Weekly Market Update – 6 June 2022

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

 IndexChange%
All Ordinaries 7,472+59+0.8%
S&P / ASX 2007,239+56+0.8%
Property Trust Index1,469+2+0.1%
Utilities Index7,901-390-4.7%
Financials Index6,551-86-1.3%
Materials Index18,268+673+3.8%

Friday 3rd June, closing values

 IndexChange%
U.S. S&P 5004,108-50-1.2%
London’s FTSE7,533-52-0.7%
Japan’s Nikkei27,762+980+3.7%
Hang Seng21,082+385+1.9%
China’s Shanghai3,195+65+2.1%

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

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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