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In the 1H of the year investors have been prepared to pay increasingly high prices for earnings certainty, propelling some stocks ever higher, while pushing others, ever lower. At MM we believe a period of performance catch-up is on the menu for some of the more ‘unloved’ names of FY23. When we consider Woolworths (WOW) as an example, it’s easy to comprehend why cautious investors have ploughed funds into this well-managed retailer of necessities that enjoys scale across their supply chain, however, when investor perception does shift, we believe stocks like WOW could be used as ‘funding vehicles’ for a foray up the risk curve.
The first session of FY24 was a positive one for local stocks with the market grinding consistently higher throughout the day to close on session highs. There seemed to be an overarching trend today that saw some of the ‘FY23 dogs’ attract buying with the discretionary retailers the most obvious example at a sector level – perhaps confidence is growing around a ‘soft landing’ as inflation cools and central banks look to a least pause on rates.
We are looking forward to the many twists and turns over the next 6 months, so far calendar 2023 has been ok for local investors with the ASX200 eking out a +2.3% gain plus dividends. Equities have ground higher in the face of many headwinds since late 2022 including central banks hiking interest rates far more aggressively than many previously forecasted. A year ago economists were largely calling for the RBA Cash rate to peak around 4%, now there are plenty flagging the 4.85% level. At MM we now believe they’ve become too hawkish and that global bond yields are approaching an inflection point i.e. a top.
The ASX200 edged higher on Friday in a pretty uneventful conclusion to what’s been a fascinating Financial Year, by now subscribers know that the broad-based market has shrugged off a blanket of negativity to end the year up over +10%, plus of course dividends. However, it’s now time to look forward, not back, as the market toys with the idea of peak interest rates this side of Christmas but pessimism persists towards earnings over the next year. A very famous investing/trading book called Reminiscences of a Stock Operator by Edwin Lefevre, which we highly recommend for “students” of the market, has a couple of sayings that we believe accurately reflect the position of both the last few and next few years:
A quiet session to wrap up FY23, a year where central banks have hiked interest rates at an unprecedented speed taking them to fresh 11-year highs, the US experienced a Banking Crisis, China’s economy was buffeted from aggressive COVID lockdowns and war was waged on Ukraine, to name just a few of the headwinds for equities. The fact the market in price terms has risen more than 10% is just another example of why we, as investors, need to keep an open mind and not let investment decisions be impacted by the barrage of negativity that dominates mainstream press.
We are amending the Flagship Growth Portfolio
The banks are one area of the market which generally likes higher interest rates unless they go too far which leads to bad debts, so far so good in terms of loans but mortgage stress is certainly on the increase as interest rates continue to rise. The next 6 months will tell us how badly the RBA is hurting the average Australian, especially with more hikes likely in the coming months, as we said earlier MM believes the pain is around the corner and the local economy is about to slow significantly if nothing else due to the uncertainty of what comes next in 2024.
While the ASX ended flat today, most of the early gains were surrendered from 11 am onwards as divergence opened up across sectors, Utilities were weak, offset by solid gains by IT stocks that keyed off a good session in the US overnig
What Matters Today: 4 stocks MM likes as yesterday’s CPI points towards a lower “peak interest rate”
One good figure obviously doesn’t mean its time to restructure portfolios but market moves such as Wednesdays should remind investors that the market is very skewed toward interest rates being higher for longer and the Australian consumer struggling at least well into 2024 but as we said yesterday “stock markets form bottoms, on both the index and sector level, when things look their worst”. Yesterday may not prove to be the ultimate inflexion point but it has made us consider that the “strong getting stronger” can only last for so long before stocks/sectors that have been out of favour will inevitably play some performance catch-up.
Shares opened higher this morning, but the real rally came following the 11.30 am print on inflation which was significantly lower than expected prompting investors to reduce bets on rate hikes – it now seems like the RBA’s aggressive move to tighten policy at an unprecedented rate is showing signs of working, boosting equities today. Most sectors finished more than 1% higher, and only one sector closed lower, but only marginally so.
