Equity markets selloff as amid rising inflationary concerns

Equity markets sold off heavily last week in response to a headline US inflation figure of 8.6% that was released the previous Friday.

Global equity markets have not seen such weakness since the onset of the COVID-19 pandemic in Q1 2020. The unexpected inflation print saw investors rotate to safe haven assets (gold +0.4%) as fears further peaks in inflation are likely.

The pessimistic outlook and investor caution led to the MSCI World Index falling -3.9% in AUD terms. A weaker AUD (-2%) softened the blow somewhat given the MSCI World Index fell -5.9% in USD terms.

Meanwhile the Federal Reserve hiked US interest rates by 75bps in an attempt to combat rising inflationary pressures and are expected to do the same at July’s FOMC meeting in 5 weeks’ time. Current estimates indicate a 3.25% cash rate by year’s end.

Locally, Australia’s employment data rebounded strongly in May with over 60,000 jobs created, driving a 3.9% unemployment rate. Full time employment surged by upwards of 69,000 jobs which offset a contraction of 8700 jobs in part-time work. Pleasingly, this saw the underemployment rate (those currently working but seeking additional hours) fall to 5.7% from 6.1%.

The surprisingly strong employment data which was released one day after the Fair Work Commission increased the minimum wage by 5.2% has further fuelled investor bets that the RBA will hike rates by 1% over the next two board meetings.

Inflation Persisting

The recent US headline inflation print of 8.6% was salt in the wound for “team transitory.” None of the 51 strategists and economists that submitted to Bloomberg predicted such a number. Consensus was 8.3% – with four of the 51 predicting the high-side of estimates being 8.5%

Unsurprisingly, bond yields in the US have soared in the days to follow, with the two-year yield recording a +37bps day to close at 3.2% last Monday. Two-year yields have not risen by this much in a single day since June 2009.

The long end which refers to longer duration bonds (i.e the 10-year US Treasury) outperformed but was also hit, despite the implications for growth. The 10-year yield closed +21bps higher over the course of the week and now yields 3.23% breaking 2018 highs of ~3.20%.

Perhaps adding to this problem was a tri-party announcement from Japan’s Ministry of Finance, the Bank of Japan (BoJ), and the Financial Services Agency that they plan to intervene in currency markets to protect the Yen, which is down ~15% YoY (year-over-year). But with no rate rise in sight, the BoJ may be forced to sell foreign assets – including huge swaths of US and Australian government bonds.

Locally, the RBA recently surprised by hiking rates 50bps to 0.85% and this has seen the 3-month BBSW (Bank Bill Swap Rates are credit-based interest rate benchmarks used by banks to issue short-term bank paper) surpass 1.50% for the first time since the start of 2019.

This is a positive for ASX bank hybrid investors with reference rate assets and distributions often priced on the 3-month BBSW. This means incomes and running yields will be significantly higher going forward.

Such benefit is set to continue, with September 2022 forward yields pricing in a 2.85% rate for 3m BBSW.

On the back of rising yields, we believe fixed income as an asset class is becoming a more attractive value proposition than it has been in recent years.

Market Volatility

(source – Libby Newman, Investment Specialist – Strategy and Research, Vanguard Australia)

Nearly everywhere you turn, from friends and colleagues to news channels, you can find someone with a strong opinion about the financial markets. At the moment, it seems that the news on so many fronts is bad with skyrocketing energy costs and both equity and bond markets down significantly since the start of the calendar year.

While investing in the stock market is typically a prudent choice for investors seeking long-term growth, sharp drops can still be hard to stomach. Below are some things to keep in mind if a market tumble makes you feel the need to “do something” which might shut you out of the strong recoveries that have historically followed market downturns.

Downturns aren’t rare events

Typical investors, in all markets, will endure many of them during their lifetime. Since 1980 there have been 9 bear markets (declines of 20% or more lasting at least two months).

There has been a lot of focus on the transition to a bear market (with the line in the sand of a 20% decline having been triggered by the US S&P 500 index in mid-June 2022). This is the same market that delivered returns of 36% for the year ended December 2021 (currency adjusted), and even with a 20% decline at the onset of the Covid pandemic, recorded 7.3% for the year ended December 2020 (currency adjusted).

It is important to keep in context that in spite of several bear markets, the market has also continued to trend higher over the long term. Not all financial market declines are the same in length or severity. For example, historically speaking, the GFC of 2008-2009 was an extreme anomaly. As challenging as that event was, it was followed by one the longest stock market recoveries in history.

The Australian equity market (which admittedly recorded a more modest, but still very respectable 17.5% for the year ended December 2021), has held up relatively well, posting a decline of 11% (so not yet in bear territory).

Dramatic market losses can sting, but it’s important to keep a long-term perspective and stay invested in order to participate in the recoveries that typically follow.

Some bear markets since 1980 have been sharp, but many bull market surges have been even more dramatic, and often longer, leaving stock investors well compensated over the long term for the risk they took on.

But such action would shut you out of the strong recoveries that have historically followed market downturns. The answer is to come up with a game plan before the next market pullback, so you’re well positioned to try to take advantage of the opportunities that follow.

What’s more, you’ll probably know what to expect as markets cycle through their phases, so you can tune out messages that don’t help your strategy.

The best defence: Making a plan and sticking to it

By focusing on the factors of your investing strategy we can control (including things such as asset allocation and costs) and not worrying about those things out of our control, such as downturns in the markets and economy, you can prepare your portfolio for the financial market shocks.

Remember that bearish market conditions—while inevitable—don’t last forever. As a savvy investor, you can ignore short-term pullbacks of the market (and any commentary that might cause you to veer off course) and remain committed to achieving your long-term vision.

Downturns come and go. The results of a well-designed and faithfully followed plan, on the other hand, can serve you the rest of your life.

ASX Weekly Wrap

The ASX200 under/outperformed the global benchmark falling -6.6% last week.

The selling was broad-based with tech stocks faring worst, down -9.8%. Energy stocks which have been the best performing sector year to date rising +28% were marked down -8%.

Iron ore fell close to -12% and this ultimately led to miners falling around -7% over the course of the week.

There was little respite in what was a horrendous week for equity market investors, but staples and telcos outperformed falling -3% and -2.4% respectively.

We have been vocal in our view that staples is a sector well leveraged to a high inflationary environment given the ease with which costs can be passed through to the end consumer. The PRIME Australian Equity Growth SMA is currently overweight the sector with Woolworths (WOW) the main exposure.

The Quality nature of the Prime Australian Equity Growth SMA tends to mean in risk-off, volatile markets, the quality of the portfolio’s underlying positions shines through. Whilst it is never nice to see markets drawdown like they did last week, it was pleasing to see the portfolio’s quality bias capture some outperformance on the downside.

We are tracking along nicely relative to benchmark month to date for June so fingers crossed we can finish off the financial year strongly.

