Weekly Market Update – 28 March 2022

Global equity markets defy hawkish central bank rhetoric

Global equity markets continued to rerate higher last week, however a stronger AUD (+1.3%) meant the MSCI World Index closed flat in AUD terms. 

The Australian equity market climbed +1.5% for the week whilst US equities delivered a 1.8% weekly return. 

We have been pleasantly surprised by this equity market strength which we were certainly not expecting. Given the Federal Reserve hiked rates for the first time in four years and given its ultra-hawkish tone we do find it a little perplexing that equities have reacted so positively to the news.  

Federal Reserve Chairman Jerome Powell last week told the National Association of Business Economists that “markets should prepare for more and faster interest rate increases” and also spoke to the possibility of a 50bps rate hike at upcoming meetings in order to meet this more hawkish target.  

Interestingly, Powell also highlighted that recessions are not caused by tightening monetary policy. Whilst we agree with this in part, there are some obvious questions that arise here. Are rates rising because economic growth can handle it or are rates solely rising to combat rising inflation which has without doubt been amplified by a ‘behind the curve’ Federal Reserve? 

The pace of the Federal Reserve’s rate hike agenda would have been significantly slower and more palatable for investors had the Fed initially hiked rates 6 months ago when investors began repricing the short end of the US Treasury curve back last September and October.   

And, if rates rise, growth is likely to slow and in the high inflationary environment we find ourselves in, can global economies and global growth navigate the murkiness of stagflation – an usual situation where high inflation coincides with low economic growth? It is for these reasons (these unknowns) that we remain cautious.  

Our portfolios remain overweight ‘quality’ and we have recently rotated quite materially out of growth towards value in the Prime International Equity SMA adding to existing positions in the Vanguard Global Value Active ETF (VVLU) and the Ausbil Long Short Focus Fund

The Ausbil Long Short Focus Fund is particularly appealing given it operates in a market neutral sector.  

Market neutral strategies involve the deliberate targeting of low or zero exposure to market risk which increases the ability of the manager to generate returns from stock selection, whilst simultaneously reducing the sensitivity of the portfolio to broader market movements. 

Market neutral strategies simultaneously buy companies that are expected to outperform peers and short sell companies that are expected to lag peers. The fund expects to receive the difference in returns, without exposure to significant market risk. Returns are therefore driven by Ausbil’s ability to correctly pick winners (long positions) and losers (short positions). 

Ausbil is expected to provide strong diversification benefits and improve the risk/return profile of an investor’s equity portfolio.  

We also added the ishares global consumer staples ETF (IXI) to the portfolio last week which invests in consumer staples businesses on a global scale. We like staples because of their dependable cash flows and ability to pass on cost pressures to the end consumer.  
 
We believe IXI’s more defensive characteristics will outperform in a volatile market with global behemoths Procter & Gamble, Nestle and Coca-Cola the highest conviction portfolio positions.  

Inflation Implications for Australia? 

US inflation hit a 40 year high in February 2022 at 7.9% – up from 7.5% as reported by the US Labor department a month earlier. The primary reasons for this outcome lay not just in the rising cost of petrol, but also food and housing costs.  

Looking even closer at the inputs that go into the inflation calculation in the US, there is a component known as “core prices” which excludes the impact from volatile price movements (think the cost of bananas after a cyclone in Queensland). Even taking these impacts out in a particularly volatile period for markets, prices in the US were generally up half a percent from January 2022.  

The current US administration would have it believed that this is all due to Russia invading Ukraine (“Putin’s price hike”), however, it is important to note that the prices for many goods in the US (not just petrol) were rising strongly well before Putin commenced his European war.  

Source: BondAdviser  

This distinction must be made as otherwise some may be prone to suggest that the significant hike in inflation over the last year was due solely to what could be a relatively short period of geo-political recklessness on the part of Russia.  

It is vastly more likely that the US is in for a much more sustained period of price rises that will not only frustrate Americans but will influence the balance sheets of banks all over the world, including Australia. 

One of the most direct relationships between US inflation, the related rate rises, and the Australian economy are Australian bank balance sheets being impacted by higher borrowing costs from US markets.  

The major banks in Australia, which depend on the much larger and more liquid markets offshore to fund their businesses, will have to respond as their costs materially increase. We have already seen this is various rate rises in fixed rate loans for mortgage borrowers in recent months. These rate rises occurred without any prompting from an Australian RBA target cash rate increase.  

Australian banks must, and will, actively manage their interest rate risk outside official moves in order to maintain appropriately managed balance sheets. This may surprise a lot of recent home loan borrowers in the next year or so, as well as economic forecasts for Australia in 2023. 

Are we starting to see the impact of supply chains bite on corporate earnings? 

It was interesting to note the number of ASX-listed companies who ‘downgraded’ citing supply-chain issues last week. 

NZ-based healthcare and respiratory provider Fisher and Paykel fell -12% after warning elevated freight costs would hurt its margins. 

