The Point

What’s driving ASX stocks this week

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.

What’s driving Aussie equities this week

Here are the main factors driving the ASX this week according to Pendal investment analyst ANTHONY MORAN. Reported by portfolio specialist Chris Adams

THE dominant narrative of resilient global economic momentum and higher-for-longer rates continues.

US 10-year government bond yields rose 7bps last week, driven by higher oil prices, a slightly higher-than-expected inflation print and resilient economic and corporate data.

At the margins there was data suggesting China’s economy is turning a corner.

Commodities were strong overall and US dollar took a breather after its strong rally over the quarter-to-date.

The European Central Bank took a dovish turn after increasing rates last week. President Christine Lagarde indicated the tightening cycle was most likely done. The problem for Europe is they are heading into a recession.

The S&P 500 fell 0.12% and the S&P/ASX 300 gained 1.82% last week.

Crispin Murray: Two factors underpinning ASX company earnings

Most people would be aware from last week’s per-capita recession headlines that Australia’s population growth is outstripping economic growth.

But population growth – especially immigration and temporary visas – is also supporting corporate earnings, says Pendal’s head of equities Crispin Murray.

“All up, we’re probably looking at about a 3 per cent rise in the population today versus a year ago.

“People are coming to Australia with money in their pockets, setting themselves up and getting accommodation – which is driving up rents.

“Part of the reason we’re seeing resilience in the top line of companies is because they’re basically driven by nominal GDP, not per capita GDP.”

Population growth is also offsetting the effects of the ‘mortgage cliff’ which forces households into higher, variable mortgage payments as low-rate fixed loans expire, Crispin says.

“With each company we met over reporting season, we talked about the issues facing them and if they were seeing consequences from this mortgage cliff. So far, the consequences are very limited.”

Small businesses are doing it tough. Cloud accounting platform Xero has some answers

Xero’s annual Xerocon event is known as ‘Coachella for accountants’ – a reference to a Californian rock concert with a cult-like following.

The ASX-listed cloud-accounting platform has a pretty strong following itself now, with more than 3.7 million subscribers in 180 countries.

That’s led to a pretty good understanding of the state of small-to-medium businesses (SMBs), says Pendal equities analyst Elise McKay.

Xero is seeing SMBs report slower sales growth in Australia, Canada, NZ, the UK and the US, though wage pressures are starting to ease in Australia, NZ and the UK, says Elise.

While SMBs are still unsure about the impact of AI, Xero is adding the technology to speed up repetitive tasks or provide better insights that help humans focus on high-value strategic activities.

“For example, helping to better enable reconciliations or provide better forecasting tools around things like cash flow. And potentially using generative AI to improve customer support.”