Weekly Market Update – 11 July 2022

A week of gains for global markets offset by the AUD weakening 

In hopes that the Federal Reserve can control inflation without sending the economy into a recession, stocks recovered a large portion of the losses from the previous week. 

Unfortunately, a large portion of the gains was evaporated by a depreciation in our local currency, which saw the Australian dollar fall to US67.6 cents at its lowest point. 

The MSCI World Index was up 0.28 per cent in AUD terms, though when stripping out currency fluctuations, the index was up over 1.7 per cent. 

Significant gains in global markets were seen in the technology and consumer discretionary sector, which pulled the S&P500 out of bear market territory, now down 19 per cent from the indexes’ peak in January.  

On Friday, a better-than-expected U.S. jobs report detailed that the U.S. economy added 372,000 jobs last month compared to expectations of 268,000. The unemployment rate remained stable at 3.6 per cent. 

The figures may ease some worries of an imminent recession. However, it also bolsters the narrative of the Federal Reserve having more room to aggressively hike interest rates to cool the tight labour market and strong consumer demand during a period of historically high inflation. 

Expectations of the Fed in its upcoming July 27-28 meeting are to hike rates by another 0.50 or 0.75 basis points, which is likely to see further volatility in asset prices. 

Investors are now looking ahead to the upcoming week, featuring a monthly US CPI report to measure inflation and kick off a crucial start to the U.S.’s second-quarter earnings, shaping the story forward.  

RBA Monetary Policy Decision; another 50bps 

Leading into July’s RBA meeting, the bank’s governor, Phillip Lowe, reiterated that the level of interest rates remains low on a relative basis for a local economy that is experiencing high inflation with low unemployment.  

Despite these comments, Lowe downplayed the chance of rates increasing by a colossal 75 basis points, forecasting that a 25 or 50 basis point hike would likely take place in July’s meeting to curb recent price pressures. 

In line with the bank’s previous comments and market expectations, the RBA hiked the official interest rate by 50 basis points. 

The meeting marked the third straight month of rate increases, with the official cash rate now at 1.35 per cent, up from 0.85 per cent in June. 

For context, since the RBA began announcing the cash rate publicly in 1990, it has never raised the cash rate in two consecutive meetings by 50 basis points each. 

Within the minutes, Lowe sounded more confident about the inflationary outlook, reiterating that the bank expects inflation to peak towards the tail-end of 2022, noting the strong labour market and household spending locally. 

The bank continued to repeat similar comments from the past, being that the board would continue to be guided by data to assess the outlook on inflation and labour market conditions, alluding that the incoming June quarterly inflation report would be pivotal in making future decisions. 

Regarding market expectations for rates, they have changed quite drastically; markets are now forecasting a cash rate locally of 3.1 per cent by year-end compared to the 3.8 per cent that markets anticipated a few weeks ago. 

Despite the fall in rate expectations, there is still a significant differential in expectations between markets and what Lowe has detailed in past speeches. However, the reality is that markets have been more accurate than the RBA in recent months. 

The upcoming quarterly inflation numbers will be pivotal to what the RBA does next. The data is expected to be published towards the end of this month, so stay tuned, and we’ll revisit the topic then. 

Looking at global growth manager, Hyperion 

For context, Hyperion Asset Management is a global growth manager whose investment philosophy is investing in quality businesses with sustained competitive advantages that offer organic growth opportunities. 

Since Hyperion first launched in 1996, the team has taken home several fund managers of the year awards with a longstanding, well-processed growth style that has proven effective in beating the index over the longer term. 

Hyperion has a select investment criterion, where many global managers in the space are willing to invest speculatively in momentum-driven early-stage start-up companies, Hyperion does not.   The team focuses on businesses that are market leaders with monopolistic like traits, screening out low-quality, highly capital intensive, and old-world businesses as they do not believe it is the right way to grow wealth over time. 


Hyperion’s portfolio: 

While the future is hard to predict, it is precisely for that reason that Hyperion can generate significant returns over time, as the team looks out 10+ years and identifies value where the market misses (i.e., Amazon and Tesla), which the market eventually catches up on and enables Hyperion to generate returns. 

Global markets have been challenging, to say the least, over the last six months.  

The strength of a company’s balance sheet is critical as increased borrowing costs often lead companies to perform emergency raises which have a severe dilutionary impact on existing shareholders. 

For context, 96 per cent of Hyperion’s global growth portfolio (see above) is positive net profit, except for Spotify; however, all companies exhibit strong pricing power and potential for margin expansion. 

