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Australian Equities
Crispin Murray: What’s driving the ASX this week
The market may be range-bound in coming weeks, says Pendal’s head of equities Crispin Murray.
“It’s high summer in the north, there are limited new data releases, we are near a large technical resistance level for the S&P 500 and it appears the sharp move in systematic investors has played out.”
But further out there remains a wide distribution of outcomes, he says:
- Inflation rolls over, we get a mild recession at worst, earnings declines are limited and the easing cycle starts at the back-end of 2023. The market may consolidate, but ultimately move higher.
- Inflation proves more persistent, driven by tight labour and higher energy prices as the economy runs too hot and China re-opens. Central banks continue tightening into the downturn and earnings decline more significantly, taking equities lower.
“The key to the call remains the main drivers of inflation: the job market, corporate pricing power and commodity markets.”
Crispin Murray: What’s driving the ASX this week
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Crispin Murray: What’s driving the ASX this week
The big debate is whether the market’s rebound is a bear market rally or whether we’ve put in the lows for this cycle.
“At this point the rebound is almost bang on the average bear market rally (in terms of rebound and length) in the S&P 500 since 1950,” says our head of equities Crispin Murray.
“The market breadth of the rally is not yet consistent with a change in trend.
“The rule of thumb is you need to see 90% of stocks above the 50-day moving average to signal a change in market direction. We are at 73%, though this could continue to climb.”
“The challenge to this perspective is the unusual speed and scale of the increases and the market’s current confidence that inflation will be brought back down.”
The bull case for equity markets is:
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Stocks have bounced off long-term technical support levels
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Oil prices have peaked, with demand weakening
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Bond yields have peaked, helped by lower commodity prices
Crispin Murray’s weekly ASX outlook
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Crispin Murray’s weekly ASX outlook
When is bad news good news? Right now say some investors — since weaker growth helps drive inflation lower, bringing forward an expected peak in rates and bond yields.
The market is seeing signs of inflation easing, the economy slowing and policy having an effect, says our head of equities Crispin Murray.
“As a result, concerns over the extreme tail risk of substantial central bank overtightening may be receding.”
Though it’s still too early to say whether we are seeing a bottom or another bear market rally, says Crispin.
“Technical measures of market breadth and volumes are not indicating a sustainable turn in sentiment. Seasonally, August and September are typically soft months for equities.
“Bear markets don’t tend to end until policy direction shifts. It would also be unusual to see markets bottom before the extent of any earnings recession is known.”
The average NASDAQ bear market rally since 1985 has been 30% — and the NASDAQ is only up around 10% from its recent low.
Weekly Aussie equities outlook
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Weekly Aussie equities outlook
The role of the US consumer will be critical in determining the scale of a slowdown and needs to be watched carefully, says Pendal equities analyst Anthony Moran.
Consumers may be more resilient than expected due to strong savings balances, a still-tight employment market, good wages growth and a softening in short-term inflationary pressures.
“The question is whether this relative strength in the consumer will partly offset the recession in global manufacturing — leading to an overall economic outcome that is better than currently feared.
“The current consensus view is that resilience in consumer spending is simply a ‘head fake’ and a summer splurge, with the hangover coming in 2H22.
“This needs to be watched closely. We could be facing a scenario where the savings buffer for consumers is sufficient to see them through the peak in inflation and we see a slowdown — though not a material consumer recession.”
Weekly Aussie equities outlook
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Weekly Aussie equities outlook
What’s driving Aussie equities this week
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What’s driving Aussie equities this week
Weekly Aussie equities outlook
Crispin Murray’s weekly ASX outlook
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Crispin Murray’s weekly ASX outlook
Will the US end up in recession?
“Investor surveys suggest an 80% probability. CEOs are suggesting 70%, says our head of equities Crispin Murray.
“The market is concerned that the Fed has been cornered — the central bank can see the risk of recession is rising, but needs to restore inflation credibility and raise rates quickly to at least get to neutral.
“We are all paying the price of central banks getting policy so wrong in 2021.”
Still, the ASX is better protected in this scenario given its lower valuations in a historical context, support from a weaker Australian dollar and index composition, says Crispin.
