Crispin Murray: What’s driving ASX stocks this week

Here are the main factors driving Australian equities this week according to our head of equities Crispin Murray. Reported by quantitative analyst Lee Ma

GLOBAL markets rebound marginally last week. The S&P500 gained 0.5% while the S&P/ASX 300 index finished in the red (-0.8%).

The market is clearly weighing up negatives around central banks removing stimulus earlier than expected versus the positives of a strengthening global economy.

Our view is that the taper is now largely priced in by the market. The incremental news is that the global economy is re-accelerating after the Delta-driven slowdown and an easing of some supply chain bottlenecks.

This should lead to an equity market rally into the year’s end.

The main news last week was the ongoing Evergrande story amid Chinese property concerns; and the Fed’s slightly more hawkish messaging, with the pace of tapering now slightly faster than the market expected.

Covid and vaccinations

Global trends have continued to improve, notably in the US. After school re-openings led to a rise in cases, US infection rates are now falling along with hospitalisations in some states.

Emerging markets are also improving as they ramp up vaccination. This is important since supply bottlenecks stemmed from factory closures in a number of EM countries such as Vietnam.

US data continues to show most hospitalisations and deaths are among the unvaccinated. This shaped the US Food and Drug Administration’s view on booster doses — which are approved only for over-65s.

The view is that the role of the vaccine is to stop people getting too sick, rather than completely stop the virus. The FDA did not see a need to approve an extra dose for the broader population given a lack of data on long-term effects.

This will give time for a variant-specific booster to be trialled (which is now underway).

At home, NSW is going better than expected and Victoria is in line with forecasts.

First-dose vaccination rates in NSW are averaging 42k per day v 46k last week. This has taken NSW to 88% first dose and potentially 90% this coming week. Second-dose vaccinations are more in line with expectations at 70k per day v 61k last week. The run rate is expected to pick up to 72k this week.

NSW is on track to reach 70% on October 5 and 80% by October 15.

Hospitalisations in NSW appear to have peaked at 1268 and are now down to 1146. ICU cases peaked at 234 and are now 222. Both figures are well below forecasts from the start of September.

We remain of the view that we will see a sharp recovery in activity on the east coast coming into November.

We are positive on domestic stocks leveraged to this.

Economics and policy

Updates from the US Federal Reserve last week were broadly in line with market expectations — with a slightly more bearish tilt.

The taper is due to start in November and finish by mid-year — two-to-three months earlier than consensus.

This implies a reduction of $15 billion per quarter rather than per meeting as the market previously thought (or $18 billion per meeting v $15 billion expected).

The dot plots were in line with an even split for the first hike in 2022 versus 2023. The logic for the faster taper is to give the central bank some flexibility if inflation stays higher next year.

The market has 25bp priced in by the end of 2022.

On the data front, median expectation for inflation has risen 20bp to 2.3%, implying the 30bp average increase in rate levels by the end 2022 in the dots.

The 2022 median GDP growth rate forecast has also risen by 50bps to 3.8%. Unemployment is now expected to fall to 3.8% by the end of 2022.

Fed chair Jerome Powell’s language has become more cautious on inflation, with the “transitory” period now lasting into 2023 and even 2024.

Overall, the underlying message was that inflationary pressures have been more resilient, particularly given supply chain bottlenecks.

This extended period of higher average inflation means the Fed will need more flexibility to respond, potentially before the end of 2022.

China

China remained in the limelight last week. Property giant Evergrande appears to have missed interest payments due on bank loans and offshore bond issues due last week. A grace period is likely to involve negotiating some form of restructure.

Cash flow appears to be directed into funding projects, which is politically sensible. We may see unfinished units sold at a discount to other developers, potentially those backed by the state.

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Our view remains that this will not be a systemic issue. There will be some attempt to put a floor under the economy given the importance of the property market.

Market moves suggest this is the case — the Chinese currency, credit spreads and equity market did not move much despite the headlines.

Against this backdrop we think the case for a policy shift in China is high, which will support cyclicals.

There is a lot of sensitivity about an overly sharp slowdown next year as president Xi Jinping locks in his third term. The need for economic growth remains important.

Meanwhile the UK is experiencing some chaos from rising electricity prices, gas shortages and labour shortages (notably truck drivers).

This is leading to some food and fuel shortages. The issue reinforces the need for more inventories of strategic commodities, higher wages and more investment. This probably contributed to a more hawkish Bank of England meeting last week. A rate hike is now becoming likely by May.

A positive outlook

Overall we are becoming more positive as falling global Covid cases allow economies to re-open.

We can see the Fed GDP numbers start to tick better, having weakened sharply over the last two months.

The bond market also continues to signal that the economy is faring better. US bond yields are following their European counterparts in breaking out of their recent trading range.

The economic surprise index also looks to be bottoming. And a significant inventory re-build is required in a number of industries as soon as supply chain blockages are resolved.

All in all, this should be supportive of cyclicals and financials v defensives. Cyclical growth will continue to do well, but more defensive growth, such as healthcare may underperform.

Markets

Bond yields went up last week in the US and Australia. Commodities generally recorded gains.

Iron ore had a wash-out last week, bottoming in the US$90s, before sharply bouncing off these lows. In the $90s, the cost curve will start to move.

We have already seen a lot of marginal suppliers for iron ore — such as Ukraine and India — redirect stocks back into their own markets as prices fall. This will make China more reliant on Australian ore.

While we don’t expect a big bounce in iron ore, we do believe the falling prices have come to an end for this year.

About Crispin Murray and Pendal Focus Australian Share Fund

Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

Find out more about Pendal Focus Australian Share Fund here.  

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