Weekly Market Update – 18 July 2022

Markets slightly down as US Q2 earnings kick-off  

Global markets were down for the week, though a gain in the Australian Dollar softened the blow, with the MSCI World falling 0.26 per cent in AUD terms. 
 
In a similar tone to recent months, stocks continued their volatile trade with big mid-week swings in the S&P500 and the Nasdaq which saw them down over 3.75 per cent and 4 per cent respectively at one point. 
 
The release of higher than forecasted CPI data, which is discussed below, in addition to the first major second-quarterly corporate earnings reports from the major banks, drove market sentiment for the week gone by. 
 
On the earnings front, the major banks JPMorgan Chase and Morgan Stanley kicked off Q2 reporting season with earnings that came in weaker than expected whilst microchip foundry Taiwan Semiconductor beat Q2 estimates and issued a strong Q3 guidance despite a weak economic backdrop, which confused markets, evident by last week’s trade. 
 
The upcoming week sees further earnings from the U.S. Banks, with Bank of America, Charles Schwab and earnings from several of the tech players, being Netflix and Tesla being released, which will paint the picture going forward. 

Expectations for the S&P500’s Q2 2022 reporting season is expected to see earnings growth of 9 to 12%, and even though companies within the S&P500 have posted results that have outperformed estimates over the past five years by an average of 8.8 per cent, the economic backdrop now looks completely different. 
 
We’ve seen a revision in the price at which these companies trade at, through a large year-to-date sell-off in equities globally, though we’re yet to see a major revision in the earnings of these companies.   Although it may be too soon to notice a material impact in company earnings, it will be important to pay attention to the tone of earnings calls and updates on full-year guidance as CEOs and CFOs factor potential risks and uncertainties in the second half of the year into their projections. 

US Inflation at a new high, rate hikes are given the green light 

As we alluded to last week, all eyes were cast upon the release of US CPI data to indicate whether the recent decade-high inflation had peaked within its local economy. 

As a reminder, the Consumer Price Index (CPI) is an important metric that tracks the pricing for everyday expenses and is utilised to recognise periods of inflation and deflation.  

Put simply, when CPI increases within a short time frame, it may indicate inflation, and significant decreases in CPI within a short time frame might indicate a period of deflation. The index is commonly used, though the downside is that CPI is a lagging indicator and may not be the best representation of the real-time environment of a country’s economy. 

With that said, the inflationary data released by the Bureau of Labour Statistics detailed a fresh four-decade high for inflation in June. 

The consumer price index increased 9.1 per cent from a year prior, while there was a 1.3 per cent gain on a month-to-month basis. 

Consensus estimates predicted an 8.8 per cent increase from year to year and a 1.1 percent gain from May; this was the fourth consecutive month in which a CPI print surpassed expectations. 

The increases were a direct result of a broad-based rise in energy, with energy prices jumping over 41 per cent on a 12-month basis, whilst an increase in food, electricity, and rent also contributed. 

Though when looking at the core CPI, which strips out volatile components such as food and energy, it came in at 5.9 per cent for the year, detailing a deceleration from March’s peak but is still far from the Federal Reserve’s target of 2 per cent. 

These new figures resulted in a dramatic change in the market’s expectations for the Federal Reserve’s hike later this month.  

Initially, the market forecasted a 50 – 75 bps interest rate hike. However, the subsequent release of the CPI print, which exceeded expectations, has significantly heightened the chance of at least a 75 or colossal 100 basis points increase. 

Though we can try to guesstimate the size of the increase at the Fed’s upcoming July 26–27 meeting, what is clear is that the CPI print, coupled with the positive jobs report from last week, now gives the central bank the green light to continue its aggressive string of rate hikes to stifle the economy and bring down higher prices. 

Australia’s tight labour market gets tighter 

The Australian Bureau of Statistics released employment data that surprised economists and the broader market. 

Australia’s unemployment rate in June fell to 3.5 per cent, the lowest rate seen in nearly half a decade. 

Australia’s economy added approximately 88,000 jobs in the past month, while unemployment fell by 54,000, pushing the unemployment rate 0.4 per cent lower than the previous month. 

The figure came in well below consensus expectations, as economists had forecasted a 3.8 per cent unemployment rate. 

Akin to the US, Australia’s red hot labour market continues to get hotter, and this fresh statistic will likely reinforce the case for the RBA to continue its series of aggressive interest rate hikes. 

Post the labour force data, markets now forecast a 50bps increase in the RBA’s monetary policy decision in the first week of August, bringing the total cash rate to 1.85 per cent. 

Conversely, economists are also advocating for a hike of 75bps or more directly responding to high inflationary data and a labour market that may be overheating.  

What both the RBA and markets will pay close attention to is the June quarterly inflation data, released five days before the bank’s monetary policy decision as it will have a material impact on the size of the hike. 

Reducing bank exposure and buying telcos 

Within our Prime Australian Growth SMA, we sold out of Commonwealth Bank of Australia (CBA). We added to the existing defensive positions Telstra Corporation Ltd (TLS) and Spark New Zealand Ltd (SPK). 

Though we do not discount the strong balance sheet of Commonwealth Bank of Australia (CBA), this redemption reflects a cautious approach to the housing cycle in Australia and other developed economies, where historically low-interest rates, quantitative easing, and fiscal stimulus have created an unsustainable global housing market. 

