Following recent robust economic data and apparent evidence inflation is becoming increasingly sticky after its steep decline from around 8% in late 2022 to 3.6% today, analysts are split on the future path for interest rates through 2024/5. Most pundits are looking for no change after Tuesday’s 2-day meeting, but the futures market is pricing a good chance of a hike by September – we believe the RBA will adopt a patient stance, but we acknowledge there is far more chance of a hike than a cut over the coming months.
Following NAB’s solid result yesterday, we’ve looked at the Diversified Financials this morning to evaluate if any opportunities are presenting themselves in the current volatile market. This is one sector of the ASX where the saying “not all boats float as one” has been very accurate, the below list of performance through 2024 demonstrates the point perfectly:
Winners: Netwealth (NWL) +28%, AMP (AMP) +15%, Pinnacle (PNI) +14%, HUB24 (HUB) +9%, and Insignia Financial (IFL) +3%.
Losers: Block Inc (SQ2) -9%, Perpetual (PPT) -8%, Magellan (MFG) -6%, Helia (HLI) -6%, and Soul Patts (SOL) -3%.
As equities have struggled over recent weeks, we’ve been asked several times whether this was a good time to allocate additional capital into the market, hopefully through Market Matters Invest, i.e. the portfolios we manage that are open for investment. While we provide general advice only and do not take into consideration any individual investors personal circumstances, we are still bullish towards equities over the medium term primarily because we see interest rate cuts unfolding over the next 12-18 months, a very bullish backdrop for stocks. We believe that active management can deliver strong risk-adjusted returns for investors, and our track record supports this claim.
The infamous May is upon us, although, as we’ve pointed out recently, the ASX200 has rallied through 6 out of the last 10 Mays, delivering investors an average small net gain. Subscribers who like to watch the market seasonality closely should be far more concerned by August and September; the average loss over these 2-months over the last decade is 3.84%. At this stage, we remain net bullish towards the ASX, especially when we reference the highly correlated Canadian TSX and UK FTSE indices, with the latter again notching new highs early in last night's session. However, two of the market's recent strong characteristics continue to prevail, and they need to be understood to add alpha (performance) to portfolios.
Investors are rapidly losing confidence that some major central banks will cut interest rates in 2024, while the local futures markets are becoming increasingly confident that the RBA will actually hike before Christmas. At MM, we believe the rate cuts will come, but investors may need to be patient as it wasn’t that long ago that central banks read the inflation picture incorrectly, which led to the aggressive rate hiking cycle through 2021/2 in an attempt to put the “inflation genie back in the lamp” a goal that hasn’t yet been fully achieved. The point is they don’t want to get it wrong again and cut too early only to have to hike soon after as strong economic activity reignites inflation.
Excuse today's title; blame Shawn as we contemplated Michelle Bullock's first move with interest rates since becoming the Governor of the RBA in September. The new head of the RBA has remained cautious towards both inflation and interest rates through 2023/4, and we see no reason for this to change. The RBA got it totally wrong on Philip Lowe’s watch, believing inflation was only temporary after COVID, a view which resulted in the dramatic rate hikes witnessed through 2022 and 2023. Bullock should and is adopting a cautionary stance until, hopefully, she is confident that inflation will return to its 2-3% target band.
The ASX consumer discretionary (retail) stocks have demonstrated their need for a strong bond market. In the short term, we remain concerned they’ve disconnected slightly from the influential credit markets. Futures markets are starting to price in the risk of rate hikes in 2024, with some well-respected economists becoming increasingly hawkish. Judo Bank’s Warren Hogan is calling for three hikes to 5.1%; previously, he was looking for cuts in 2025, but the recent hot inflation data has seen him reverse this outlook. We feel the call for rates to hit 5.1% in 2024 is too aggressive, but we cannot see Michele Bullock considering rate cuts until the inflation genie is firmly back in the bottle.
Bond markets have struggled over recent weeks as inflation appeared increasingly “sticky,” but it hardly registers on the chart compared to their weakness through 2021/2 and mid-2023. We believe the local credit markets have come back to realistic levels as the RBA awaits further economic data to deliver clarity on the underlying strength and direction of the local economy. Traders have gone from being far too optimistic on rate cuts into Christmas to becoming almost pessimistic; the US futures markets have gone from pricing in three cuts to 1.77 cuts, or one definitely, and probably two.
On Monday, Citi joined Macquarie with a “sell call” on the major banks, which saw the sector reverse early gains to close near their intra-day lows, ANZ even slipped into negative territory. There were two major reasons behind their bearish stance:
• Citi believes the valuations of the banks are stretched considering the potential political “attacks on their profits”, i.e. when the RBA starts cutting, they will be forced to follow suit at the expense of profitability.
• Macquarie said to “sell” the banks in mid-March as the sector posted new highs, again a call on valuation grounds; good timing so far!
The cornerstone of Citi's argument is valuation, which could be applied to the whole market when the ASX200 is challenging new all-time highs. Overall, it is an understandable view, but we question if it's a good enough reason to exit the sector, forgoing enticing dividends and potentially incurring capital gains issues after the “Big Four” have run so hard.
Last week’s Bank of Americas Fund Managers Survey showed the market is the most bullish in over two years on the back of the biggest jump in global growth optimism since May 2022 – allocations to stocks and commodities hit a 27-month high, at the expense of bonds, with cash levels falling to 4.2% from 4.4% in the previous month - just shy of the sub-4% level that traditionally signals a contrarian sell indicator for equities according to the BofA Global FMS Cash Rule. Conversely, an increasing number of fund managers now believe gold is the most overpriced since COVID. The most crowded trade recognized by fund managers continues to be the "Long Magnificent 7.” Overall, last week was not the best time for Fund managers!
