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At MM, we continue to foresee the next major swing in bond yields will be lower, and we believe they are “looking for a top”, but as we’ve said a few times through 2023, trends post the GFC have been lasting longer than many imagined. Also, it’s important to recognise that falling bond yields won’t necessarily be good for stocks if they’re driven lower by a weakening economy, or a recession, but it will fuel some dramatic stock/sector rotation – Dr Copper has been flagging looming economic problems since January with the economic bellwether down ~19% from its 2023 high.
Some signs of buying helped support the local market today, driven in particular by the heavy-weight sectors of Materials and Financials. The support there helped put an end to a 3-day rout which had set the ASX200 to an 11-month low. Locally, the focus will turn to inflation data due out tomorrow morning, the next print to determine where rate expectations head in the short term.
MM is taking profit on WDS and buying GMG in the Active Growth Portfolio
Global equities have been trading sideways for the last few years, albeit with ~15% swings on either side of the mean. However, as we’ve discussed previously, there will be plenty of winners & losers on the stock level, especially as bond yields experience their most rapid appreciation in our lifetime, e.g. year-to-date: ANZ Bank (ANZ) +6.6% but Bank of Queensland (BOQ) -19.3% and Cochlear (COH) +21.2% & CSL Ltd (CSL) -17.7%. Excuse the pun, but with the Melbourne Cup looming, it’s all about backing the right horse at this stage.
Further pain was felt across the ASX today as the risk-off trade continued in the face of rising geopolitical tensions. Commodity markets took a hit, flowing through to local Materials and Energy stocks with the weakness today sending the index to an 11-month low. The recent underperformers from a sector perspective were the relative outperformers today, healthcare and Staples bucking the trend to close higher.
We are increasing our position in Mineral Resources (MIN) in recent weakness. Adding 1% to bring the target weight to 5% in the portfolio.
It’s hard to know exactly which factor is dragging on equities the most, but the combination isn’t pretty, the ASX200 closed down -3.5% in September, and for October, it has already fallen another -2.1% with another ~1% drop likely this morning following steep losses on Wall Street on Friday night. We are not in the business of second-guessing how the Israel -Hamas conflict will unfold, but when we read headlines such as “Israel strikes Gaza, Syria and the West Bank”, it does feel like the conflict will overhang markets for weeks/months to come.
Last week saw broad-based weakness across the ASX200, the index closed down -2.1% after particularly aggressive selling on Thursday and Friday, the rate-sensitive Tech -5.1% and Consumer Discretionary -3.4% Sectors led the decline, while only the energy Sector closed higher over the 5-days as tensions increased across the Middle East, e.g. Whitehaven Coal (WHC) +12.3%, Santos (STO) +2.9%, Beach Petroleum (BPT) +2.9%, and Woodside Energy (WDS) +1.9%. The same two issues continue to weigh on stocks:
The ASX caught a cold from the weakness seen in the US overnight. Selling came on the back of Fed Chair Jerome Powell’s hawkish comments which sent to the US 10-year rate to 16-year highs, just a shave shy of 5%. Further tensions in the Middle East also weighed on growth assets, though that was supportive of Energy and Precious Metals, two areas of the market that largely bucked the trend today. The ASX200 fell -150pts/-2.13% during the week.
One of the three stocks we are revisiting today is the best-performing member of the ASX200 year-to-date, although it will lose that position when trading recommences after its capital raise. The other two, Whitehaven Coal (WHC) -20.5%, and Ramsay Healthcare (RHC) -22%, have regularly occupied the lower enclosure through 2023. As is usually the case with “situation” stocks, the best approach is to consider the combination of risk/reward and “what if scenarios”.