Looking ahead

Monday 20th June 2022 – Friday 24th June 2022

• Monday: AU RBA Governor Lowe Speech, CN Loan Prime Rate
• Tuesday: AU RBA Meeting Minutes, US Chicago Fed National Activity Index (MAY)
• Wednesday: AU Westpac Leading Index (MAY), UK Inflation Rate (MAY), US Existing Home Sales (MAY)
• Thursday: AU S&P Global Manufacturing & Services PMI (JUN), US Weekly Jobless Claims 
• Friday: UK Retail Sales (MAY)

Friday 17th June, 5pm values

Friday 17th June, closing values

Key dividends

Monday 20th June 2022 – Friday 24th June 2022

• Monday: Div Pay-Date – ANZPG (ANZPG), ANZPH (ANZPH), ANZPI (ANZPI), ANZPJ (ANZPJ), MQGPE (MQGPE), NABPE (NABPE), WBCPI (WBCPI)
• Tuesday: Div Ex-Date – Premier Investments (PMV). Div Pay-Date – WBCPK (WBCPK)  
• Wednesday: Div Ex-Date – Fisher & Paykel Healthcare (FPH) Div Pay-Date – WBCPH (WBCPH), WBCPJ (WBCPJ)
• Thursday: Div Pay-Date – WBCPE (WBCPE)
• Friday: Div Pay-Date – Westpac Banking Corporation (WBC)

Contact

If you would like to discuss your situation, please speak to your adviser or email clientservices@primefinancial.com.au

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (www.primefinancial.com.au/fsg) for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.

Higher volatility characterised the month of May, with the ASX 200 down 2.6%.

A concerted push by central banks to tighten financial conditions to counter the chilling effects of inflation continued to weigh on equities. The prospect of rising interest rates was particularly damaging to the Real Estate and Technology sectors which fell 8.9% and 8.7% respectively. Materials +0.1% was the only sector to manage a positive return for month.

Commodities were a welcome source of diversification in the portfolio as markets grappled with tightening financial conditions and persistent high inflation. BHP Group (BHP) and Santos (STO) provided an important ballast to the portfolios in a turbulent month. A prolonged period of under investment coupled with ongoing challenge of supply chain disruption as economies reopened has contributed to the sharp rise in commodity prices. 

With a backdrop of rising raw material prices, the portfolios also benefited from exposure to Amcor (AMC) and Brambles (BXB) that had contractual pass-through price mechanisms to absorb higher costs. 

Nevertheless, the portfolios were buffeted by Goodman (GMG), Macquarie (MQG), News Corp (NWS) and Woolworths (WOW) that were impacted by concern of higher interest rates and weaker than expected earnings results from the US bell weather stocks of Amazon, Target, and Walmart.

The healthcare sector recovery in volumes lost during the pandemic continues to face headwinds in Australia, as the impact of Covid/flu has resulted in delays in medical testing and elective surgery. Whilst the delayed backlog for patient care is inevitably weighing on health companies’ results in the short term, the recovery in earnings should be underpinned by the demand for the treatment for chronic disease, catch-up referrals, and an ageing population. Encouragingly, in the US CSL and key industry participants have highlighted that plasma collection volumes (depressed during Covid) are now returning to pre-Covid volumes.

We are seeing the first tangible signs that rising interest rates and high input costs are dampening both earnings momentum (with earnings revisions turning negative) and house prices declining for the first time in the cycle. Amid an economic environment characterised by slowing growth our clear preference is to be invested in companies that offer exposure to consumer staples and defensive industrial sectors. Moreover, in a period of high inflation we continue to hold commodity stocks that are benefiting from elevated prices and offer a hedge against inflation.

Portfolio Performance Figures

Risk Profile Portfolio Performance Figures as at 31 May 2022

Post-Franking Credits

Prime SMA – Model Portfolio Performance Figures as at 31 May 2022

Post-Franking Credits

About the Portfolio

Portfolio Objective
To achieve capital growth with moderate tax-effective income via franked dividends through investment in listed Australian securities.

Model Portfolio
The Model Portfolio is managed by selecting primarily those securities with moderate growth potential but robust cash-generating capacity. These securities are expected to deliver an above-market average income yield, together with a relatively moderate level of capital growth. The portfolio benchmark is the S&P/ASX200 Accumulation Index.

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.

GDP data beats ahead of RBA meeting tomorrow

There will be no edition of the Weekly Market Update next Monday given the Queen’s Birthday public holiday. The next update will be released on Monday 20th June.

Global equity markets fell last week with the MSCI World index down -1.8% in AUD terms.

For the third consecutive week, the AUD rallied against the US Dollar (+0.6% and this ultimately weighed on the performance of the MSCI benchmark.

From a data perspective, the major releases locally were the S&P Manufacturing Purchasing Managers Index (PMI) which fell a material 2-3 points and further confirmed our view that productivity on the supply-side is indeed slowing. 

However, the market seemed to discount the weaker PMI print, instead choosing the focus on a decent GDP reading of 0.8%, despite weakness in inventories and business investment. Much of the strength in GDP data came about as a result of strong net exports, however the overall complexion of the data was certainly more mixed, than outright strong.

Importantly, we think the ‘surprise beat’ in the GDP data might provide the RBA with the ammunition it needs to normalise cash rates to 0.25% settings and ultimately raise cash rates by 40bps this week, taking the overall cash rate back to 0.75%.

Strong inflation and decent wages data suggest the RBA should do this and common sense says that cash rates at 0.35% and then perhaps at 0.6% make little sense.

However, despite the RBA’s more recent hawkish rhetoric, the RBA track record very much indicates the possibility of rates rising in slower than anticipated increments to allow the economy ample time to adjust to new policy settings. It’s a hard one to call with markets pricing in a 50/50 chance as to whether rates rise by 25bps tomorrow or 40bps.  

The newly elected Labor government last week announced a review into the RBA and while the terms of reference have not been stated, it is expected to be a wide-ranging review. The question will be what to focus on and expect, who does it, and what outcomes could be achieved to improve monetary policy making further.

In terms of what to expect, the clear template here is provided by the NZ Labour government review into the RBNZ, which produced a key outcome which is that the RBNZ now needs to take into account housing affordability, alongside price stability and full employment, as one of its policy goals.

And with regards to who will conduct the review, we would hope that the RBA does not undertake the review of itself, instead believing the standing parliamentary committee with responsibility for the RBA should undertake the review. Time will tell.

Lastly, we had non-farm payrolls released in the US on Friday and the overall consensus was that jobs added (+390k) exceeded analyst forecasts of around 330k. The growing trend of slowing job growth remains in play but wage growth pleasingly appears to be holding firm with rages rising +0.3% (up +5.2% from a year ago). The unemployment rate held steady at 3.6%.

A Closer Look at International Equity Fund Manager T. Rowe Price – Active Stock Choices are Key in Volatile Times

(source – Scott Berg, Portfolio Manager, T. Rowe Global Growth Equity Strategy)

Markets have endured a tumultuous period over the last two years with an extraordinary period encompassing a pandemic, economic recovery, and now, military conflict in Europe.