Hyperion believes that companies within their portfolios are well-positioned to successfully navigate a future economic downturn without being forced to raise large amounts of equity or debt at distressed prices. 

The team invests in robust business models that have the ability to pass on any inflationary related increases in their cost bases to customers without adversely impacting the strength of their value propositions. 

Given this strong pricing power, its portfolio is well-positioned to offset any material increase in interest rates associated with higher inflation with higher revenue and future free cash flows. 

Whilst the Hyperion portfolio has been sold off with the recent PE compression (revision) in international markets. We agree with Hyperion that over time EPS growth is the critical driver of share price performance. Given the significant higher earnings growth of the underlying companies within the Hyperion portfolio we believe the fund is likely to outperform over the medium to long term. 

ASX Weekly Wrap 

The ASX200 notched a healthy 2.1 per cent gain for the past week, though the index tracked slightly lower than gains seen in global peers. 

Small-caps were the clear favourite, up 3.86 per cent, while large-caps and mid-caps gained 1.89 and 1.65 per cent, respectively. 

Energy stocks benefitted from a firming of the oil prices after recessionary fears drove the fall in the commodity’s price earlier in the week. 

Furthermore, the big miners locally jumped on Friday’s news that China is considering a $220 billion stimulus package to accelerate its nation’s infrastructure plan to bolster the economy following a period of its strict COVID-zero policy throughout several of its major cities. 

In terms of Prime Australian Growth SMA, there were eighteen gainers and five detractors from a performance perspective last week. 

CSL Limited (CSL), which represents one of the most significant weights within our Prime Australian Growth SMA, led the week in terms of gains, firming a healthy 6.73 per cent as the stock received an upgrade from analysts at Macquarie. 

We believe the defensive nature of CSL provides a solid backbone for the portfolio, with CSL outperforming the benchmark by +7.9 per cent in June and will continue to be a beneficiary of an uptick in foot traffic for its blood plasma division. 

Additionally, our portfolio benefitted from gains seen in convenience retail REIT Waypoint (WPR) and global industrial property group Goodman Group (GMG), which both gained upwards of 4 per cent as markets priced in lower future cash rate expectations, which bolstered the broader property sector. 

Conversely, Ramsay Health Care (RHC) suffered the biggest loss from last week, dropping 3.4 per cent. As a reminder, RHC is still undergoing due diligence from private equity firm KKR which poised a conditional takeover offer at $88 per share back in May.   Despite RHC’s share price fall from the original offered lobbed, we believe KKR is likely taking a long-term view with respect to the underlying fundamentals of Ramsay’s business, with the high quality and scarcity value of Ramsay’s underlying portfolio of 50+ hospitals. 

Looking ahead

Monday 11th July 2022 – Friday 15th July 2022

  • Monday: N/A
  • Tuesday: AU NAB Business Confidence (Jun)
  • Wednesday: AU Westpac Consumer Confidence Index (Jul), CN Balance of Trade (Jun), UK GDP (Jun), US Inflation Rate (Jun)
  • Thursday: AU Unemployment Rate (Jun), US PPI (Jun)
  • Friday: CN GDP Growth Rate (Q2), CN Industrial Production (Jun), US Retail Sales (June)

Friday 8th July, 5pm values

 IndexChange%
All Ordinaries 68771572.3%
S&P / ASX 20066781382.1%
Property Trust Index1384503.7%
Utilities Index7707280.4%
Financials Index59131382.4%
Materials Index15246-128-0.8%

Friday 8th July, closing values

 IndexChange%
U.S. S&P 5003899741.9%
London’s FTSE7196280.4%
Japan’s Nikkei265175822.2%
Hang Seng21725-134-0.6%
China’s Shanghai3356-31-0.9%

Key dividends

Monday 11th July 2022 – Friday 15th July 2022

  • Monday: Div Ex-Date – Westpac Capital Notes 2 (WBCPE)
  • Tuesday: Div Ex-Date – Metcash Limited (MTS) Div Pay-Date – Nanuk New World Fund (NNUK)
  • Wednesday: Div Pay-Date – iShares Asia 50 ETF AUD (IAA), iShares S&P 500 ETF AUD (IHVV), iShares Global Consumer Staples ETF (IXI)
  • Thursday: N/A
  • Friday: Div Pay-Date – Platinum Asia Fund (PAX), Platinum International Fund (PIXX), Qualitas Real Estate Income Fund (QRI)

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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