The Point

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.

China’s economy is showing signs of recovery. Here’s how our fixed income team is responding

Recent data suggests China’s economic activity could be starting to stabilise.

Monthly industrial output sped up and retail sales grew faster than expected. Is this a turning point in the economic cycle?

That remains to be seen, cautions Pendal’s head of income strategies Amy Xie Patrick, who has taken a close look at the latest signals.

“It’s been only a few months since hopes for a re-opening led boom in economic activity were dashed,” says Amy.

“We think activity is now stabilising on a cyclical basis, and China’s economy can continue to gradually recover into the end of the year.

“But structural drags on the economy are heavy and deep-rooted.”

Amy has just published an article covering the strength of the recovery, structural issues and implications for global growth and investing.

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.”

Tim Hext: Australian business remains resilient as we enter spring

Business managers believe the economy remains on a decent footing and has even slightly picked up from July.

That’s the finding from NAB’s latest monthly business survey.

“The soft landing looks on track, at least for now,” says Pendal’s head of bond strategies, Tim Hext

“Businesses are not confident about the future, but still see conditions as favourable and even improving.”

But investors should separate the nominal economy from the real economy (adjusting for inflation), says Tim.

“Nominally, higher population growth has seen some expansion in the economy and increasing demand for goods and services.

“On the real side, inflation and higher rates has meant individuals are tightening their belts.

“Business knows this, and when the population growth falls back next year the nominal economy will also start feeling this.

“For now, though our models show rate hikes are still more likely than cuts, though the RBA looks happy to sit out the next few months.”