The Point

Jim Taylor: What’s driving ASX stocks this week

Each week our Aussie equities team runs through the factors driving the Aussie stock market.

Observations on two major forces stood out in the latest report from PM Jim Taylor – one in the virtual world and one in the physical world.

On the AI mania gripping US markets, Jim noted that last week was the biggest ever weekly inflow into US listed tech companies at close to $US9 billion, according to researcher EPFR.

“That’s about 40% more than the next biggest inflow in 2021.”

Those more invested in the physical world would have noted the Bureau of Meteorology updating its El Niño-Southern Oscillation outlook from “watch” to “alert”.

“This means about a 70 per cent chance of El Niño forming in 2023 – roughly three times the normal chance,” said Jim.

“After three years of high rainfall, the ‘weather ate my homework’ excuse may be taken off the table for many ASX-listed companies.”

The case for bonds as rate hikes push Australia towards recession

Recession talk increased in Australia this week after the RBA’s decision to lift rates for the 12th time in just over a year.

Pendal’s Anna Hong agrees the chance of a recession in Australia is increasing with rate hikes.

That bolsters the case for Australian government bonds, cash and high-grade investment credit, argues Anna, an assistant portfolio manager in Pendal’s Income and Fixed Income team.

Australia is one of only a handful of countries to record a budget surplus this financial year and – not withstanding the threat of recession – remains in good economic shape, she says.

“From an economic perspective, even if things go wrong, the government is in a good position to support the Australian economy.

“Australian banks are world-leading in capital strength. As a result, assets within Australian shores are safer than almost any other part of the world.”

Emerging markets aren’t so different to us – but you’ve got to pick the right ones

There’s a common misconception that emerging markets countries are dysfunctional, war-torn or burdened with significant health or security issues.

“But they’re not that different from us,” says James Syme, who co-manages Pendal Emerging Markets Opportunities fund.

“The main emerging market benchmark has 24 countries in Latin America, eastern and southern Europe, Africa and Asia.

“Generally they are well-run democracies or stable non-democracies with happy, successful economies and large and growing middle classes.”

That misperception presents an opportunity, says James – as long as investors can choose the right countries.

James and his team are now investing in eight EM countries including Brazil, Mexico and Indonesia.

EMs can help diversify risk in global equities portfolios, says James.

Tim Hext: Inflation remains stubbornly high — but not as high as you may think

The April monthly inflation data from the ABS showed an annual rise of 6.8%, versus an expected 6.4%.

On the surface that should worry the RBA and markets – and increase the chance of another rate hike in June.

But under the hood, the May number looks closer to 5.5%, which means the RBA should be able to hang on till August and reassess then.

How can we tell? The monthly numbers are published as year-on-year outcomes, and you need to back-solve to gain a sense of the monthly pace, says Pendal’s head of bond strategies Tim Hext.

There’s no underlying inflation data yet, and only half the items in the basket are updated every month at the moment.

Pandemic and energy shock subsidies also need to be taken into account, he says.

“The outlook for inflation here and in the US should be mildly friendly over the next few months,” believes Tim.

What’s driving ASX stocks this week

Do spikes among US chipmakers such as NVIDIA and Marvell mark the start of a multi-year, AI-driven bull cycle?

What might it mean for ASX stocks?

NVIDIA and its rivals are churning out Graphics Processing Units which are in-demand for AI services such as OpenAI’s ChatGPT.

Pendal equities analyst Elise McKay notes that just seven US tech mega caps (Apple, Microsoft, Alphabet, Amazon, NVIDIA, Meta and Tesla) have driven most of the 25% NASDAQ rally this year.

“But valuation metrics for this group do not seem stretched,” she says. “They are growing, making efficiency gains, have strong balance sheets, are buying back stock and may be moving into a more favourable macro and interest rate backdrop.

“While timing and take-up of accelerated computer infrastructure is uncertain, we expect this to be a net positive for ASX-listed data centre player NEXTDC.

“There could also be a positive impact for Macquarie Technology’s data centre business and Megaport on the network-as-a-service side.”