Weekly Market Update – 21 March 2022

Rates rise as Federal Reserve rhetoric becomes more hawkish

Global equity markets rallied last week with the MSCI World index climbing 4.9% in AUD terms.   

Equity markets largely shrugged off any concerns relating to the Federal Reserve’s first rate hike since 2018. One could argue that markets had largely priced in this rate hike so were undaunted or unphased by the 25bps rate hike that was confirmed during the FOMC meeting. 

However, the Federal Reserve’s commentary and guidance surrounding future rate hikes is something we feel the market is underappreciating. 

The Federal Reserve was noticeably more hawkish last week committing to 7 hikes for the rest of 2022 and further hikes in 2023-2024 which will take the Fed Funds rate to 2.8% and above its longer run 2.5% estimate.  

The Federal Reserve committed to start quantitative tightening (QT) at a future Fed meeting (likely April but possibly June) and elevated its inflation forecasts.  

Bond yields spiked higher across the curve but had a greater impact on the front end than the long end ultimately meaning a flatter yield curve. As expected, the USD spiked higher on the announcement but then largely retreated given investors were ultimately anticipating this hike.  

Whilst surprising to us that equities were broadly so strong (US equities rallied +6% for the week), perhaps other factors were at play. The Fed did not deliver a 50bp rate hike as forecast a month ago whilst optimism for a potential ceasefire in the Ukraine may have also driven equities higher.  

Best course of action for portfolios? 

We have been writing about our cautious outlook for equity markets since the backend of CY21 citing rising inflation, peaking PMI indices and central bank monetary policy that we believe was ‘behind the curve’. 

We are now beginning to see central banks play a little bit of catch up. The Federal Reserve has committed to multiple rate hikes, whilst the Reserve Bank of Australia which only a few months ago changed its rhetoric from ‘don’t expect a rate rise until 2023’ to ‘interest rates are plausible in 2023’ to ‘expect rates to rise in 2H22’. 

In light of this change in rhetoric we remain cautious and continue to advocate for a well-diversified, quality portfolio. 

We believe corporate profits for FY22 in Australia will return around +10% and continue to invest in some of the highest quality, market leading businesses with strong cash flows and future earnings growth. 

We believe a number of the Prime Australian Equity Growth SMA’s highest conviction portfolio positions represent attractive value at current levels and suggest considering these for portfolios that may be overweight cash or underweight ‘quality.’ 

CSL Limited (CSL) 

CSL’s 1H22 result was ahead of expectations and reaffirmed FY22 guidance. Plasma collection showed continued signs of recovery, with collection volumes up +18% in 1H22.  

CSL remains well placed in FY23, with additional earnings support from the acquisition of Vifor as well as the potential yield benefits from the Terumo Platform (plasma collections) which should improve higher plasma yields at a lower cost.  

Sequrius (Flu vaccine) sales were up +17% ahead of expectations. This was driven by strong growth in influenza vaccines, with a positive mix shift towards higher value products. 

Macquarie Group (MQG) 

Recent share price weakness in Macquarie Group (MQG) has provided an attractive entry point for portfolios with an opportunity to increase exposure to the structural tailwinds in infrastructure and green energy.  

The International Energy Agency (IEA) Net Zero Emissions by 2050 Scenario (NZE) calls for renewable investment to quadruple from ~US308bn in 2015-20 to US$1.3tr by 2026-30.  

Macquarie’s global commodities business is also expected to benefit from the structural increase in volatility and trading activity as the transition to renewables could create more uncertainty around energy supply. 

Woolworths (WOW) 

Momentum for Woolworths (WOW) supermarkets has improved since its December trading update with EBIT at the top end of guidance and sales growth of ~5% in the first 8 weeks of 2022.  

WOW is benefiting from an easing in restrictions and declining cases enabling a reduction in Covid costs and better operational efficiency.  

WOW should also be a beneficiary of higher food inflation lifting shelf prices up ~2-3% in 2H22. We believe an improving trading outlook and recent share price weakness provides valuation support for WOW

ASX Weekly Wrap

The ASX200 underperformed its global peers but still rallied +3.3% last week. 

