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The ASX was knocked today, following Asian markets deep into the red after the US Federal Reserve held rates unchanged overnight, but kept the door ajar for another hike this side of Christmas. While there wasn’t a lot of new news coming from Jerome Powell and co, the dot plot projections implied that rates are unlikely to be cut by as much as previously thought during 2024, and that has rattled markets.
An increasing Australian population will ultimately lead to increased money flow into stocks and, by definition, support valuations as the growing pool of workers will likely further swell Australia’s pension fund assets to a colossal ~A$14 trillion by 2050, with a younger workforce likely to see asset allocations remain favourable toward stocks. We don’t believe the subsequent growth is currently priced into equities with the implied medium-term earnings growth for the ASX200 of just under 4.0% per annum over the next decade, comparing favourably to GDP estimates of around ~5.3% p.a. over the same period.
Shares extended their slide to three consecutive days following US markets lower in preparation for tonight’s FOMC meeting. Commodity-linked sectors of Energy and Materials saw the most pain today while a slight lift in local bond yields also weighed on Tech and Real Estate. Consumer sectors were surprisingly well supported though, as were Industrials as today’s weakness was not as broad-based as recent days – 40% of the ASX200 managed to close higher despite the index weakness.
Tuesday was another tough day at the office for Australian equities, with a +0.2% gain by the Energy Sector the only shining light as the index ended down 0.5%. It came as no surprise to MM that buyers remained on the sidelines before Wednesday night’s FOMC meeting, i.e. will the Fed hike, probably not, but the bias implied through the Dot Plot is what’s likely to determine how the market moves. With the S&P500 within striking distance of its 2023 high and the US 10-year yielding 4.3%, we believe there is a diminishing amount of room for a hawkish Fed.
The ASX is in a holding pattern it seems ahead of a barrage of Central Bank activity headlined by the US Federal Reserve (Wednesday), the Bank of England (Thursday) before Bank of Japan Governor Kazuo Ueda steps up to the plate on Friday. That saw the ASX open on the back foot this morning and there was no reason to bid up stocks ahead of what are very important decisions on interest rates that will likely have a major impact on how markets trade into the back end of the year.
Both pre and post-COVID the banks and insurers have followed a relatively similar path although there was a period of major outperformance by the Banks through 2021, and early 2022. The banking index in a similar fashion to the ASX, has trod water over the last two years while the insurers have ground higher. Hence we question today whether the likes of QBE & IAG will prove a better investment into 2024 and beyond, especially with some economists concerned by the dramatically named “mortgage cliff” although it hasn’t called any major issues so far.
Friday’s rally seems a distant memory with the ASX coming back to earth with a thud, giving back around half the gains made in the prior session as IT stocks keyed off weakness in the US courtesy of higher Treasury yields to lead todays weakness.
The ASX200 is almost flat after a fascinating first half of September, although under the hood, it’s a very different story, with the Energy Index up +3.6% while the Real Estate sector is down -3.2%. Unfortunately for the index, the heavyweight financials and materials sectors are also positive, while the other eight sectors are all negative to date for September. As we keep saying, until further notice, most of the excitement into 2024 will be on the stock and sector level.
We’re halfway through September, the seasonally weakest month of the year for the local market, and it’s so far so good, with the ASX200 down just -0.4% following Fridays +1.3% advance. The Materials Sector sprang to life after the PBOC cut reserve requirements, MM we’ve been waiting for Beijing to pull the stimulus lever, which would have investors believing that the world’s second-largest economy can return to solid economic growth – We may have just witnessed this very catalyst last week. By the end of the week, 8 of the market’s 11 sectors had closed higher, but it was the +3.9% move by the Materials Index which helped catapult the ASX200 up +1.7%, the Financials came in a distant second up +2.5%.
The stars aligned for a strong finish to the week, and the ASX delivered with its best one-day rally in more than 8 weeks today. All sectors were higher today, led by a resurgent materials sector thanks to strong commodity prices. It was a very broad-based rally today with 80% of the ASX200 finishing higher with money keen to pile into the market. The index posted a gain of 122pts/+1.71% this week, recouping the losses of last week.
