Weekly Market Update – 2 May 2022

Equities weaker ahead of Federal Reserve and RBA meetings this week.

Having been trading close to record highs, global equity markets experienced a brutal and sustained selloff last week with the MSCI world index falling close to -1% in AUD terms. The reasons for the sharp decline in equities were not hard to find either. 

Fears over China’s rising Omicron case numbers, particularly in Beijing, saw the possibility of a Shanghai-style hard lockdown rise. Such an outcome would bring Beijing’s primary business activities (tertiary services and manufacturing and construction) to a grinding halt.  

China’s zero-case approach to COVID frightened equity markets last week with the spot price of iron ore falling -5% on fears demand would fall as the potential for sweeping lockdowns across the country increased. 

It is no surprise that analysts have pared back GDP growth forecasts for China in 2022 with the manufacturing and industrial sector which represents ~35% of GDP likely to be impacted by lockdowns.  

Concerns on the future pace of interest rates was another reason for last week’s weakness and continues to weigh on markets. 

Traditional Federal Reserve ‘doves’ continue to congregate at a 50bp hike at this week’s meeting. Furthermore, the need to hike more ‘aggressively’ than initially thought means markets are now pricing in nearly 4x50bp hikes at the next 4 meetings implying an end of year 2022 Fed Funds of 2.57%. 

This is well above the current Fed dot plot (a chart recording each Fed official’s projection for the short-term interest rate which reflects what each member thinks will be the appropriate midpoint of the fed funds rate at the end of each calendar year three years into the future) estimate of 1.9%. 

Our sense is that with inflation still a headache for central banks (particularly in the US where headline inflation hit 8.5% in March) the Federal Reserve is more likely to deliver aggressive rate hikes than it is to err on the side of caution and as such we continue to position the PRIME International Equity SMA with this in mind. 

Finally, key mega tech stocks Alphabet (Google), Microsoft, Meta, Apple and Amazon all reported quarterly earnings last week. 

Overall, earnings numbers were in-line with forecasts (Meta and Apple beat expectations while Amazon lagged) but the NASDAQ sold off as risk-off investor sentiment brought tech stocks down. The index fell -4% for the week. 

Inflation data and interest rate implications locally 

Like the Federal Reserve, the Reserve Bank of Australia are also due for a policy meeting this week – tomorrow.  

The RBA had been considered a 50% chance to deliver a rate hike in May prior to last week’s inflationary data being released. 

However, following the release of the March quarter Consumer Price Index (CPI) last Wednesday, markets are now pricing in a 50% chance the RBA hike rates tomorrow. 

This carries more weight than normal given the RBAs preference to not interfere with rates in the lead-up to a federal election, but we believe the escalation in pricing pressures evident in last week’s inflation figures makes the RBA’s decision a little more difficult.   

Headline inflation came in at 5.1% whilst quarterly inflation was 2.1% far exceeding analyst forecasts. Whilst the RBA is focussed on underlying inflation (which strips out volatile items) and this came in at 3.7%, the reality is everyday consumers (you and I) are now dealing with 5%+ inflation.   

A reminder that the RBA’s preferred measure of inflation is underlying inflation, and this target is 2-3% so the figure of 3.7% is confirmation that 1) things are going to change and soon and 2) the RBA were too dovish for too long.  

Key drivers were food costs (+2.8%) with fruit and vegetable rising sharply due to covid-related supply chain disruptions and floods in NSW and QLD impacting supply. Transport costs also rose (+4.2%) as the Russian invasion of Ukraine saw oil and petrol costs spike higher.  

Only last month we had thought the RBA would likely be overly cautious before hiking rates and wait for not only inflation data but also wages and employment data due in just over a fortnight. However, in light of the inflation numbers we believe there is a strong likelihood the RBA will hike rates by 15bps tomorrow and deliver a more meaningful 25bps hike next month.  

Should the RBA decide not to hike rates tomorrow and our prediction proves to be incorrect, we would expect the RBA hike at next month’s policy meeting in the vicinity of 40bps to bring the cash rate to 0.50%.  

A closer look at International Fund Manager Aoris, why we hold it & winners and losers in a rising rate world 

Aoris is a “quality-first value investor” who seeks to own businesses that grow in value over time. Central to the Aoris investment philosophy is acquiring these businesses for less than they are worth, and they achieve this through a differentiated and unique approach to “quality”. 

The challenging external conditions experienced by most industries began with COVID-19 shutdowns and morphed into supply chain disruption, inflation and labour shortages. Aoris believe these challenges will continue to be a separator between the best businesses and the rest.  

Aoris have no views on the direction the market may take but have a clear view of the characteristics necessary for businesses to be ‘all weather’. Aoris is confident that through owning a concentrated portfolio of exceptional businesses it will achieve its investment objective of 8–12% p.a. over a market cycle. 

The Aoris process is to own established winners in growing but also competitively stable markets. Here are three core characteristics Aoris believe will be key to driving returns no matter what is around the corner: 

1. Companies that provide immense value relative to the cost

How much more will you pay for a can of baked beans this year and next year compared to last year? If you sell basic products that don’t improve year-to-year, rising inflation or new competition is bad news. The likes of Campbell Soup, Kimberly-Clark, Unilever and Procter & Gamble face stiff resistance from consumers, and retailers, when seeking to charge a few percent more for the same product.  