Within the last two months of interest rate increases, Australia has seen the fastest house price decline in over 30 years. CBA’s loan book comprises 72%~ mortgages and the most significant domestic mortgage market share of ~25% in Australia and ~22% in NZ, respectively. 

While CBA has been a mainstay in portfolios for some time, its valuation sits at a 50% premium relative to peers both domestically and internationally and sits well above the average. We expect the premium to revert closer to global peers in the backdrop of slower growth and higher inflation. 

As the risk of an economic slowdown continues to rise, we think the defensive nature and the outlook for telecoms in this economic cycle are more alluring within portfolios.  

The recent adoption of inflation-linked pricing by TLS, which has resulted in a 5% price increase for its mobile plans, will be advantageous for the group’s revenue. The value proposition from TLS, being the undisputed leader in network coverage and speeds across Australia, will translate to high customer stickiness despite the price hike; thus, we believe an additional weight allocated to TLS will prove beneficial within portfolios given the current economic backdrop. 

Additionally, SPK has been part of the portfolio for some time now. It continues to be the largest telecom provider in New Zealand with a wide range of communications services and revenue streams. Due to the company’s track record of solid execution, a defensive balance sheet, and a demonstrated history of routinely reaching or exceeding earnings, we have increased our weighting in SPK.  

We continue to monitor the likes of Wesfarmers Limited (WES) as a possible inclusion within portfolios as we continue to favour businesses with large moats and diverse earnings profiles. The group’s sheer size allows them to benefit from economies of scale to gain market share, and its strong portfolio of companies, primarily Bunnings, Officeworks, and Kmart Group, are industry leaders in their respective retail segments. 

ASX Weekly Wrap 

The ASX200 remained essentially flat for the week, though a disappointing trade on Friday sent the benchmark lower, resulting in the index falling 1.08 per cent for the week. 

Healthcare was the favoured sector for the week, with the broader sector adding 3.54 per cent. 

In contrast, a missed GDP print from China’s economy and a tapering off in import growth sent the broader materials sector deep in the red, with no big miner left unscathed. The materials index fell -6.1 per cent for the week. 

Regarding our Prime Australian Growth SMA, we had the same number of gainers as losers for the week. 

In the same theme as last week, CSL Limited (CSL), which continues to be a material weight within the Prime Australian Growth SMA of 10 plus per cent, led the pack in terms of gains, with the stock adding 4.14 per cent. For some context, the biotech player has gained a healthy 15.68 per cent in the past thirty days against the backdrop of a flat market. 

What has caused this run-up in CSL’s share price? It’s hard to say, as nothing material has been released from CSL to inspire the buying. However, several recent broker upgrades tipping a target of $330 (currently $298~) price may be the cause and has instilled confidence from the market in CSL

Conversely, Bega Cheese Limited (BGA), which represents one of the smallest weights within our Prime Australian Growth SMA was the worst performer; it fell 12 per cent after the company announced lower guidance for FY2023. The fall comes from a spiking in the cost of milk, which is a core input for Bega’s cheese and will weigh on FY2023 earnings, with BGA guiding down FY2023 EBITDA in the $160 to $190 million range.  

While the cost pressures will hurt Bega in the short term, a moderation of input costs, through a lower milk gate price over the longer period, will allow BGA to recover margins lost by only passing through a portion of it. 

In other market news, Pendal Group Ltd (PDL) dropped over 12 per cent at one point after the investment manager reported a lower-than-expected level of fund under management outflows for its June quarter, in which assets totalling approximately $4.2 billion were pulled out from under the group’s control, PDL shares closed to $3.78 at the week’s end.

Looking ahead

Monday 18th July 2022 – Friday 22nd July 2022

  • Monday: N/A
  • Tuesday: AU RBA Meeting Minutes, UK Unemployment Rate (May), US Building Permits (Jun)
  • Wednesday: UK Inflation Rate (JUN)
  • Thursday: N/A
  • Friday: UK GfK Consumer Cofidence

Friday 15th July, 5pm values

 IndexChange%
All Ordinaries 6798-79-1.1%
S&P / ASX 2006605-73-1.1%
Property Trust Index1382-2-0.1%
Utilities Index7690-17-0.2%
Financials Index5892-21-0.4%
Materials Index14323-923-6.1%

Friday 15th July, closing values

 IndexChange%
U.S. S&P 5003863-36-0.9%
London’s FTSE7159-37-0.5%
Japan’s Nikkei26788+271+1.0%
Hang Seng20297-1428-6.6%
China’s Shanghai3228-128-3.8%

Key dividends

Monday 18th July 2022 – Friday 22nd July 2022

  • Monday: Div Pay-Date – BetaShares Australia 200 ETF (A200), BetaShares Gold Bullion ETF-Currency Hedged (QAU), Vanguard Australian Shares Index ETF (VAS), Vanguard Diversified High Growth Index ETF (VDHG), Vanguard Msci Index International Shares ETF (VGS), Vanguard Global Value Equity Active ETF (VVLU)
  • Tuesday: N/A
  • Wednesday: Div Pay-Date – Westpac Capital Notes 2 (WBCPE), WCM Quality Global Growth Fund (WCMQ)
  • Thursday: Div Pay-Date – Magellan Global Fund (MGF)
  • Friday: Div Ex-Date – Uniti Group Ltd (UWL) Div Pay-Date – Vanguard US Total Market Shares Index ETF (VTS)

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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