Weekly Market Update – 27 June 2022

Stocks rebound strongly as investors reassess the Fed’s rate path 

After three weeks of losses, global equity markets achieved their first week of gains, rising 5.36 per cent, as measured by the MSCI World Index in AUD terms. 

All three major U.S. indexes witnessed gains, with the S&P500 closing 3 per cent higher than it had opened on Friday’s trading session, which was the indices’ largest gain since May 2020. 

Bond yields declined following Federal Reserve Chair Jerome Powell’s testimony, in which he reaffirmed his commitment to containing inflation, indicating that rate hikes would be on the horizon. However, how long and quickly the hikes would remain undetermined. 

However, what can be inferred from the decline in yield is that investors now seem to be pricing in predictions that the Fed will scale back the magnitude and the frequency of rate hikes in response to indicators of slowing economic growth. 

Concerns over China’s tight COVID zero policy’s potential impact on demand led to a general lowering of prices in the commodities market. 

Copper dropped to its lowest level since March of 2021, and Oil fell to US$102/barrel, a 17 per cent reduction from two weeks prior, though it made up some of those losses towards the tail-end of the week. 

Prices for iron ore also continued to fall from their March highs. However, remarks made by Chinese President Xi Jinping later in the week detailed China’s commitment to meeting its development goals, which naturally translated to a rebound in iron ore mid-week to close above US$130/ton.

The RBA’s outlook on inflation and monetary policy 

In a broad speech to the press, the Reserve Bank of Australia’s governor Philip Lowe provided further insight into the RBA’s view on interest rates and inflation in the months ahead. 

Lowe commented that interest rates were still ‘low’ and told the public to brace for further suffering in the upcoming months as the RBA tries to tame the current spike in price growth. 

Inflation had picked up faster and across more goods and services than the RBA had forecasted. With the RBA raising its inflation forecast to a peak of 7 per cent come the December quarter, having earlier predicted a high of 6 per cent. 

On wages, Lowe flagged that the ideal wage growth is 3.5 per cent and that wage rises above this amount risked embedding higher inflation throughout the longer term, making it harder to return inflation to the bank’s 2.5 per cent target. 

When speaking on interest rates directly, the governor indicated rates are most likely to increase by 25 or 50 basis points in July’s meeting, which contrasted money market expectations that the central bank would follow in line with the Federal Reserve with a 75-basis point increase. 

The central bank’s governor also reiterated their usual messaging that there was no pre-set interest rate path and that decisions will continue to be guided by economic data in the coming months. 

Lowe remarked that a 4 per cent plus cash rate by year-end, which markets have been tipping, is not likely to occur, though he did acknowledge investors had forecasted rates better than the central bank had in recent times. 

Currently, markets are pricing in a cash rate far above the RBA’s estimate of 2.5 per cent, so the disparity between them is one of two things. 

Either the RBA is incorrect, or the current pricing in markets is wrong. So one forecast must change and move towards another, though which one that is will only be told in the months ahead. 

Finally, criticism of the RBA missing the surge in inflation and thus falling behind the curve was directly addressed as Lowe played down recessionary fears.  

The governor stated that he does not foresee Australia tipping into a recession, arguing that the strong fundamentals of Australia’s economy, with unemployment at a 50-year low and a considerably strong participation rate, will allow us to avoid recession.

Navigating volatility via market-neutral strategies: A closer look at the Ausbil Long Short Focus Fund. 

Ausbil’s Long Short Focus Fund has been a key position within portfolios in recent times; thus, we see this as an opportune time to understand how a fund can perform irrespective of market movement. 

For context, Ausbil is a top-down, bottom-up investment manager, aiming to provide positive investment returns over the long term as the team believes they can benefit from volatility within global financial markets by employing a long/short approach to equity markets.  

This approach is considered ‘market-neutral’; that is, generated absolute returns are generally independent and uncorrelated to overall market swings. 

The team’s broader investment philosophy is that active management of portfolios facilitates consistent and risk-controlled outperformance. Rather than focusing just on growth or value investing, Ausbil’s investment approach allows them to exploit the inefficiencies across the entire market, at all stages of the cycle and across all market conditions. 

Ausbil believes that the Australian equity market is relatively efficient but not perfect. Their combination of top-down macroeconomic research with in-depth, bottom-up stock analysis gives Ausbil better insights into the earnings profile of our universe of companies during the various stages of the economic/investment cycle. 

Furthermore, Ausbil believes that stock prices ultimately follow earnings and earnings revisions and that markets place excessive emphasis on the current situation without sufficiently considering the likelihood of future changes to the earnings profile of individual companies and/or sectors. 

Investment Process

Macroeconomic analysis 

Ausbil seeks to assess current market conditions impacting the Australian equities market to determine Ausbil’s view of the macro framework and thus set an overall portfolio strategy. 

Sectorial analysis

The application of Stage 1 conclusions to each sector to identify early-stage sectors subject to earnings revisions – both upward and downward over the coming 12-month period. 

Stock selection 

Identification of stocks which Ausbil believe will achieve the greatest 12-month outperformance within the investment universe. Given Ausbil’s belief that earnings and earnings revisions lead stock prices, the analyst’s primary objective is to investigate and assess all facets impacting each company’s earnings profile. Analysts undertake fundamental analysis, a program of company visitations and utilise proprietary quantitative ranking model.

