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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”.
A tough day at the office for the ASX, tracking weakness in US/European markets that permeated across Asia. More tension in the Middle East is threatening higher Oil prices that would underpin persistent inflation and higher interest rates, all very logical and these concerns have pushed the ASX 200 back down to the bottom of its recent trading range.
Over the last eighteen months, as interest rates soared higher, the small caps have stood patiently in the naughty corner as their cost of funding has gone from bad to worse, whereas US Big Tech has rallied, assisted by their large mountains of cash. If we are correct and bond yields are “looking for a top”, then stock/sector reversion is likely in many pockets of the market, today, we have looked at the outperformers with an eye on whether some look rich at current levels.
A choppy but overall positive session at the index level, although there was a lot happening under the hood, with some hits and a few big misses to get across today.
