In April, the $250bn Future Fund said it was now backing active fund managers switching out of the passive approach they had employed for the past 6 years. The changing economic backdrop now lends itself to active management, with Chief Executive Raphael Arndt declaring that “Conditions have changed. Economies are diverging and companies can better distinguish themselves in a more challenging environment”. We certainly agree at Market Matters with our portfolios enjoying the changing dynamics that are at play as tougher macro conditions are making it easier to distinguish the haves and have-nots.
There has been phenomenal hype in recent years around Lithium and other key commodities that underpin the global move towards Electric Vehicles (EVs), and we think there is a solid foundation to this sector, however, the shorter-term movements in the Lithium price for example, where a pullback of ~70% has recently played out, highlights a theme that MM often speaks of, around crowded trades creating risk.
The ASX200 reacted badly to the “surprise” RBA rate hike but after a rapid 250-point drop buyers returned albeit in very specific pockets of the market e.g. ESG and gold names. The markets experienced a rollercoaster ride of sentiment over the last 2-year yet the markets remained largely range bound between 6500 and 7600, in this case we believe it’s a case of if it’s not broken don’t fix it i.e. de-risk in the 7400-7600 area and increase market exposure/risk below 6750.
The ASX200 had felt tired over recent weeks but that’s now translated to outright vulnerability as buyers retreat on worsening economic/company news which is leading to increased weakness in the current low-volume environment. However, not all stocks/sectors are moving as one as we saw yesterday when the banks fell after NAB’s result while the resources enjoyed a strong session e.g. oil stocks rallied even after a more than 4% dip by crude oil.
The ASX200 has felt tired over recent weeks, as we’ve been highlighting, but that’s translated to outright vulnerability following a couple of weak sessions on Wall Street and the surprise rate hike by the RBA on Tuesday – recession fears are clearly gathering momentum. At MM we had adopted a more defensive stance into May but after seeing the local index fall over 100 points at one stage yesterday it poses the question of whether we should migrate even further down the risk curve.
The RBA surprised the vast majority of market participants at 2.30 pm yesterday as they hiked the Official Cash rate from 3.6% to 3.85%, a brutal outcome for homeowners languishing under the mounting pressures of rising mortgage repayments. Our preferred scenario was they would hold at 3.6% until Christmas, that opinion went up in smoke after just one pause in May. The decision by Philip Lowe et al could prove the correct move but it was extremely confusing considering the guidance in the lead-up to Tuesday – they paused in May to watch and consider future economic data, the CPI print came in better than expected and they hike, on this occasion, it’s not surprising that most people called it wrong.
The Australian Banking Sector has noticeably outperformed its US peers courtesy of the strength of the “Big Four” - the press so often likes to knock our banks but they’ve definitely helped most Australians super over the last few years. The sector is trading on an inexpensive valuation relative to its long-term average but most analysts believe the banks will be close to peak profit for their 1H23 results. At MM we are expecting strong results overall, driven mainly by timing differences on interest rate increases and NIM (net interest margin) tailwinds. Conversely, headwinds we must be aware of are higher funding costs, strong competition for deposits and loans, worse-than-expected bad debts, and ongoing tightening of bank regulation.
The RBA meets on Tuesday with financial markets expecting a 2nd-second consecutive pause following last month’s encouraging inflation data tipped the scales in favour of no change i.e. rates will remain at 3.6%. Even with inflation falling there is an outside chance of another hike but in our opinion, such a move would make no sense as signs are already emerging that the RBA may be winning the inflation battle i.e. after no hike in March why would they raise rates in April when the data on the whole has gone in the right direction?
Post-COVID M&A activity has been extremely strong even as bond yields rallied and the US/Europe suffered a minor “Banking Crisis” courtesy of tumbling bond prices and awful risk management. Private equity was reported to be holding ~$US2 trillion at the start of 2023 and whatever the actual number is when we combine this with large cash reserves in the hands of Australian super funds plus cashed-up fund managers there remains a huge undercurrent of support for stocks.