It’s no surprise that these brands have lost market share in times of inflation as consumers seek out alternatives, including retailers’ own private label brands.  

On the other hand, Aoris own Accenture, which has been an industry winner due to its success in staying relevant and continually adding value to its clients. Accenture is the world’s largest IT consulting and outsourcing company, focusing on the world’s largest organisations.  

‘Rotating to the new’ has been the company’s rallying cry for many years, emphasising growth in areas such as digital, cloud, security, artificial intelligence and digital media. These ‘new’ services now account for about 70% of revenue and has created pricing power and market share gains. 

2. Business with size and scale where it matters

When costs are rising, smaller firms are often at a significant disadvantage. They have less buying heft when it comes to negotiating purchasing terms, and less sophisticated supply chains when it comes finding alternative suppliers and utilising data to navigate a period of rising costs.  

Aoris own Costco, one of the world’s largest retailers with $250 billion of annual purchasing power. Costco operates a membership model where over 100 million individuals pay US$60 per year for the right to shop in its 800 warehouses.  

Costco’s size and scale make them very difficult to compete with. Costco’s vast purchasing power is focused on about 3,700 items that it sells in large quantities, which compares to more than 100,000 at a typical Walmart.  

As such, Costco achieves operating efficiencies through volume purchasing, distribution directly from manufacturers to stores and reduced handling of merchandise in no-frills, self-service warehouse facilities. Also, Costco’s highly regarded store brand, Kirkland, accounts for about one-third of sales, giving it a valuable optionality in an environment of supply chain and inflationary pressures. 

3. A culture of continuous cost improvement

Some companies build up fat through the good years. The burden of rising inflation on such companies is amplified by their layers of excess costs. To reign in the rampant expenses, a restructuring program is undertaken. This looks straightforward on paper but can be very demoralising and destabilising internally, as skills and experience are lost.  

Companies that are effective at trimming the fat every year are always looking to become more efficient and pull ahead of their peers. A good example of this is Graco. Since its founding in 1926, Graco has produced premium-quality pumps and spray equipment for fluids and powders, servicing a broad range of industries.  

In contrast to competitors, manufacturing is a core competency for Graco and provides greater control over its costs. The company is always looking for efficiency measures that at least offset their cost inflation each year. These cumulative savings have allowed Graco to earn operating margins significantly higher than its peers. 

ASX Weekly Wrap

The ASX200 was not spared from the global risk-off sentiment that plagued equity markets last week. The index outperformed its global peers last week albeit in a down market falling -0.5%. 

The ASX has been a happy hunting ground for investors in recent months with its heavy iron ore and resources exposure benefitting from a broad-based rally in commodities. The reliance on commodities has also provided our market with a level of protection from supply chain issues weighing more heavily on other equity markets. 

However, the risk that China administers further lockdowns saw heavy selling across the ASX last week.  

Tech stocks fared worst falling -1.7% whilst miners fell -1.1% on the risk that any lockdowns will dent demand for iron ore.  

Mid-caps outperformed rising +0.1% whilst small caps dragged on portfolios falling -1.4%. Large caps fell in line with the broader index.  

Best performers in the PRIME Australian Equity Growth SMA last week were CSL (+0.9% on no news) and OZ Minerals (OZL) which rallied +1.8% after receiving a broker upgrade.  

Looking ahead

Monday 2nd May 2022 – Friday 6th May 2022

  • Monday: AU ANZ Job Advertisements (APR), UK Nationwide Housing Prices (APR)  
  • Tuesday: AU RBA Interest Rate Decision, US ISM Manufacturing PMI (APR) 
  • Wednesday: AU Home Loans (MAR), UK, BoE Consumer Credit (MAR), US JOLTs Job Openings (MAR) 
  • Thursday: AU Balance of Trade (MAR), US Fed Interest Rate Decision, ISM Non-Manufacturing PMI (APR) 
  • Friday: AU Statement on Monetary Policy, US Non-Farm Payrolls (APR) 

Friday 29th April, 5pm values

All Ordinaries 7725-43-0.6%
S&P / ASX 2007435-38-0.5%
Property Trust Index1629+11+0.7%
Utilities Index8248+106+1.3%
Financials Index6783-48-0.7%
Materials Index17915-207-1.1%

Friday 29th April, closing values

U.S. S&P 5004132-140-3.3%
London’s FTSE7545+23+0.3%
Japan’s Nikkei26848-257-0.9%
Hang Seng21089+450+2.2%
China’s Shanghai3047-40-1.3%

Key dividends

Monday 2nd May 2022 – Friday 6th May 2022

  • Monday: Div Pay-Date – Harvey Norman (HVN)  
  • Tuesday: Div Pay-Date – Brickworks Limited (BKW) 
  • Wednesday: Div Pay-Date – Centuria REIT (CIP), Centuria Office REIT (COF), New Hope Corporation (NHC) 
  • Thursday: Div Pay-Date – Arena REIT (ARF), Gold Road Resources Limited (GOR) 
  • Friday: Div Pay-Date – Spheria Emerging Companies Fund (SEC), Seven Group Holdings (SVW) 


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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