The Point

Weekly Australian equities outlook

Australian data suggests ongoing economic strength despite worrying signs in Europe, says Pendal portfolio manager Jim Taylor.

“Policy decision and timing in Europe are complicated by a strong inflationary pulse. This is underpinned by continued capacity constraints, second-order effects of the Ukraine war and China’s Covid response.”

Meanwhile in Australia retail sales are almost back to their pre-Omicron peak in November. Fashion and eating out dominated the February sales data with about 15% growth.

“Statistics indicate housing credit growth continues to accelerate to a post-GFC high, while residential approvals have rebounded strongly from a Covid-induced delay,” says Jim.

“Business credit growth is also strong, running at 10% year-on-year. This is also a post-GFC high. Other data shows household wealth growing as quickly as ever.

“The ratio of job vacancies to unemployed people has also spiked to a record high 75%.

“Normally for every job vacancy there are three-to-four unemployed people available. Now there are only about 1.25.”

Federal Budget will embolden the RBA on rates — but not as much as you think

Not surprisingly in an election year, the federal government is already spending its recent windfall in this week’s Budget.

How will this affect rates?

In recent months the Budget improved by about $115 billion (over four years) as Australia’s terms of trade boomed and massive fiscal spending delivered a stronger economy, says Pendal’s Tim Hext.

Josh Frydenberg has already spent $30 billion of that on top of $16 billion in earlier pre-election handouts.

“This adds further fuel to an already strong economy,” says Tim.

The Budget will further encourage the RBA to admit they need higher rates. “But with markets forecasting 2% rates here early next year — and 3% by the end of next year — there is simply too much priced in.

“We think the US will get to those levels, but investors assuming Australia must follow are missing a couple of factors.

“Firstly, our inflation is significantly lower. Secondly, our floating rate mortgage market means any rate hikes have more impact sooner.

“It may seem strange but when the RBA actually starts to moderately tighten rates, bond markets will likely rally.”

Crispin Murray’s weekly ASX outlook

Equity markets continue to bounce despite increasing two-year US bond yields, a surging oil price and higher US dollar.

While our head of equities Crispin Murray remains wary in the near-term, he continues to reiterate that Australia is better placed than many other countries.

“There is less need to raise rates,” says Crispin. “The economy is benefiting from pent-up demand as restrictions roll back.

“Australia is largely self-sufficient in key commodities and is a beneficiary of rising prices here.

“This underpins our relatively positive view of the domestic equity market. This is reinforced by the degree to which the Australian market has underperformed the S&P 500 since the GFC.

“While recent outperformance has been material, it is a blip on a longer-term view. This gives us confidence in the potential for further outperformance.”

Crispin Murray’s weekly ASX outlook

“The environment we are in today is different to the post-GFC era — what worked in the last six years won’t work going forward,” says Pendal’s head of equities Crispin Murray.

“We see corporate cash flow and consistency as critical. We do not expect high growth, speculative and profitless tech to resume market leadership.

“We see Australia as a relative safe haven given the economy is in good shape and skews to commodity and financial stocks.

“The near-term market is likely to remain weak, but we don’t expect stagflation and the start of a bear market.

“Current drawdowns tend to be indiscriminate, thereby creating significant stock opportunities.”