Crispin Murray: What’s driving the ASX this week?

Here are the main factors driving the ASX this week, according to Pendal’s head of equities CRISPIN MURRAY. Reported by portfolio specialist Chris Adams

• Equities continued moving higher last week
• Australian inflation remains key to market performance
• Find out about Pendal Focus Australian Share fund
• Watch Crispin’s most recent Beyond the Numbers webinar

EQUITY markets continued moving higher last week, triggered by the drop in bond yields.

Macro news flow, while limited, supported the signal that US growth is slowing at the margin. This is good for markets, as it brings rate cuts back into play.

The S&P 500 gained 1.89%.

The ASX 300 was up 1.78%, supported by bank results, which noted that the economy is holding up and margin pressures are abating.

A series of updates from other companies generally painted a picture of a solid economy, particularly on the industrials side – with upgrades from AUB Group (AUB) and AGL (AGL), good results from Orica (ORI) and Goodman (GMG), and an absence of material downgrades at the annual Macquarie conference.

The one area of potential weakness is in consumer discretionary stocks, which have underperformed the market.

We’ve also seen a significant shift in government energy policy ahead of this week’s Federal Budget.

The Federal Government is now embracing gas as a transition fuel and recognising the risk of a shortfall in gas supply from 2028, unless more development occurs or import facilities are built.

US economy

Credit

The senior loan officer opinion survey (SLOOS) – a quarterly update on the credit environment – suggested banks are still in credit-tightening mode, but the extent of that is flattening to slightly diminishing.

The US Federal Reserve pays attention to the SLOOS.

This result is consistent with its perception that policy is still somewhat restrictive but not deteriorating. Given the economy has been able to grow despite tighter standards, it suggests nothing should change.

Employment

Following softer payrolls data, we saw a spike in jobless claims last week.

However, half of this came from New York, suggesting it was a not a signal of broad-based deterioration.

Consumer expectations

The University of Michigan’s survey on consumer sentiment deteriorated while inflation expectations rose, which is at face value a negative signal.

The issue is that surveys in general have not given great signals.

For example, consumer sentiment fell in late 2023 despite a strong economy. There is a view that the heightened political tensions in the US may be having an impact on the measure.

Inflation expectations have been volatile, but they are important as it points to more persistent wage pressures. On a more positive note, the Conference Board surveys for CEO Confidence are improving, mirroring the better-than-expected economy and earnings.

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US market update

Around 85% of the US market has reported quarterly earnings.

In summary, it has been a good season, with EPS up 6% year-on-year, versus 3% expected when results started.

This has been driven by margin improvement rather than revenue growth, which highlights both the issue of industry structure, and that economic resilience enables more pricing power.

The other observation is that the better earnings tended to be concentrated in the larger stocks rather than the median.

The rally in bond yields has put a floor under the market’s recent correction, and it seems likely we’ll see a test of the prior high.

Volatility has eased off, which is supportive, and we have seen key sectors like the banks already back at their highs.

There is an interesting signal in European equity markets – these have performed well recently, reflecting a more benign inflation outlook than the US and greater scope for rates to fall.

This is also reflected in European bond markets, where yields are rolling over.

The relevance for Australia is that our inflation performance is key to how well the market does. This week’s Budget will be important to see the level of restraint in fiscal spend, which can impact rates.

Australian equities

The combination of results for March-end reporting companies and the Macquarie conference meant there was a lot of stock news.

Banks saw earnings fall but signalled that they were not seeing any signs of economic deterioration, with asset quality good, a steady pipeline of business loans and margins stabilising.

Orica (ORI) offered a good example of an industrial company managing sluggish volumes with more value-added products, helping improve margins.

Consumer trends are divergent.

Some retailers are seeing a slight slowing of sales; combined with cost growth, this triggered market concerns on margins.

However, Qantas (QAN) is seeing no slowdown in travel demand, with some small improvement in the corporate travel market. The upshot is we remain of the view that the market can continue to move higher, with individual stock stories – rather than macro factors – re-emerging as the key driver of performance.

About Crispin Murray and the 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 a global investment management business focused on delivering superior investment returns for our clients through active management. 

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