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The Australian Consumer Staples sector has struggled over recent years, but as MM looks to position portfolios more defensively, it’s been on our radar of late, i.e. people have to eat. With interest rates set to fall through 2024/5, inflation under control and supply chain issues in the rearview mirror, the outlook has improved for the sector. The peak cost of living has passed, with spending growth on the horizon, helped by solid immigration, with supermarkets likely to be a key beneficiary.
Jerome Powell and the Fed put a swift end to the local equity rally that had taken the ASX200 to all-time highs yesterday, as they left rates unchanged overnight as expected, however, the press conference had a few more fireworks as the Chair poured cold water on any imminent rate cut expectations.
Overnight saw the Fed hold interest rates steady for the 4th straight meeting while signalling its openness to cut, if not straight away. The Futures markets are now pricing in an implied Fed Funds rate of 3.695% in January 2025, well below today’s effective 5.33% rate – we still believe this outlook will prove too dovish as we move through 2024. Jerome Powell shocked many doves when he effectively took a March cut off the table during the press conference, investors need to be patient!
We are taking a more defensive stance across our International Equities Portfolio, selling or trimming some positions.
The ASX200 hit a new all-time high today closing at 7680 supported by a more benign read on inflation released at 11.30am that underpins the chorus for rate cuts, sooner rather than later it would seem. Bond yields fell, the Aussie 3 years down 14bps to 3.57% with the first rate cut now priced in by June.
We are taking a more defensive stance across our Active Growth Portfolio, locking in some profits, buying a more defensive position, and increasing cash fairly materially.
As we look right across the suite of Market Matters Portfolio’s with an eye on increasing their defensive qualities, the Income Portfolio stands out as one that is already set very defensively, both in terms of overall asset allocation (49% in Equities, 37% Bonds & Hybrids, 8% in Property & 6% in Cash), but also in terms of the types of equities held, with a skew towards predictable earnings (some regulated), high yielding, low beta stocks. While this stance will cost us ‘upside’ in a strong market, it will help to smooth returns amid choppier conditions while maintaining strong levels of income, with the portfolio yielding over ~7% inclusive of franking.
The ASX traded to within 2-points of an all-time high this morning hitting 7630 just before a materially softer-than-expected retail sales number printed, which got the sellers off the sidelines, the ASX 200 finishing ~30 points off the morning highs ahead of a very big weak of data and company results, particularly in the US, but also a bunch locally headlined by local inflation data tomorrow.
Yesterday, China Evergrande Group received a liquidation order from a Hong Kong court, which was no major surprise when we consider the company’s share price over recent years. China’s property crisis continues to unfold, although a market nadir is often plumbed on headline bad news. The collapse of this previous poster child is by far the largest failure in the world’s 2nd largest economy’s property market, which has witnessed several defaults by developers, aka a falling pack of cards. In the short term, the move by Judge Linda Chan is likely to see some asset sales in a property market lacking liquidity and confidence; the world will be watching closely.
The market continued to push higher as sector rotation rather than any sign of liquidation/cashing up continued, although, to MM, it does seem the market is slowly losing some momentum after a strong run and ahead of local reporting season– the Market Matters Reporting Calendar linked below.