Following NAB’s solid result yesterday, we’ve looked at the Diversified Financials this morning to evaluate if any opportunities are presenting themselves in the current volatile market. This is one sector of the ASX where the saying “not all boats float as one” has been very accurate, the below list of performance through 2024 demonstrates the point perfectly:
Winners: Netwealth (NWL) +28%, AMP (AMP) +15%, Pinnacle (PNI) +14%, HUB24 (HUB) +9%, and Insignia Financial (IFL) +3%.
Losers: Block Inc (SQ2) -9%, Perpetual (PPT) -8%, Magellan (MFG) -6%, Helia (HLI) -6%, and Soul Patts (SOL) -3%.
As equities have struggled over recent weeks, we’ve been asked several times whether this was a good time to allocate additional capital into the market, hopefully through Market Matters Invest, i.e. the portfolios we manage that are open for investment. While we provide general advice only and do not take into consideration any individual investors personal circumstances, we are still bullish towards equities over the medium term primarily because we see interest rate cuts unfolding over the next 12-18 months, a very bullish backdrop for stocks. We believe that active management can deliver strong risk-adjusted returns for investors, and our track record supports this claim.
The infamous May is upon us, although, as we’ve pointed out recently, the ASX200 has rallied through 6 out of the last 10 Mays, delivering investors an average small net gain. Subscribers who like to watch the market seasonality closely should be far more concerned by August and September; the average loss over these 2-months over the last decade is 3.84%. At this stage, we remain net bullish towards the ASX, especially when we reference the highly correlated Canadian TSX and UK FTSE indices, with the latter again notching new highs early in last night's session. However, two of the market's recent strong characteristics continue to prevail, and they need to be understood to add alpha (performance) to portfolios.
Investors are rapidly losing confidence that some major central banks will cut interest rates in 2024, while the local futures markets are becoming increasingly confident that the RBA will actually hike before Christmas. At MM, we believe the rate cuts will come, but investors may need to be patient as it wasn’t that long ago that central banks read the inflation picture incorrectly, which led to the aggressive rate hiking cycle through 2021/2 in an attempt to put the “inflation genie back in the lamp” a goal that hasn’t yet been fully achieved. The point is they don’t want to get it wrong again and cut too early only to have to hike soon after as strong economic activity reignites inflation.
Excuse today's title; blame Shawn as we contemplated Michelle Bullock's first move with interest rates since becoming the Governor of the RBA in September. The new head of the RBA has remained cautious towards both inflation and interest rates through 2023/4, and we see no reason for this to change. The RBA got it totally wrong on Philip Lowe’s watch, believing inflation was only temporary after COVID, a view which resulted in the dramatic rate hikes witnessed through 2022 and 2023. Bullock should and is adopting a cautionary stance until, hopefully, she is confident that inflation will return to its 2-3% target band.
The ASX consumer discretionary (retail) stocks have demonstrated their need for a strong bond market. In the short term, we remain concerned they’ve disconnected slightly from the influential credit markets. Futures markets are starting to price in the risk of rate hikes in 2024, with some well-respected economists becoming increasingly hawkish. Judo Bank’s Warren Hogan is calling for three hikes to 5.1%; previously, he was looking for cuts in 2025, but the recent hot inflation data has seen him reverse this outlook. We feel the call for rates to hit 5.1% in 2024 is too aggressive, but we cannot see Michele Bullock considering rate cuts until the inflation genie is firmly back in the bottle.
Bond markets have struggled over recent weeks as inflation appeared increasingly “sticky,” but it hardly registers on the chart compared to their weakness through 2021/2 and mid-2023. We believe the local credit markets have come back to realistic levels as the RBA awaits further economic data to deliver clarity on the underlying strength and direction of the local economy. Traders have gone from being far too optimistic on rate cuts into Christmas to becoming almost pessimistic; the US futures markets have gone from pricing in three cuts to 1.77 cuts, or one definitely, and probably two.
On Monday, Citi joined Macquarie with a “sell call” on the major banks, which saw the sector reverse early gains to close near their intra-day lows, ANZ even slipped into negative territory. There were two major reasons behind their bearish stance:
• Citi believes the valuations of the banks are stretched considering the potential political “attacks on their profits”, i.e. when the RBA starts cutting, they will be forced to follow suit at the expense of profitability.
• Macquarie said to “sell” the banks in mid-March as the sector posted new highs, again a call on valuation grounds; good timing so far!
The cornerstone of Citi's argument is valuation, which could be applied to the whole market when the ASX200 is challenging new all-time highs. Overall, it is an understandable view, but we question if it's a good enough reason to exit the sector, forgoing enticing dividends and potentially incurring capital gains issues after the “Big Four” have run so hard.
Last week’s Bank of Americas Fund Managers Survey showed the market is the most bullish in over two years on the back of the biggest jump in global growth optimism since May 2022 – allocations to stocks and commodities hit a 27-month high, at the expense of bonds, with cash levels falling to 4.2% from 4.4% in the previous month - just shy of the sub-4% level that traditionally signals a contrarian sell indicator for equities according to the BofA Global FMS Cash Rule. Conversely, an increasing number of fund managers now believe gold is the most overpriced since COVID. The most crowded trade recognized by fund managers continues to be the "Long Magnificent 7.” Overall, last week was not the best time for Fund managers!
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