The Point

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.”

Crispin Murray: Australia is a good place for investors right now

Australia is as good a place as investors can be in this tough environment, says Pendal’s head of equities Crispin Murray.

Four major challenges are hitting markets simultaneously, says Crispin: the crisis triggered by Russia’s invasion of Ukraine, the re-emergence of inflationary pressures, impending interest rate rises and the pandemic.

“It’s not a great short-term message — we think markets are going to continue to struggle,” Crispin said this week in his bi-annual Beyond the Numbers webinar.

“There are however, two silver linings. The first is that Australia is perhaps the most defensive market in the environment we’re in.

“The second is that when you see this sort of drawdown in financial markets, there tends to be an indiscriminate nature to those sell-offs.

“They often lay the foundations for some of the best investment opportunities that we will be able to take advantage of over the next few years.”

Tim Hext: Dust off the text books as stagflation threat looms

We can expect a lot more mentions of stagflation this year following fed Chair Powell’s acknowledgment last week that he would “do what it takes” to fight inflation.

Many of us wil be dusting off the textbooks, having not lived or at least invested through stagflation conditions, says Pendal’s Tim Hext.

“If taken at face value US rates may need to go far higher than the current 2% factored in by markets.

“Suffice to say it is bad news for most of us, seeing not only our investments but also our spending power go backwards.”

Inflation should pass 3% this year and could hit 5% on an annual basis, Tim says.

“But as long as wages don’t lock in with inflation shocks — creating the vicious circle we saw in the 1970s — supply will eventually return to commodity and goods markets.”

“It just might not be a 2022 — or even a 2023 — story.”

Be ready for a Russian default as sanctions bite

Few investors would take issue with global sanctions aimed at limiting the terrible human toll of Russia’s invasion of Ukraine.

It’s accepted that the financial implications will impact markets around the world. But what does it mean in terms of asset allocation?

“There is an increasing chance that Russia might default,” says Oliver Ge, a portfolio analyst with Pendal’s Income and Fixed Interest team.

“Russia has about $US640 billion of reserves of which $US400 billion is frozen in central banks around the world. On conservative estimates it costs about $US1 billion a day to run the war, so the impact to Russian coffers is material.

“The message to advisers is that if you were told at the start of the year that you’d get 5 to 7 per cent growth, that’s not going to play out in the current state of affairs.

“So, you should be very wary about holding growth assets and potentially think about some rotation to bonds. Bonds will keep paying,” he says.

“It shouldn’t be a massive rotation, but investors should be more mindful around the expectations of growth assets.”

Crispin Murray’s weekly ASX outlook

Here are the main factors driving the ASX this week according to our head of equities Crispin Murray. Reported by portfolio specialist Chris Adams.

RUSSIA’S invasion of Ukraine is creating second-order effects which the market is struggling to read, leading to dislocations.

We can see two ends of the spectrum in commodities which are “melting up” and European equities (banks in particular) which are plunging.

The markets are facing a four-way collision: the pandemic, a geopolitical crisis, an interest rate tightening cycle and an inflation shock. This is a unique combination.

Historically a geopolitical crisis such as Ukraine and the resulting supply side shock would be partly managed through a reduction in interest rates — as was the 1998 Russian default.