Stocks remain especially volatile given the shocking events occurring in Ukraine, adding uncertainty to an already complex backdrop of rising inflation and monetary tightening.

While the geopolitical and economic backdrop is dominating market movements, T. Rowe Price have managed client assets through periods of uncertainty before and are using its experience and learning to focus on separating the long‑term economic prospects of stocks from the short‑term narratives surrounding equities in a highly unusual period.

T. Rowe have always believed, and continue to believe, that fundamental analysis and maintaining its time horizon should deliver the best outcome for our clients.

Regime Shifts and the Growth Versus Value Debate

At a headline level, 2022 marks a point of regime change for investors. A marked uptick in inflation and rising interest rates have contributed to equity market weakness and a very material rotation into value stocks. Indeed, Q1 of 2022 has been one of the worst starts for growth versus value stocks for many years.

The emergence of inflation catalysts in a recovery phase for the global economy is to be expected, but inflation has accelerated faster than expected and is presenting a significant challenge for monetary policymakers. While the sources of rising inflation are embedded in a complex mosaic of temporary and structural forces, the investor reaction has been clear.

We have seen a significant repositioning into areas of the market that might benefit from monetary tightening, accelerated further by the consequences of the Russia‑Ukraine conflict, most notably the rise in commodity prices and further supply chain disruption.

The shift in focus comes at the expense of long duration growth stocks that have experienced exceptional levels of volatility. While we experience adverse market conditions from time to time, the sheer size and speed of the market’s rotation to value and deep cyclicals are perhaps less common.

Inflation Remains a Risk

T. Rowe remains comfortable in its search for stocks with superior earnings prospects and more enthusiastic about valuations after the sell‑off, inflation has clearly emerged as a risk in the near term.

Supply chain normalization is crucial to easing pressure points, and while much of the world is learning to “live with COVID,” the outbreak of the omicron variant in China has ramifications for an extension and amplification of supply chain disruptions and inflation. T. Rowe believe that inflation is likely to peak in 2022, with interest rates moving slowly and progressively higher, given the need to maintain financial stability.

We Continue to Find Attractive Opportunities in Many Areas of the Market

In this new world of higher inflation and rising interest rates, we still fundamentally believe in the outperformance potential of companies capable of compounding long‑term earnings and cash flows at above‑market levels.

After recent weakness, we believe we are at a point where risk/reward looks materially better.

As a result, we have leaned in to some of the prevailing scepticism surrounding technology names, where many stocks have pulled back from their highs on near‑term disappointment. Our largest sector overweight position remains in consumer discretionary, specifically leaders within the global online retail and consumer services ecosystem.

We also have strong exposure to health care, where we see cyclical, economic reopening, and secular forces influencing prospective earnings growth. With inflation pressures likely to remain prevalent, we have largely retained our exposure to financials and real estate.

Our faith in our ability to find good stock ideas in emerging markets remains steadfast. The prospects of higher U.S. interest rates and the subsequent knock‑on impact of funding costs for emerging markets have seen the asset class underperform materially versus developed markets. Countries with higher levels of debt have been impacted most, as was the case during 2013’s “taper tantrum,” despite the reality that the debt structure of most countries has changed materially over the course of the past two decades.

ASX Weekly Wrap

The ASX200 outperformed the global benchmark rising +0.8% last week.

Once again, energy and miners did most of the heavy lifting rallying close to +4% on the back of underlying strength in oil and base commodities. Iron ore had one of its better weeks in recent times rising upwards of 7% to trade US$143/tonne.

The PRIME Australian Equity Growth SMA’s second largest active portfolio position (BHP) was a major benefactor of rising iron ore prices contributing 0.67% to portfolio performance last week.

The major detractor at a portfolio level on performance was Healius (HLS) which detracted 19bps from overall performance whilst CBA and NAB which both fell around -1.3% for the week, collectively cost the portfolio 0.14% in performance.

BHP shareholders also received their in-specie dividends from the sale of its oil and gas assets to Woodside Petroleum last week.

Woodside has since changed its name to Woodside Energy and its code from WPL to WDS.

The Prime Diversified Income SMA and Growth SMA added an additional 1% to their starting positions with a longer-term view to further increasing our portfolio positions in WDS.

Looking ahead

Monday 6th June 2022 – Friday 10th June 2022

• Monday: AU ANZ Job Advertisements (MAY), CN Caixin Composite PMI (MAY)
• Tuesday: AU RBA Interest Rate Decision, US Balance of Trade (APR)
• Wednesday: AU NAB Business Confidence (MAY), UK Halifax House Price Index (MAY)
• Thursday: CN Balance of Trade (MAY)
• Friday: AU Consumer Inflation Expectations (JUN), CN Inflation Rate (MAY), US Inflation Rate (MAY)

Friday 3rd June, 5pm values

Friday 3rd June, closing values

Key dividends

Monday 6th June 2022 – Friday 10th June 2022

• Monday: Div Ex-Date – CBAPD (CBAPD), CBAPG (CBAPG), CBAPH (CBAPH), CBAPI (CBAPI), CBAPJ (CBAPJ), CBAPK (CBAPK)
• Tuesday: Div Ex-Date – ANZPG (ANZPG), ANZPH (ANZPH), ANZPI (ANZPI), ANZPJ (ANZPJ) Div Pay-Date – MBLPD (MBLPD)
• Wednesday: Div Ex-Date – NABPF (NABPF), NABPH (NABPH) Div Pay-Date – Metrics Master Income Trust (MXT), Metrics Income Opportunities Trust (MOT)
• Thursday: Div Ex-Date – NABPE (NABPE), WBCPI (WBCPI), WBCPK (WBCPK)
• Friday: Div Ex-Date – WBCPH (WBCPH), WBCPJ (WBCPJ)

Contact

If you would like to discuss your situation, please speak to your adviser or email clientservices@primefinancial.com.au

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (www.primefinancial.com.au/fsg) for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.

From 1 July 2022 there will be Superannuation Guarantee (SG) changes that will impact you and your employees.

Super Guarantee Rate Increase

The super guarantee rate will increase from 10% to 10.5% on 1 July 2022. You will need to use the new rate to calculate superannuation on payments you make to employees on or after 1 July. The new rate will need to be applied even if some or all of the pay period is for work done before 1 July. Please also note that the SG rate is legislated to increase to 12% by 2025.

No Superannuation Guarantee Threshold

From 1 July 2022, employees can be required to pay the super guarantee for employees, regardless of how much they earn. This is because the $450 per month threshold for when SG is paid is being removed. You only need to pay super for workers under 18 when they work more than 30 hours in a week.

Company Tax Rate Changes

Separately for company tax payers that are considered base rate entities, for the 2021–22 income year, companies that are base rate entities must apply the 25% company tax rate. The tax rate for base rate entities has reduced from 26% in the 2020–21 income year.