Large caps, mid caps and small caps were all evenly bid returning around +3%. 

In a reversal of previous weeks miners (-1%) and energy stocks (broadly flat) underperformed as a result of declining iron ore prices (7%) and oil (-4%). We view this more as some mean reversion with both sectors having largely underpinned the p[performance of the broader market in recent weeks.  

Tech stocks performed best last week rising +7.8% in a sign investors were largely ‘risk-on’. Financials (+6%) and healthcare (+5.5%) also outperformed for portfolios.  

Best performers in the PRIME Australian Equity Growth SMA were heavyweights Commonwealth Bank (CBA), CSL Limited (CSL) and Macquarie Group (MQG) which all rallied between 6-7%. 

BHP (-3%) and Santos (STO) (-0.4%) weighed on performance but were simply a function of falling commodity prices. 

Looking ahead

Monday 21st March 2022 – Friday 25th March 2022

  • Monday: CN Loan Prime Rate  
  • Tuesday: AU RBA Governor Lowe Speech, UK Public Sector Net Borrowing (FEB)  
  • Wednesday: UK Inflation Rate
  • Thursday: AU Markit Manufacturing PMI (MAR), US New Home Sales (FEB), Durable Goods Orders (FEB) 
  • Friday: UK Consumer Confidence (MAR), Retail Sales (FEB) 

Friday 18th March, 5pm values

 IndexChange%
All Ordinaries 7571 +232+3.2%
S&P / ASX 2007294+230+3.3%
Property Trust Index1604+55+3.6%
Utilities Index7091+7+0.1%
Financials Index6701+384+6.1%
Materials Index17349-202-1.2%

Friday 18th March, closing values

 IndexChange%
U.S. S&P 5004463+259+6.2%
London’s FTSE7405+249+3.5%
Japan’s Nikkei26827+1664+6.6%
Hang Seng21412+858+4.2%
China’s Shanghai3251-59-1.8%

Key dividends

Monday 21st March 2022 – Friday 25th March 2022

  • Monday: Div Ex-Date – Adairs Limited (ADH), NRW Holdings Limited (NWH), Div Pay-Date – ANZPG (ANZPG), ANZPH (ANZPH), ANZPI (ANZPI), MLBPC (MBLPC), NABPE (NABPE), WBCPK (WBCPK) 
  • Tuesday: Div Ex-Date – Blackmores Limited (BKL), Emeco Holdings (EHL), Div Pay-Date – Challenger Limited (CGF), REA Group (REA), WBCPH (WBCPH), WBCPJ (WBCPJ) 
  • Wednesday: Div Ex-Date – Myer Holdings Limited (MYR), Seek Limited (SEK), Div Pay-Date – Sims Limited (SGM), Sonic Healthcare (SHL), WBCPE (WBCPE), Woodside Petroleum (WPL) 
  • Thursday: Div Ex-Date – Healius Limited (HLS), Spark New Zealand (SPK) Div Pay-Date – ANZPE (ANZPE), ANZPF (ANZPF), Bega Cheese Limited (BGA), Downer EDI Limited (DOW), Medibank Private Limited (MPL), Santos Limited (STO)   
  • Friday: Div Ex-Date – Adbri Limited (ABC), Div Pay-Date – Monadelphous Group (MND), Origin Energy (ORG) 

Contact

Mark Johnson – Chairman of Investment Committee(03) 8825 4738
Guy Silbert – Investment Manager(03) 8825 4750

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

Mark JohnsonT: (03) 8825 4738Michelle BromleyT: (03) 8825 4751
Livio Caiolfa T: (03) 8825 4748Nicole LewisT: (03) 8825 4734
Marcus AingerT: (02) 9134 6292Nicholas MillerT: (03) 8825 4722
Dylan CresswellT: (03) 8825 4707Gina McIntoshT: (07) 3557 2557
Jarrod Rodda T: (03) 8825 4729

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.

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