The US FAANG+ Index has now corrected over -10% from its July high, nothing too sinister in our opinion considering its still up over +65% year to date. The overnight weakness is being attributed to the hawkish Fed minutes but we believe it’s more a case of negative sentiment from China combining with a market that’s rallied very strongly over the last 9 months i.e. its simply being in need of a rest.
The initial reaction to the stimulatory move by the PBOC was positive with resource stocks in particular reversing early losses e.g. BHP Group (BHP) rallied +50c from its lows but by the close it had surrendered half of the move to end down -0.3%. The move by the PBOC came in as China suspended reporting youth unemployment rates from August, that’s one way to hide souring numbers. In our opinion, the Politburo, China's prime decision-making body, will need to pull more levels to turn around their juggernaut economy and consumer sentiment.
Beijing has undoubtedly got its work cut out, July's CPI fell by -0.3% year on year while the PPI fell -4.4% over the same period, the 1st time both numbers have been negative since November 2020 when COVID was the only story in town hence the deflation concerns are real and well-founded and MM firmly believes Xi Jinping et al must step up. However, it's not all bad news with Chinese household savings continuing to rise illustrating that a significant part of the issue is consumer confidence which can be reversed with the appropriate action.
China's economy has been misfiring post its extreme COVID-zero lockdown which both failed in its objective and set their economy back many, many years. Last week we saw Chinese banks extend the smallest amount of monthly loans in 14 years illustrating the deflationary pressures weighing on the world's second-largest economy. The number of new loans announced by the PBOC came in less than half of that forecast by the economists covered by Bloomberg.
We’ve edged into what we see as the ‘deep value’ space, already buying a few beaten up stocks in Elders (ELD), Lendlease (LLC) and Magellan (MGF), looking for turnarounds to unfold on the stock specific level – encouragingly all of these positions are showing a small paper profit with an average of +5.5%.
We currently hold two property positions in our Active Income Portfolio which are unloved and priced accordingly while in our Growth Portfolio, we only hold Goodman Group (GMG) which is regarded by many as more of a growth play. Investors remain scared of property and other cyclical sectors however we think this pain, or at least the vast majority of it, is now priced in and we should be increasing our attention towards identifying the opportunities.
The theme through most of 2023 has been the strong getting stronger and vice versa and this is playing out early this reporting season with buyers showing no interest in buying dips after a disappointing result – not classic bull market price-action but very befitting of one of the most hated bull markets in history. This morning will see a big test for the financials with investors needing to digest Commonwealth Bank (CBA) and Suncorp (SUN) results this morning.
Although it often gets less attention, what to avoid is as important as what to buy and with MM looking for a major rally in bonds/pullback in yields the performance baton is likely to change hands a few times during the 2H. Following moves which caught our attention over recent sessions we thought today was an ideal time to revisit 3 sectors we are cautious towards due to their defensive nature &/or preference for a higher interest rate environment.
When all of the news went into the mixing pot bonds continued to follow the MM roadmap with US 2-Years slipping to 4.76%, well below both their July 5.1% high and the current Fed Funds target range of 5.25%-5.5%, on the equities front, we saw some weakness flow through from reporting season which was compounded by strong moves from some stocks ahead of their reports.
The Australian consumer is under pressure from both rising prices (inflation) and interest rates and this is translating to reduced spending at the supermarket, household goods appliances to takeaway food. Theoretically, the often referred to mortgage cliff is about to hurt homeowners hard which could see the average Australian continue to think twice before spending. A couple of pauses by the RBA should help, but we believe discretionary spending is unlikely to improve significantly until people feel more comfortable as to what comes next on the economic front.
The initial reaction to the stimulatory move by the PBOC was positive with resource stocks in particular reversing early losses e.g. BHP Group (BHP) rallied +50c from its lows but by the close it had surrendered half of the move to end down -0.3%. The move by the PBOC came in as China suspended reporting youth unemployment rates from August, that’s one way to hide souring numbers. In our opinion, the Politburo, China's prime decision-making body, will need to pull more levels to turn around their juggernaut economy and consumer sentiment.
Beijing has undoubtedly got its work cut out, July's CPI fell by -0.3% year on year while the PPI fell -4.4% over the same period, the 1st time both numbers have been negative since November 2020 when COVID was the only story in town hence the deflation concerns are real and well-founded and MM firmly believes Xi Jinping et al must step up. However, it's not all bad news with Chinese household savings continuing to rise illustrating that a significant part of the issue is consumer confidence which can be reversed with the appropriate action.
China's economy has been misfiring post its extreme COVID-zero lockdown which both failed in its objective and set their economy back many, many years. Last week we saw Chinese banks extend the smallest amount of monthly loans in 14 years illustrating the deflationary pressures weighing on the world's second-largest economy. The number of new loans announced by the PBOC came in less than half of that forecast by the economists covered by Bloomberg.
We’ve edged into what we see as the ‘deep value’ space, already buying a few beaten up stocks in Elders (ELD), Lendlease (LLC) and Magellan (MGF), looking for turnarounds to unfold on the stock specific level – encouragingly all of these positions are showing a small paper profit with an average of +5.5%.
We currently hold two property positions in our Active Income Portfolio which are unloved and priced accordingly while in our Growth Portfolio, we only hold Goodman Group (GMG) which is regarded by many as more of a growth play. Investors remain scared of property and other cyclical sectors however we think this pain, or at least the vast majority of it, is now priced in and we should be increasing our attention towards identifying the opportunities.
The theme through most of 2023 has been the strong getting stronger and vice versa and this is playing out early this reporting season with buyers showing no interest in buying dips after a disappointing result – not classic bull market price-action but very befitting of one of the most hated bull markets in history. This morning will see a big test for the financials with investors needing to digest Commonwealth Bank (CBA) and Suncorp (SUN) results this morning.
Although it often gets less attention, what to avoid is as important as what to buy and with MM looking for a major rally in bonds/pullback in yields the performance baton is likely to change hands a few times during the 2H. Following moves which caught our attention over recent sessions we thought today was an ideal time to revisit 3 sectors we are cautious towards due to their defensive nature &/or preference for a higher interest rate environment.
When all of the news went into the mixing pot bonds continued to follow the MM roadmap with US 2-Years slipping to 4.76%, well below both their July 5.1% high and the current Fed Funds target range of 5.25%-5.5%, on the equities front, we saw some weakness flow through from reporting season which was compounded by strong moves from some stocks ahead of their reports.
The Australian consumer is under pressure from both rising prices (inflation) and interest rates and this is translating to reduced spending at the supermarket, household goods appliances to takeaway food. Theoretically, the often referred to mortgage cliff is about to hurt homeowners hard which could see the average Australian continue to think twice before spending. A couple of pauses by the RBA should help, but we believe discretionary spending is unlikely to improve significantly until people feel more comfortable as to what comes next on the economic front.
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