from considering Asian bank stocks.

Clive Beagles, a senior fund manager at Pendal’s UK-based affiliate J O Hambro, has a similar view on British bank stocks.

“Many of the UK banks are posting returns on equity of close to 20 per cent in the first quarter,” says Clive.

“But they all trade at a discount to book value – some of them at 0.4 or 0.5.

“There’s an old assumption that when the US sneezes everyone else catches a cold, but I do slightly wonder if it’s going be different this time.

“If this is a crisis, it’s the first one we’ve had where the US dollar is going down rather than up.”

US dollar weakness could indicate that something different is going on from the usual global contagion, Clive argues.

It could be a sign of a period where the US is one of the slower-growing economies in the developed world rather than its traditional role as one of the fastest, he says.

Why the value rotation still has years to play out

A rotation from growth to value will take years to play out for a generation of investors that has only known low interest rates, says senior fund manager Clive Beagles.

Many investors sold down high-growth stocks like the big US tech firms over the past year as higher interest rates reduced the future value of their earnings.

But despite a selldown that shaved trillions from market values, Clive believes investors are only at the start of a market re-orientation that could last up to three years.

“There’s a generation of fund managers who have only ever lived in a world of zero interest rates and very low discount rates – and it’s taking them a long time to recognise that this is a regime shift,” says Clive, a UK equity income manager with our London-based affiliate J O Hambro.

When you realise Apple is worth the same as the UK’s All-Shares index

IT’S easy to forget that newspaper headlines are designed to do only one thing: sell newspapers.

If anyone needed a reminder to look past the headlines, they need only look to the UK, says Pendal’s Clive Beagles.

The headlines have focused on the UK’s political instability, energy market disruption and the prospect of a recession.

Yet UK shares are the best-performing developed market in the world this year — and still offer strong value, healthy dividends and the prospect of growth, says Clive, a senior fund manager at Pendal’s UK-based asset manager J O Hambro.

Consider this: the 600-company FTSE All-Share Index trades at a similar market cap to Apple.

“It’s crackers. One is a two-product company — the other is an extraordinarily diverse index in all sorts of industries. And yet which one have investors got more money in?”