Portfolio Construction 

Portfolio construction creates a robust, appropriate and risk-aware portfolio which conforms to (and optimises) the conclusions of the previous three stages of the process. 

Investment Performance 

Regarding the fund’s performance, the Ausbil Long Short Focus Fund is benchmarked against the Reserve Bank of Australia’s cash rate. The Ausbil Fund has returned an average of 16.54 per cent per annum since inception in September of 2020, against its benchmark of 0.12 per cent. 

When put against common market indexes, Ausbil’s market-neutral strategy has proved effective, with the fund returning 1.59 per cent year-to-date against declines of the ASX200 (-11.56 per cent), NASDAQ (-26.69 per cent), and S&P500 (-18.45 per cent).  

Positioning

The fund has cautiously positioned itself with tail risk hedges on both sides (long puts and calls) to protect against violent moves. Short positions are maintained within domestic and international cyclical companies, in addition to companies at risk of equity capital raisings due to higher expenses/cash burn and underfunded balance sheets. 

Ausbil is now heavily focused on the upcoming Australian August reporting season and is proactively reviewing all companies. Furthermore, the US reporting season will provide some insights on the extent of earnings downgrades, believing that if earnings cannot stabilise that there is more inherent downside risk.

ASX Weekly Wrap 

The ASX200 closed 1.66 per cent higher for the week, recording the first two consecutive days of gains throughout June, which puts into perspective how brutal the selling as of late has been. 

Mid-caps (+1.6 per cent) outperformed both small (+1.07 per cent) and large caps (+1.5 per cent), thanks to a strong trade on Friday. 

Though, it was quite an unusual week, with most of the big miners and banks trending lower, which the broader ASX tends to follow, though a rebound in the beaten-up technology and renewable energy space propped up markets as investors gauged the damage from this month’s sell-off.  

In line with this, technology was the most robust sector last week, notching a substantial 8.1 per cent gain, though importantly, these gains come in the form of a bounce from some of the most ferocious falls in tech names in recent times. 

In contrast, the materials and energy sectors felt the brunt of losses, falling -4.9 per cent and -4.5 per cent, respectively, as recessionary worries continued to weigh on commodity prices. 

Within portfolios, the best performers in the PRIME Australian Equity Growth SMA were Goodman Group (GMG) and Woolworths Limited (WOW), which rallied 7.4 per cent and 7.9 per cent, respectively, on no news though gained in line with market peers. 

Conversely, our exposure to the waste manager Cleanaway (CWY) fell by -7.01 per cent after the company flagged that its New Chum inert landfill would be closed for the FY23 following floods in QLD, flagging $11 million worth of costs expected to be incurred up until the end of FY22 to rectify the damage.  

On broader market news, US private equity behemoth Blackstone finally concluded its acquisition of Crown Resorts (CWN), with Blackstone promising to restore Crown Resorts’ reputation following a track record of breaches of anti-money laundering and media reporting of the company’s junket operations. 

Lithium miner Vulcan Energy (VUL) saw a strong jump of 26.8 per cent after announcing that global automaker Stellantis had invested $76 million in the business to become its second-largest shareholder. Stellantis is a European automaker behind luxury brands names Alfa Romeo, Maserati, Chrysler and Jeep and aims to fully electrify all passenger vehicle sales in Europe by 2030. 

Looking ahead

Monday 27th June 2022 – Friday 1st July 2022

  • Monday: US Core Durable Goods Orders (May) 
  • Tuesday: US Goods Trade Balance (May) 
  • Wednesday: AU Retail Sales (May), US CB Consumer Confidence (Jun), US GDP (Q1), US GDP Price Index (Q1) 
  • Thursday: AU Private Sector Credit (May), CN Manufacturing PMI (Jun), UK GDP (Q1) 
  • Friday: AU AIG Manufacturing Index (Jun), CN Caixin Manufacturing PMI (Jun), UK Manufacturing PMI (Jun) 

Friday 24th June, 5pm values

 IndexChange%
All Ordinaries 6762+99+1.5%
S&P / ASX 2006579+104+1.6%
Property Trust Index1378+94+7.3%
Utilities Index7567-16-0.2%
Financials Index5754+205+3.7%
Materials Index15641-802-4.9%

Friday 24th June, closing values

 IndexChange%
U.S. S&P 5003912+100.3%
London’s FTSE7208-111-1.5%
Japan’s Nikkei26491-1334-4.8%
Hang Seng21719-88-0.4%
China’s Shanghai3349+631.9%

Key dividends

Monday 27th June 2022 – Friday 1st July 2022

  • Monday: N/A
  • Tuesday: Div Ex-Date – NAB Capital Notes 2 (NABPD), Div Pay-Date – Champion Iron Ltd (CIA), GQG Partners Inc (GQG) 
  • Wednesday: Div Ex-Date – Charter Hall Group (CHC), Mirvac Group (MGR), Transurban Group (TCL) 
  • Thursday: Div Pay-Date – KMD Brands Ltd (KMD) 
  • Friday: Div Pay-Date – Aristocrat Leisure Ltd (ALL), Australia and New Zealand Banking Group Ltd (ANZ), CSR Limited (CSR), Pendal Group Ltd (PDL) 

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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