A company is a base rate entity for an income year if:

• the company’s aggregated turnover for that income year is less than the aggregated turnover threshold for that income year ($50m in 2021-2022), and
• it has 80% or less of their assessable income in that income year that is base rate entity passive income – this replaces the requirement to be carrying on a business from the 2017–18 income year onwards.

The full company tax rate of 30% applies to all companies that are not eligible for the lower company tax rate.

This post is provided by Prime Accounting and Business Advisory Pty Ltd. Liability limited by a scheme approved under Professional Standards Legislation. This post is not a substitute for independent professional advice. We do not warrant the accuracy, completeness or adequacy of the information or material in this post. All information is subject to change without notice. We and each party providing material displayed in this post disclaim liability to all persons or organisations in relation to any action(s) taken on the basis of currency or accuracy of the information or material, or any loss or damage suffered in connection with that information or material. You should make your own enquiries before entering into any transaction on the basis of information or material in this post. Please ensure you contact us to discuss your particular circumstances and how the information provided applies to your situation.

Michelle Bromley CFP®, Director – Strategy and Advice

Each year the ATO issues a press release outlining the key areas they will scrutinise in the current financial year’s tax lodgements.

This year, the ATO will be focusing on:

• record-keeping
• work-related expenses
• rental property income and deductions, and
• capital gains from crypto assets, property, and shares.

Record Keeping

Our previous article ‘End of Financial Year Tips and Tidy Ups’ highlighted the need to collate your evidence of income and expenditures.

The ATO will take action to deal with taxpayers who try to increase their refund through falsifying records or failing to substantiate their claims.

To claim a deduction in your tax return at the ‘Work-related expense’ section:

• You must have spent the money yourself and weren’t reimbursed.
• The expenses must directly relate to earning your income.
• You must have a record to prove it.

The record would usually be a receipt showing when you spent the money, what you spent it on, who the supplier was and when you paid. Your bank or credit card statement doesn’t have all this information and isn’t sufficient as a substantiation record for the expense.

Work-related expenses

A popular myth is that everyone can automatically claim $150 for clothing and laundry, 5000 km under the cents per kilometre method for car expenses, or $300 for work-related expenses, even if they didn’t spend the money.

However, there is no such thing as an ‘automatic’ or ‘standard’ deduction.

While you don’t need receipts where your total work-related expenses (including laundry expenses) claimed is under $300, you still must have spent the money, it must be related to earning your income, and you must be able to explain how you calculated your claim.

You can only claim a deduction for the proportion of an eligible expense that is work-related use. You can’t claim a deduction for any portion of the expense that was for private use, or if your employer reimburses you for an expense.

For example, you cannot claim all of your travel and accommodation expenses if you extend your three-day conference into a two-week holiday – you must apportion the expenses between the private and work-related components.

Likewise, if your employer reimbursed you for professional association fees, you cannot claim the expense in your tax return. If the ATO suspects that you may have been reimbursed for an expense, they can ask your employer for confirmation.

Some of the work-related expenses you can claim for may include:

• Travel expenses, such as driving your car expenses between workplaces (e.g. your base of work and visiting a client or another office)
• Clothing expenses if the clothing is occupation specific, protective or a uniform
• Tools, equipment
• Self-education expenses for study connected to your current work activities that maintains or improves the specific skills or knowledge you require
• Union and professional association subscription fees
• Home office running costs and work from home expenses, such as phone, data and internet expenses

To claim a deduction for your working from home expenses, there are three methods available depending on your circumstances.

You can choose from:

• the shortcut method – an all-inclusive rate of $0.80 per work hour only available from 1 March 2020 to 30 June 2022. You must have a record of the number of hours you worked from home.
• the fixed rate method of $0.52 per hour for each hour you worked from home, plus the work-related portion of phone, data and internet expenses and decline in value of depreciating assets such as home office furniture and computers.
• the actual cost method – you work out your deduction by calculating the actual expenses you incur to produce your income when working from home, including decline in value of depreciating assets, cleaning expenses, heating, cooling and lighting, phone and internet and computer consumables.

Rental Property Income and Deductions

If you are a rental property owner, make sure you include all the income you’ve received from your rental in your tax return, including short-term rental arrangements, insurance payouts and rental bond money you retain.

The ATO has published a comprehensive Guide for Rental Property Owners that can be accessed here.

Capital gains from crypto assets, property, and shares

If you dispose of an asset such as property, shares, or a crypto asset, including non-fungible tokens (NFTs) this financial year, you will need to calculate a capital gain or capital loss and record it in your tax return.

Generally, a capital gain or capital loss is the difference between what an asset cost you and what you receive when you dispose of it.

If you made a crypto loss, you can’t offset this against your other taxable income. You can only offset capital losses – including crypto losses – against capital gains. If you don’t have any capital gains to offset this financial year, capital losses can be carried forward to offset capital gains in future years.

Conclusion

You must declare all the income you receive from your employment or business activities, investments, super pensions and annuities, government payments and any overseas income. Some forms of income are ‘non-assessable, non-exempt’ income, such as the taxed or tax-free components of super pensions drawn by taxpayers over age 60.

The ATO will receive most of your income information from your employers and financial institutions and use it to pre-fill most income information in your tax return when you use my.gov.au to lodge online. You should still check the information to make sure it is complete and correct, and to manually enter any other income not captured.

This data collection process also alerts the ATO to crypto trading activities.

Understanding what can be claimed as an expense and having receipts to substantiate claims is important, as penalties may apply for getting things wrong.

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (www.primefinancial.com.au/fsg) for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.

Investors buy the dip despite PMIs weakening

It was a relatively muted week by way of economic data last week with Purchasing Managers Index (PMI) indicators from Australia, UK and the USA the only market releases of note. 

As a reminder, PMIs are monthly surveys put to manufacturing businesses to get an understanding of prevailing trends within manufacturing and service industries. The answers and overall trends then get reflected in a PMI index which is a diffusion index. A number above 50 implies expansion, whilst a number sub 50 implies contraction. 

Last week we saw Australia’s composite PMI fall to 53, while the UK PMI neared the 50 level which suggests the UK economy is very much nearing that ‘contraction phase’. Finally, the US fell to the 53 level, similarly to Australia.  

We look at PMI’s closely and the interesting point to make from last week’s round of surveys was that the PMI surveys which as discussed above focus on manufacturing trends (for simplicity’s sake we can interpret this as ‘supply’) showed sentiment weakened further as elevated inflation, the Ukraine conflict and more recently rising rates have begun to impact the consumer (so this has now started to impact on ‘demand’). 

Based on this weakening PMI data, we would expect or forecast global GDP estimates to be lowered in the coming months to account for this slowing economic environment.  

Following seven consecutive weeks of negative global equity market returns (as represented by the MSCI International World Index benchmark in USD terms) investors ‘bought the dip’ last week with the index rising +5.5% in USD terms. 

