Weekly Market Update – 30 May 2022

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

 IndexChange%
All Ordinaries 7,413+27+0.4%
S&P / ASX 2007,183+43+0.6%
Property Trust Index1,467+15-1.0%
Utilities Index8,291-94-1.1%
Financials Index6,637+99+1.5%
Materials Index17,595+297+1.7%

Friday 27th May, closing values

 IndexChange%
U.S. S&P 5004,158-257+6.6%
London’s FTSE7,585+196+2.7%
Japan’s Nikkei26,782+43+0.2%
Hang Seng20,697-20-0.1-%
China’s Shanghai3,130-16-0.5%

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

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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