The Point

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.

MARKET reaction to Russia’s invasion of Ukraine was more subdued than many would have expected, though there has been underlying volatility.

The S&P500 actually ended up last week, gaining 0.8%. This is possibly because the market had already priced in a high probability of conflict – alongside the underlying issue of higher rates.

Sentiment was cautious as a result. The view that sanctions would not cover key commodities and NATO forces would not engage on the ground tempered perceived near-term impact on the broader global economy.

ESG: Investors are voting for diversity in board elections

Need more evidence that ASX investors are placing greater importance on ESG factors?

A new study from responsible investing leader Regnan finds investors are voting against the election of men to boards that lag on gender diversity targets.

Regnan examined two groups of ASX 300 companies — those with low gender diversity at board level and a smaller group with no female directors at all.

For the low-diversity boards, men up for election or re-election were supported by 93% of votes compared to 98.8% for women. Among companies with no female directors, support for men fell to 88.6%.

“Support for re-election of directors in Australian companies is typically very high,” says Regnan’s head of research Alison George.

“A vote that dips below 95 per cent stands out. While this is a small sample set it’s quite a strong difference. Gender diversity concerns are driving the outcome.”

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.

Several themes are emerging from Australia’s reporting season:

The Australian economy is in good shape with a strong outlook

Companies that have been challenged for some time by Covid disruptions are responding well and positively surprising the market

Labour availability and inventory management have been a challenge for some companies

US-based businesses are seeking to put through material price rises

Crispin Murray’s weekly ASX outlook

Our head of equities Crispin Murray remains cautious in the short-term, but says Australian stocks should fare better than their US counterparts.

“The challenge for central banks — particularly in the US — is that the economy is growing well above trend, with little slack in labour markets, says Crispin.

“They need to engineer a tightening of financial conditions to resolve this and at least slow the economy back to trend growth rates.

“This is yet to be achieved, which means they need markets to adjust further.

“This is why we remain wary of equity markets in the near term. We are not expecting a major bear market, but believe we remain in a correction phase.”

Crispin believes there are good reasons to be wary of market expectations that annualised inflation will drop below 3% by the end of 2022.

Still, Australian equities should fare better than the US, reflecting our sector mix and less need to tighten, he says.

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.

Equity markets bounced last week after overselling — but underlying news flow indicates further tightening, which remains a headwind for markets.

Both the European Central Bank and the Bank of England signalled a more hawkish policy direction

US employment and average earnings growth were far stronger than expected

Oil prices continue to rise as “OPEC Plus” nations signalled they were sticking to their plan despite high oil prices

US bond yields hit new cycle highs; the 10-year government bond yield reached 1.92%

The S&P/ASX 300 gained 2% and the S&P 500 1.6% last week.

So far this year the latter is now down 5.5% and the NASDAQ has lost 9.8%. The S&P/ASX is down 4.5%, reinforcing our view that the Australian market should be more defensive in this environment.

Crispin Murray’s weekly ASX outlook

“We remain cautious in the near term,” says Pendal’s head of equities Crispin Murray.

“The withdrawal of liquidity combined with the Fed’s aim of slowing economic growth suggests there may yet be more downside.

“But we also expect markets to be punctuated by sharp bounce-backs. This is partly because selling is amplified by the effect of investor hedging, which then unwinds.

“It’s important to keep a close watch on the trifecta of rates, oil prices and the US dollar. When all three are rising it usually means a stiff headwind for equities.

“However the underlying growth environment remains strong and supportive of earnings. The selling has also been largely indiscriminate, ultimately driving good alpha opportunities.”

Inflation: nowhere to run, nowhere to hide

What impact will this week’s extremely strong inflation numbers have on next Tuesday’s RBA meeting?

New dwellings, food and fuel were the main drivers of the spike, but the real surprise came from a wider range of goods that normally see little if any inflation, says Pendal’s Tim Hext.

“Clothing, footwear, furnishings and a wide range of everyday items are going up by around 3% to 5% annually. Some of that is supply related and might come down if things normalise later in the year. But for now that is all speculation.

“The RBA once again has been railroaded on its forecasts and will need to address this number in next week’s meeting.”

Four rate hikes are priced for 2022 with the first in May. The RBA would have thought that too aggressive, but now may be forced to admit the market has been better at reading the economy, says Tim.

“Although the numbers support inflation concerns, we still don’t expect an unhinging of inflation from the medium-term 2% to 3% band.

“That’s still considered low — and business investment and the economy in general can easily handle that.”