This figure was offset somewhat when converted back to AUD (+3.8%) given the AUD rallied +1.8% against the USD last week.  

Post-election views  

The absence of major data gives us the chance to talk politics, with the election delivering a change of government, and some substantial changes to the parliamentary makeup in terms of seats and the role of major parties.  

On balance the outcome was largely projected by the polls, but perhaps what was not projected was the decimation of the Liberal/National coalition in their heartland seats in the major cities, and the size of the loss of seats by the conservative coalition.  

The first point we would make is that the result was not surprising given that conservative governments in the USA (Trump) and UK (Johnson) have been on the nose for nigh on a year now, and it was likely to thus be the case in Australia too. Broad political trends tend to cross borders, and they did so again last Saturday.  

The second point we would make is that the composition of the Australian electoral result was also similar to that seen in the US and UK. In those recent elections, conservative states and regional areas continued to support conservative parties, but in the cities where voters tend to be in higher socio-economic bands, voters tended to favour left leaning parties such as the US Democrats or UK Labour parties.  

This was increasingly evident in the Australian election, with the regional conservative bloc staying conservative although admittedly with larger swings against, the capital cities in NSW & VIC tending to vote for more centre or left leaning causes and parties, and thus Labour, Greens and Independents took numerous seats from the Australian Coalition conservative parties.  

The final point we would make is that a strong economy is no longer protection enough for incumbent governments, especially when you are at the top of the macro growth cycle. When things are good and people are prosperous, they tend to think beyond their money/job worries (because they have a lot of it and are fully employed) and consider other things such as quality of life, climate, gender issues, political integrity, as all being issues than can further improve their existences.  

Thus, they make those issues of higher import than traditional fiscal ones. The lesson here for political parties is that next time we are at the top of the cycle, moving towards those more centrist issues is the right pivot to make. The other lesson is that when the economy slows and people feel less confident, economic management will come back to the fore again, so addressing those concerns in advance will also be important for political parties to achieve too.  

CBA Class Action 

If you have received any paperwork in the past fortnight from Maurice Blackburn Lawyers and litigation firm Omni Bridgeway, you will no doubt be aware of a class action relating to Commonwealth Bank (CBA).  

This class action dates back to the period of 16 June 2014 – 3 August 2017 and fundamentally relates to AUSTRAC’s allegations that CBA contravened the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) over 53,000 times. 

The class action alleges that CBA knew about serious instances of non-compliance with the AML/CTF Act and that its failure to disclose that information to the ASX amounts to misleading and deceptive conduct and a breach of its continuous disclosure obligations under the Corporations Act 2001 (Cth) and the ASX Listing Rules. 

When news of the AUSTRAC proceeding became public, the CBA share price fell -5.4% which is considered a significant movement for an otherwise stable stock. 

If you purchased ordinary CBA shares during the period from 16 June 2014 to 3 August 2017 you are eligible to join the class action.  

On 7 April 2022, the Court made orders providing that group members who have not yet signed up for the CBA Class Action may register their claims by 4.00pm AEST on 7 June 2022. While registration is not mandatory, failure to register could have significant consequences because the parties intend to seek an order that group members who fail to register by the deadline will not be entitled to participate in any settlement that may be agreed to before 7 November 2022.  

Therefore, we encourage all investors who have received paperwork notifying them of their possible eligibility to register their claim on the Omni Bridgeway website. 

Doing so ensures that if any compensation is awarded, you will be eligible to receive some. 

If no compensation is awarded, then nothing changes and you are not penalised. 

If you need assistance identifying your Holder Identification Number (HIN) please contact your adviser and if you have any queries regarding the class action or the registration process, please contact Maurice Blackburn.  

Understanding Private Debt

(source – Andrew Lockhart, Metrics Credit Partners) 

When interest rates plunged to record lows in recent years, investors had limited options to generate yield and secure income from the financial markets. At the start of the pandemic, even some stocks paying high dividends were subject to those dividends being deferred, cancelled or reduced.  

Popular income alternatives, such as listed hybrid securities issued by the banks, come with the risk that they will be converted to shares if the issuer strikes trouble, increasing the investor’s exposure to equity at the worst possible time. 

By contrast, private debt can potentially meet investor demands for income without the volatility of financial markets and the equity risks attached to shares or hybrids.  

By participating in a diversified pool of loans to large companies across a wide range of industries, investors can use private-debt exposure to potentially aid portfolio diversification and generate income. 

From alternative to mainstream 

The global financial crisis (GFC) sparked the growth of private debt – in two ways. First, banks were forced to become more conservative in their lending and to hold increased capital against certain types of loan assets. This restricted the availability of business credit and forced a search for alternatives.  

Secondly, by slashing rates to near zero in a bid to stimulate economic growth, central banks forced investors to look beyond traditional investments such as bonds or term deposits to generate income. 

Private debt filled these needs and is now estimated to be a US$1 trillion-plus market globally, double what it was in 2015. In Australia private debt is estimated to be 10% of the corporate loan market. 

Risks

The main risk of private debt is credit risk or the deterioration of the financial performance of a borrower resulting in the non-payment of principal, which can result in capital loss.  

However, the processes in approving and managing the loan are designed to protect against the likelihood of loss. Loans are typically secured against the real or “hard” assets of the borrower, sit at the top of the capital structure and are given priority over equity and other unsecured creditors under Australian Corporate Insolvency Law. Equity holders take the first loss and the lender has the ability to recover the cost of dealing with a default from the borrower. 

Rising rates drive increased interest 

One feature of private debt that has attracted more investors is the way it performs relative to other fixed income investments at a time when interest rates look set to rise. Because private debt is typically issued with a floating interest rate that includes a margin over the benchmark, there is an increase in income from rising interest rates that helps protect capital.  

Typical fixed-rate investments do not offer this feature and investors who hold them in a superannuation fund would face a capital loss as rates rise. Applying the inverse relationship between bond prices and bond yields – prices fall as yields rise and vice versa – a fund would be required to “mark to market” the value of the bond. 

In the private debt space, we currently hold the Metrics Direct Income Fund, the Qualitas Real Estate Income Fund, the Alceon Debt Income Fund and the MA Priority Income Fund in the Prime Defensive Income SMA. 

ASX Weekly Wrap

The ASX200 underperformed the global benchmark rising +0.5% last week.  

Energy (+2.1%) and miners (+1.8%) led the market higher as oil prices climbed 3-4% higher and base commodities also rallied. Iron ore prices rose +3% to round out the week at US$130/tonne.  

Worst performers were tech stocks which fell more than -3% despite the NASDAQ posting near +7% gains for the week. Computershare (CPU), WiseTech (WTC) and Xero (XRO) all fell and ultimately dragged on overall performance of the tech sector.  

Elsewhere, consumer staples (-2.2%) fell for a fourth consecutive week with the sector currently posting month to date declines of -8%.  