FPH warned rising transport costs were likely to weigh negatively on gross margins for FY22 and subsequently downgraded its margin target from 65% to 62.5%. Whilst the company had not provided revenue guidance throughout FY22 given ongoing pandemic-related concerns, lower margins will ultimately impact profitability. 

And in the same industry, ResMed Inc (RMD) shares fell close to -10% after the sleep apnoea treatment provider’s NYSE listed shares fell over -8% in one session driven by supply-chain concerns. Increasing freight charges and semiconductor chip shortages have weighed on RMD’s ability to meet demand. 

RMD flagged that it expected the problem to persist into 2023 and was seeking to address the shortage problem by redesigning some of its products and turning to new suppliers.  

Meanwhile, construction and materials company Boral (BLD) flagged a hit to profitability last week as rising energy prices on the back of Russia’s invasion of Ukraine have driven costs higher. Diesel is a key component in BLD’s materials and whilst some of the cost pressures have been passed through to the end consumer, the company has been unable to avoid incurring some of these increased costs.  

BLD’s profitability was also affected by the QLD, NSW floods which meant materials and deliveries were delayed and in shorter supply. BLD shares ended the week down -0.6%.  

ASX Weekly Wrap

The ASX200 performed in line with global peers adding +1.5% last week. 

Miners (+5.5%) and energy stocks (+5.1%) were once again the flavour of the week with iron rise rising while oil rallied close to 10% as ongoing geopolitical tensions in Eastern Europe saw oil prices test the $120/bbl level – a 10year high. 

Mid caps outperformed rising 2% whilst large caps and small caps both performed in line with the market rallying +1.5%.  

The worst performing sector was healthcare (-2.5%) which was weighed down by CSL which fell -2.2% on no news, whilst FPH and RMD as mentioned above were material underperformers.  

At a portfolio level, best performers in the PRIME Australian Equity Growth SMA were miners BHP (+7.6%) and oil producer STO (+5.3%). BHP’s FY22 record interim dividend of $2.08 per share is paid to shareholders today in what will be a significant boost for the cash levels of portfolios.  

BGA and HLS were the worst performers falling around -3%. 

In other stock specific news NAB announced a $2.5b on-market share buyback. Given how well capitalised the major banks are we had expected an announcement like this, but pleasing nonetheless. 

QUB launched a $400m off-market buyback following the completion of the sale of its Moorebank Logistics Park transaction whilst Ramsay Healthcare (RHC) received a US$1.35b takeover proposal from IHH Healthcare Berhad (IHH) to acquire 100% of its 50:50 joint venture in Asia, Ramsay Sime Darby Health Care Sdn. 

RHC and SDH has decided to grant IHH a 4-week period of exclusivity to conduct its due diligence.  

Looking ahead

Monday 28th March 2022 – Friday 1st April 2022

  • Monday: N/A  
  • Tuesday: UK Bank of England Consumer Credit (FEB), US House Price Index (JAN)
  • Wednesday: US JOLTs Job Openings (FEB), ADP Employment Change (Mar)
  • Thursday: AU Private Sector Credit (FEB), CN NBS Manufacturing PMI (MAR), US Personal Spending (FEB) 
  • Friday: AU Markit Manufacturing PMI (MAR), CN Caixin Manufacturing PMI (MAR), US Non Farm Payrolls (MAR) 

Friday 25th March, 5pm values

 IndexChange%
All Ordinaries 7690+119+1.6%
S&P / ASX 2007406+112+1.5%
Property Trust Index1616+12+0.7%
Utilities Index7493+402+5.7%
Financials Index6707+6+0.1%
Materials Index18309+960+5.5%

Friday 25th March, closing values

 IndexChange%
U.S. S&P 5004543+80+1.8%
London’s FTSE7483+78+1.1%
Japan’s Nikkei28150+1323+4.9%
Hang Seng21405-7-0.0%
China’s Shanghai3212-39-1.2%

Key dividends

Monday 28th March 2022 – Friday 1st April 2022

  • Monday: Div Ex-Date – Cochlear Limited (COH), Reece Limited (REH) Div Pay-Date – BHP Group Limited (BHP), Idp Education Limited (IEL), Nick Scali Limited (NCK)
  • Tuesday: Div Ex-Date – NABPD (NABPD) Div Pay-Date – Northern Star (NST)
  • Wednesday: Div Ex-Date – WCM Global Growth (WQG) Div Pay-Date – AGL Energy (AGL), Aurizon Holdings Limited (AZJ), Commonwealth Bank (CBA), Fortescue Metals Group (FMG), Wesfarmers Limited (WES), Worley Limited (WOR)
  • Thursday: Div Ex-Date – Harvey Norman (HVN) Div Pay-Date – Ampol Limited (ALD), Bendigo and Adelaide (BEN), CBAPF (CBAPF), Coles Group (COL), Newcrest Mining (NCM), Ramsay Healthcare (RHC)
  • Friday: Div Pay-Date – Insignia Financial (IFL), L1 Long Short Fund (LSF), Suncorp Group Limited (SUN), Telstra Corporation (TLS), Treasury Wine Estate (TWE)

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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