“The hope for Australia is that lower inflationary pressure, a looser job market and more exposure to variable rates means sufficient cooling can occur without rates needing to rise to the 4% level the market is predicting. But this would require a material slowdown in growth.”
In terms of recovery, Crispin says this market “looks closer in nature to 2000 and 2008 where the market had to consolidate near its lows for a number of months before sentiment improved – unlike the sharp policy-driven bounce of 2020”.
Crispin Murray’s weekly ASX outlook
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Crispin Murray’s weekly ASX outlook
Tightening cycles often trigger some form of financial shock, which can create a capitulation in the market. This often marks the low, says our head of equities Crispin Murray.
Here are the indicators Crispin’s team is watching for signs of further market strain:
- Spreads among European “peripheral” or non-core bonds (indicate pressure on the Euro as ECB is forced to raise rates into a downturn)
- Credit spreads (indicate evidence of recession risk)
- USD/Yen and Japanese bond yields (indicate evidence that market is losing confidence in yield curve control)
- CNY/USD (reflecting pressure on Chinese economy from higher energy and food prices)
- Crypto — the first real test of how liquid this is in a bear market
- Performance of banks versus market
After the May low, the S&P’s next resistance is at 3500, says Crispin.
“Beyond that, the pre-Covid level was 3250. If we get into this territory it would represent a material tightening of total financial conditions which may see a moderation in the market’s view of how far the Fed needs to tighten.”
- Inflation remains resilient as the economy doesn’t slow sufficiently
- Companies continue to catch up to the cost impost they are wearing
- Housing costs keep rising
- The labour market stays tight as service jobs continue to recover, workers seek compensation for higher prices and so wage growth doesn’t slow
- Supply shortages combined with the return of China continue to underpin higher commodity prices
- This leads to the Fed remaining hawkish, triggering a recession
Crispin Murray’s weekly ASX outlook
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Crispin Murray’s weekly ASX outlook
Pendal’s Crispin Murray outlines two possible paths ahead for Australia:
1) The path to a soft landing
- Building inventories mean consumer price rises ease off
- Chinese re-opening eases product supply, also helping inflation
- Wages ease as a lack of stimulus means companies no longer need to pay up to induce workers to return. Companies begin to stop hiring and even lay off workers. Tesla and Amazon’s recent comments are pertinent in this regard
- Commodity prices stop rising
- As a result, the Fed doesn’t need to go harder than what’s already priced in the forward curve
2) The path to recession
- Inflation remains resilient as the economy doesn’t slow sufficiently
- Companies continue to catch up to the cost impost they are wearing
- Housing costs keep rising
- The labour market stays tight as service jobs continue to recover, workers seek compensation for higher prices and so wage growth doesn’t slow
- Supply shortages combined with the return of China continue to underpin higher commodity prices
- This leads to the Fed remaining hawkish, triggering a recession
ESG election: what Labor means for investors
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ESG election: what Labor means for investors
The shift towards progressive politics and climate action that swept Labor to power has important implications for investors, says Pendal’s Rajinder Singh.
“It was an ESG election,” says Rajinder, who manages Pendal Sustainable Australian Share Fund.
“If you break it down, some of the key policy differences in this election were all about E, S and G.
“On the environmental side, it’s about climate change. For social issues, it was about gender and diversity in workplaces, childcare and Indigenous issues. And a federal integrity commission? That’s governance.”
Some spots to watch: new energy transmission infrastructure, investment in childcare and aged care and how a renewed focus on indigenous affairs affects not only miners but all ASX-listed companies.
“This is now a government with policies that are more aligned with the ESG trends that we’re seeing in the market.”
Crispin Murray’s weekly ASX outlook
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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:
- Energy: Positive fundamentals, making it the most defensive
- Consumer staples: Supported by predictability and lack of cyclicality
- Financials: Becoming less defensive in the past few weeks, probably as the market has started to focus on the prospect of a domestic economic slowdown
- Property: The break-out in Australian bond yields has turned this sector from defensive to under pressure in recent weeks
- Healthcare: Has lagged due to growth characteristics, but becoming more defensive recently
- Discretionary: Has been under pressure due to cyclical concerns and Covid benefits unwinding
- Tech: Remains the weakest
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.
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