Despite the selloff across the sector, we believe the high inflationary environment we find ourselves in is positive for staples. Staples can typically pass on price increases to the end consumer with relative ease and quickness when compared to other industries.  

The PRIME Australian Equity Growth SMA currently favours Woolworths (WOW), Endeavour Group (EDV) and Bega (BGA) for its staples exposure.  

Once again, we witnessed ‘quality’ outperforming last week with large caps rising above +0.5%, whilst mid-caps were closer to flat and small caps fell more than -1%. 

We continue to position and construct the portfolio with a quality bias believing this approach is best placed to deliver excess returns to investors in a volatile and weakening market.  

BHP (BHP) was the best performing stock last week rising nearly +4%. As a reminder, BHP shareholders will receive 1 Woodside (WPL) share for every 5.534 BHP shares held on the record date (May 26) and this in-specie dividend (issue of WPL shares) will occur this Wednesday. 

The issue of WPL shares relates to BHPs sale of its oil and gas assets to Woodside.  

Integral Diagnostics (IDX) was the worst performer for the portfolio last week falling -10% after a broker downgraded the stock to neutral and cut its share price target. IDX provides diagnostic imaging services to general practitioners and medical specialists, and we believe it will benefit from an increase in elective surgery.  

Looking ahead

Monday 30th May 2022 – Friday 3rd June 2022

• Monday: N/A
• Tuesday: AU Private Sector Credit (APR), Business Inventories (Q1), CN NBS Manufacturing PMI (MAY), US House Price Index (MAR) 
• Wednesday: AU GDP Growth Rate (Q1), CN Caixin Manufacturing PMI (MAY), UK Housing Prices (MAY) 
• Thursday: AU Balance of Trade (APR), US ISM Manufacturing PMI (MAY), ADP Employment Change (MAY) 
• Friday: AU Home Loans (APR), Non-Farm Payrolls (MAY) 

Friday 27th May, 5pm values

Friday 27th May, closing values

Key dividends

Monday 30th May 2022 – Friday 3rd June 2022

• Monday: Div Ex-Date – Coronado Global Resources (CRN)
• Tuesday: Div Ex-Date – BENPG (BENPG), Orica Limited (ORI), Div Pay-Date – Janus Henderson (JHG)
• Wednesday: Div Ex-Date – MQGPD (MQGPD), SUNPF (SUNPF), SUNPG (SUNPG), SUNPH (SUNPH), SUNPI (SUNPI)
• Thursday: N/A
• Friday: Div Ex-Date – MBLPC (MBLPC)

Contact

If you would like to discuss your situation, please speak to your adviser or email clientservices@primefinancial.com.au

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (www.primefinancial.com.au/fsg) for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.

Stocks continue their sell-off, S&P 500 toys with bear market territory

At a headline level, global indices were weaker last week, dropping 3.3 per cent in AUD terms and accelerating the year-to-date sell-off in stocks globally.

The S&P 500 joined the Nasdaq in briefly entering bear market territory, which is typically defined as a fall of 20 per cent or more.

The S&P 500 fell -20.9 per cent at its low point during the market’s Friday trade from intraday record highs in January, though it ultimately recouped its losses in the final minutes to close just above bear territory.

The fall for the week was largely driven by disappointing results from several of the US’s largest retailers with Target, Walmart, and Home Depot all falling short of consensus estimates by nearly a third.

Their financials showed a hit to all retailers’ profit margins as inflation continues to chip away at company profits.

The discussion now being had is the potential impact of these big-box retailers passing on the increased input prices to consumers in the coming months, which may be a cause for inflation to stay higher for longer.

These results dampened market sentiment and resulted in the seventh straight week of losses for both the S&P 500 and Nasdaq and the eighth for the Dow Jones Industrial Average.

Labour wins Australian Election 

Over the weekend, millions of Australians submitted their votes for the federal election.

The outcome of the election now sees Anthony Albanese, the leader of the Australian Labour Party serving as the 31^st prime minister of Australia. 

This change in leadership ends the Coalition’s near decade-long reign, which began with Tony Abbot’s election in 2013. 

Though it is a changeup of parties, history suggests that the outcome of Australia’s federal election bolsters the local share market, irrespective of the party in power. 

Eight of the last ten elections have seen the ASX200 increase by an average of 2.4 per cent in the three months following an election.

It will be interesting to see what the change brings forth and we will continue to watch the space to see what unfolds next.

More to follow on this front. 

Local Job & Wage Data

It was a week littered with numbers with the Australian Bureau of Statistics releasing new unemployment and wage data.

In terms of unemployment, the local labour market continues to remain tight.

Australia’s unemployment rate continues to fall, with the rate now dropping to 3.9 per cent which came in line with consensus estimates.

To put that into perspective, the last time the unemployment rate was this low was back in August of 1974.

Looking further into the underlying data revealed a robust trend, with full-time employment growing by 92,400 while part-time employment decreased by 88,400.

This is significant because full-time employees typically earn slightly more than their part-time counterparts, which may encourage additional spending in our local economy.

Outside of this, the underemployment rate, which refers to people who are already employed but are willing to work more hours, continues to decline, falling 0.2 per cent to 6.1 per cent.

On the wages front, the wages of Australian workers continue to rise, but real wages continue their slump.

Wage growth came in at 0.7 per cent in the first quarter of 2022 and 2.4 per cent over the year.

The largest gains were 3.1 per cent in rental, hiring, and real estate services, whilst both manufacturing and professional, scientific, and technological services grew by 2.7 per cent.

In comparison, only a 1.5 per cent pay rise was seen in the electricity, gas, water, and waste services industries.

Though these figures detail an increase, real wage growth which adjusts wages for inflation continues to remain of concern.

Inflation locally sits at 5.1 per cent and with wage growth sitting below half of the rate of inflation, which starts to paint the picture of how pay packets are shrinking in real terms.

Hawkish RBA Minutes

At the last Reserve Bank of Australia’s Monetary Policy Decision, the central bank hiked rates by 25bps, which caught many market participants off-guard as they were forecasting a 15bps increase.

So, minutes published last Tuesday from the RBA’s latest Monetary Policy Decision would provide insight into understanding how the central bank came to that conclusion.

The minutes published revealed quite a different perspective than what market participants were pricing in as the board considered quite a contrasting perspective.

Overall, the board was split between two decisions in its meeting on the 3^rd of May.

Two scenarios were considered, either the 25bps hike which occurred or a significant 40bps hike.

Commentary from the bank in its minutes highlighted that the latter hike could’ve been justified given the upside risks to inflation and the current very low level of interest rates, though the board ultimately decided that the 25-bps increase was the preferred option.

The previously anticipated 15bps hike was considered, though the central bank’s members decided that it was not the preferred option as it was highly probable that further rate rises would be required in the near term.

Though the RBA does not like to detail any specific forecasts, the minutes published indicated that internal RBA economists assumed the cash rate would reach 1.75 per cent by the end of this year and 2.5 per cent by the end of the following year.

Additionally, the board noted that when making future decisions that it would continue to be guided by inflationary and labour market data as members of the board expressed that significant uncertainty remains in the economy which will continue to play out.

ASX Weekly Recap – how do we compare to the U.S?

In terms of our local market, the ASX200 outperformed its global peers and gained 1 per cent for the week.

Overall, the ASX200 continues to track above other global indices in terms of returns, likely due to our market’s weighting towards sectors.

The ASX has largely been comprised of ‘old-fashioned’ companies such as the mining, mineral, and banking giants and lacks the same exposure to the growth heavy technology sector when compared to its US counterpart.

Why this sector allocation is important is because it shifts how the indexes perform under certain market cycles.

The U.S. outperforms in periods of market strength and tends to underperform in a falling market. The opposite is true for the ASX.

We generally outperform in a falling market, evident by declines of the ASX 200 year-to-date of (-5.85 per cent) vs the S&P 500’s (-18.66 per cent), though in a rising market, our local market doesn’t capture the same upside.

Transitioning across into the specifics of last week saw the biggest rises locally in the technology and materials sector, led by gains in recently listed Block Inc (SQ2) and Mineral Resources (MIN).

Both the consumer discretionary and consumer staples sectors were the worst performers, weighing down markets following US retail behemoths Target & Walmart reporting lower-than-expected quarterly financials which spooked investors locally.

In terms of our portfolios, the best performers in our PRIME Australian Equity Growth SMA were OZ Minerals Limited (OZL) which gained 5.05 per cent and Northern Star Resources Ltd (NST) which gained 4.98 per cent, thanks to a bounce in both the commodity prices of copper and gold.

Similarly, exposure to Wesfarmers Limited (WES) and Woolworths Group Ltd (WOW) were the biggest detractors in terms of portfolio performance, falling -6.41 per cent and -6.13 per cent respectively.

In stock-specific news. Crown Resort Ltd (CWN) shareholders gave the final green light in accepting the takeover bid from private equity behemoth Blackstone at a consideration of $13.10 per share, though the bid remains subject to regulatory approval by the relevant gaming authorities.

Woolworths Group Ltd (WOW) also announced that it has paid $243 million in acquiring a majority position in MyDeal Limited (MYD), an e-commerce marketplace, for $1.05 per share which represented a 62.8 per cent premium to MYD’s last closing price. The acquisition of MYD will likely strengthen WOW’s existing online offering and complement its existing operations.

Looking ahead

Monday 23rd May 2022 – Friday 27th May 2022

• Monday: AU RBA Ast Gov Kent Speech
• Tuesday: US Manufacturing PMI (May), US Services PMI (May)
• Wednesday: US Core Durable Goods Order (Apr), US New Home Sales (Apr)
• Thursday: AU Private New Capital Expenditure (Q1), US FOMC Meeting Minutes, US GDP (Q1)
• Friday: AU Retail Sales (Apr)

Friday 20th May, 5pm values

Friday 20th May, closing values

Key dividends

Monday 23rd May 2022 – Friday 27th May 2022

• Monday: Div Pay-Date – Challenger Capital Notes 2 (CGFPB)
• Tuesday: Div Ex-Date – Amcor CDI (AMC)
• Wednesday: Div Pay-Date – Challenger Capital Notes (CGFPA), Challenger Capital Notes 3 (CGFPC)
• Thursday: Div Ex-Date – James Hardie Industries PLC (JHX) Div Pay-Date – Bank of Queensland Limited (BOQ)
• Friday: Div Ex-Date – CSR Limited (CSR)

Contact

If you would like to discuss your situation, please speak to your adviser or email clientservices@primefinancial.com.au

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (www.primefinancial.com.au/fsg) for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.

The ASX 200 declined 0.9% in April, outperforming the steep falls that beset US equities where the S&P 500 fell 8.7% and the Nasdaq fell 13.2%.

The realisation that financial conditions will need to be aggressively tightened to combat the fastest pace of inflation in several decades prompted a sharp derating in equity prices. The declines were led by falls in Materials, Technology and Discretionary Retail. BHP was the largest single stock detractor. Higher bond yields continued to weigh on technology valuations. Whereas Healthcare, Industrials and Consumer Staples were the strongest sector contributors benefiting from a rotation into defensive companies. 

Health Care was supported by a strong contribution from Ramsay (RHC) that received a $88 per share cash bid by a consortium led by the private equity company KKR. We view the bid for Ramsay as opportunistic given earnings have been depressed throughout the pandemic and are now well placed to recover with an unprecedented post COVID backlog of patients. Ramsay was the largest positive contributor to the portfolio in April. 

Clearly the prospect of tighter central bank policy at a time of weaker global growth has presented a meaningful headwind for equity valuations. The ASX 200 now trades on a 12-month forward PE of ~15 times, its lowest multiple since the beginning of the pandemic in March 2020, and well below its recent peak of ~18 times.  

The 12-month forward ASX 200 dividend yield is ~4.1%, the equal highest in the developed world. Australia’s dividend yield has been supported by the resources sector (namely BHP) benefiting from high commodity prices and strict capital discipline. Overall, dividends have been well supported by continued solid earnings growth by ASX 200 companies. 

Nevertheless, earnings momentum is expected to moderate as financial conditions tighten and companies continue to endure supply chain disruptions and cost pressures.  Indeed, the higher-than-expected March quarter inflation outcome prompted the RBA at its May Board meeting to lift the cash rate target (by+25bps) for the first time in a decade. 

The portfolio remains overweight consumer staples, defensive industrials, and healthcare, sectors that should deliver more resilient earnings against a backdrop of more challenging economic conditions. 

Portfolio Performance Figures

Risk Profile Portfolio Performance Figures as at 30 April 2022

Post-Franking Credits

Prime SMA – Model Portfolio Performance Figures as at 30 April 2022

Post-Franking Credits

About the Portfolio

Portfolio Objective
To achieve capital growth with moderate tax-effective income via franked dividends through investment in listed Australian securities.

Model Portfolio
The Model Portfolio is managed by selecting primarily those securities with moderate growth potential but robust cash-generating capacity. These securities are expected to deliver an above-market average income yield, together with a relatively moderate level of capital growth. The portfolio benchmark is the S&P/ASX200 Accumulation Index.

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.

Stocks continue their losses, volatility remains high 

It was a roller coaster for financial markets last week, with global equities continuing their falls whilst volatility dominated markets. 

Both the S&P500 and the Nasdaq Composite Index logged their sixth consecutive week of declines, whilst the Dow Jones logged its seventh consecutive week. 

That is the longest stretch of declines the market has experienced since 2001. 

Before Friday’s remarkably strong trading session which saw global indexes jump 2-4%, the Nasdaq Composite index sat at 18-month-lows after suffering a near 30% decline since the start of this year. 

Additionally, the S&P 500 was down nearly 18% from its peak and sat in correction territory though it sat slightly above the -20% performance threshold that defines a ‘bear market’. 

Volatility continues to remain elevated within markets, with the VIX index, a common gauge of fear within the market approaching levels of 35 which continues to reflect investor uncertainty. 

Though, context is important here and the VIX sits well-below levels seen historically with the index currently sitting at half of what it was in the sell-down March of 2020. 

US CPI Data 

Following March’s soaring inflation figure, all eyes were cast upon US CPI data, to dictate how global markets move going forward. 

US consumer prices increased 8.3% on an annualised basis, which came in above consensus estimates and continues to remain elevated near 40-year highs, emphasising the importance of the Federal Reserve to respond. 

Despite the figure remaining elevated, it marked the first time in eight months that US consumer prices fell, albeit small, from an 8.5% annualised CPI figure which was recorded in March. 

Core inflation, which excludes volatile components such as food and energy prices, rose 0.6% from March and came in higher than the 0.4% figure that economists had forecast. 

These elevated levels of persistent inflationary pressures will likely encourage the Federal Reserve to continue tightening monetary policy at an aggressive pace and comments from Fed Chairman Jerome Powell following April’s CPI data confirmed this 

Powell acknowledged that getting these high levels of inflation under control could create a short-term hit to the US’s economy and that he couldn’t promise a ‘soft-landing’. 

Additionally, he reiterated his view that a further 0.50bps point increase would likely be appropriate in upcoming coming meetings though said the central bank could consider larger hikes if economic data necessitate such steps.  

Several economists now believe that the COVID-19 fuelled inflation surge, which saw a combination of extreme consumer demand and severe supply-chain bottlenecks has tapered off and will likely moderate in coming months.  

Though this may be true, we believe there are several wild cards at play that can materially impact the outcome of inflation going forward. 

China’s COVID related lockdowns continue to impact supply chains globally, add the ongoing unstable Russia/Ukraine situation and the potential further impact it can have on energy prices, and you can see how it proves challenging to forecast inflation in the months to come. 

Declining Aussie dollar 

Just last month, the Australian Dollar was trading at 75 US cents. 

Just last week the AUD traded close to 68 US cents which is a significant move in currency markets within such a short time period. 

Despite the hawkish move from the RBA earlier this month, the flight safety continues to drive our local currency lower. 

Global market sentiment is poor and surging widespread inflation continues to dampen risk sentiment and drive investors out of the AUD and into safe-haven currencies such as the US dollar and the Japanese yen in hopes of limiting their exposure to losses in the event of a market downturn. 

Additionally, China’s ongoing COVID-19 outbreak continues to weigh on demand for Australian commodities, namely iron ore, which has fallen -9% over the last week as virus restrictions and a worsening property crisis were expected to cut demand which places further downwards pressure on our local dollar. 

Though there is considerable speculation on where the AUD goes from here, April’s job data being released in the upcoming week will be pivotal to dictate the path ahead. 

Data out this Wednesday on job numbers is expected to add 30,000 jobs which will push the overall unemployment rate to 3.9%, the lowest recorded since 1974. 

Should the job data be in line with consensus expectations, it may ignite further hawkish RBA policy expectations which would likely boost the Australian currency, though only time will tell on this front. 

ASX Weekly Wrap

The ASX200 largely followed in line with the broader market and closed -1.81% for the week. 

The ASX was in a risk-off mode last week after U.S inflation figures spooked investors which resulted in the ASX falling below 7000 points for the first time in three and a half months. 

Despite the fall, Friday’s considerably strong trading session saw the index close at 7075 points and marked the second-biggest daily gain for the ASX this year. 

In terms of how the broader sectors faired, it was to no surprise that defensive exposure through the likes of the healthcare and consumer staples sector faired the best, gaining 2.59% and falling by -1.27% respectively. 

Unsurprisingly, Technology stocks again continued their freefall with the sector dropping by -9.3% at one point throughout the course of trading, though Friday’s strong session saw it close down -4.66%. 

Both the safer mid-cap and large-cap space outperformed the falling market, dropping -1.09% and -1.44% respectively whilst small caps plunged, dropping -3.82%. 

In terms of our Prime Growth Equity SMA, the strongest performer within the portfolio was Newscorp CDI (NWS) which was a beneficiary of Friday’s session adding 5.82% whilst the mainstay in portfolios CSL Limited (CSL) notched a healthy 3.15% gain. 

Our exposure to the material sector by way of Northern Star Resources (NST) and OZ Minerals (OZL) were the largest detractors in terms of performance last week, dropping -8.57% and -6.01% respectively. 

In other stock-specific news, Link Administration Holdings (LNK) fell 15.1% on no-news before entering a trading halt and announcing a takeover offer from Canadian company Dye & Durham Ltd.  

Should the deal go ahead, holders of LNK will receive $5.50 per share, though investors remained concerned about Dye & Durham’s ability to complete the takeover which is reflected in the 20% discount to the takeover bid LNK is currently trading at. 

Media favourite Magellan Financial Group (MFG) confirmed its new CEO, which would be Future Fund’s ex-Chief Investment Officer David George following the indefinite medical leave of absence of MFG’s previous CEO, Hamish Douglass. 

Outside of specific stocks, the much-anticipated launch of the first ASX-listed bitcoin and Ethereum exchange-traded funds came to market, albeit at a difficult time with the broader cryptocurrency market down significantly due to the recent devaluation of an algorithmic stable coin. 

Looking ahead

Monday 16th May 2022 – Friday 20th May 2022

• Monday: CN Retail Sales (APR) 
• Tuesday: AU RBA Meeting Minutes (MAY), UK Unemployment Rate (MAR), US Retail Sales (APR) 
• Wednesday: UK Inflation Rate (APR), US Building Permits (APR) 
• Thursday: AU Unemployment Rate (APR)
• Friday: UK Consumer Confidence (MAY), UK Retail Sales (APR)

Friday 13th May, 5pm values

Friday 13th May, closing values

Key dividends

Monday 16th May 2022 – Friday 20th May 2022

• Monday: Div Ex-Date – Macquarie Group Limited (MQG), Div Pay-Date – Bank of Queensland Limited Capital Notes (BOQPE), Bank of Queensland Limited Capital Notes 2 (BOQPF), Qualitas Real Estate Income Fund (QRI) 

• Tuesday: Div Pay-Date – BetaShares Western Asset Australian Bond (BNDS), VanEck Australian Subordinated Debt ETF (SUBD) 
• Wednesday: N/A
• Thursday: Div Ex-Date – Pendal Group Ltd (PDL), Virgin Money UK CDI (VUK), Westpac Banking Corp (WBC) 
• Friday: Div Ex-Date –  Macquarie Bank Capital Notes 3 (MBLPD) Div Pay-Date – Cromwell Property Group (CMW) 

Contact

If you would like to discuss your situation, please speak to your adviser or email clientservices@primefinancial.com.au

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