Travel is enjoying a strong recovery after being basically shut down through COVID with travel bookings proving resilient despite extremely high prices e.g. the Australian Bureau of Statistics just reported that domestic holiday prices increased by 25% in March year on year while international soared an incredible +38%. We are clearly spending our pandemic savings and spreading our wings after being couped up by COVID for over 2 years.
There has been phenomenal hype in recent years around Lithium and other key commodities that underpin the global move towards Electric Vehicles (EVs), and we think there is a solid foundation to this sector, however, the shorter-term movements in the Lithium price for example, where a pullback of ~70% has recently played out, highlights a theme that MM often speaks of, around crowded trades creating risk.
The ASX200 reacted badly to the “surprise” RBA rate hike but after a rapid 250-point drop buyers returned albeit in very specific pockets of the market e.g. ESG and gold names. The markets experienced a rollercoaster ride of sentiment over the last 2-year yet the markets remained largely range bound between 6500 and 7600, in this case we believe it’s a case of if it’s not broken don’t fix it i.e. de-risk in the 7400-7600 area and increase market exposure/risk below 6750.
The ASX200 had felt tired over recent weeks but that’s now translated to outright vulnerability as buyers retreat on worsening economic/company news which is leading to increased weakness in the current low-volume environment. However, not all stocks/sectors are moving as one as we saw yesterday when the banks fell after NAB’s result while the resources enjoyed a strong session e.g. oil stocks rallied even after a more than 4% dip by crude oil.
The ASX200 has felt tired over recent weeks, as we’ve been highlighting, but that’s translated to outright vulnerability following a couple of weak sessions on Wall Street and the surprise rate hike by the RBA on Tuesday – recession fears are clearly gathering momentum. At MM we had adopted a more defensive stance into May but after seeing the local index fall over 100 points at one stage yesterday it poses the question of whether we should migrate even further down the risk curve.
The RBA surprised the vast majority of market participants at 2.30 pm yesterday as they hiked the Official Cash rate from 3.6% to 3.85%, a brutal outcome for homeowners languishing under the mounting pressures of rising mortgage repayments. Our preferred scenario was they would hold at 3.6% until Christmas, that opinion went up in smoke after just one pause in May. The decision by Philip Lowe et al could prove the correct move but it was extremely confusing considering the guidance in the lead-up to Tuesday – they paused in May to watch and consider future economic data, the CPI print came in better than expected and they hike, on this occasion, it’s not surprising that most people called it wrong.
The Australian Banking Sector has noticeably outperformed its US peers courtesy of the strength of the “Big Four” - the press so often likes to knock our banks but they’ve definitely helped most Australians super over the last few years. The sector is trading on an inexpensive valuation relative to its long-term average but most analysts believe the banks will be close to peak profit for their 1H23 results. At MM we are expecting strong results overall, driven mainly by timing differences on interest rate increases and NIM (net interest margin) tailwinds. Conversely, headwinds we must be aware of are higher funding costs, strong competition for deposits and loans, worse-than-expected bad debts, and ongoing tightening of bank regulation.
The RBA meets on Tuesday with financial markets expecting a 2nd-second consecutive pause following last month’s encouraging inflation data tipped the scales in favour of no change i.e. rates will remain at 3.6%. Even with inflation falling there is an outside chance of another hike but in our opinion, such a move would make no sense as signs are already emerging that the RBA may be winning the inflation battle i.e. after no hike in March why would they raise rates in April when the data on the whole has gone in the right direction?
Post-COVID M&A activity has been extremely strong even as bond yields rallied and the US/Europe suffered a minor “Banking Crisis” courtesy of tumbling bond prices and awful risk management. Private equity was reported to be holding ~$US2 trillion at the start of 2023 and whatever the actual number is when we combine this with large cash reserves in the hands of Australian super funds plus cashed-up fund managers there remains a huge undercurrent of support for stocks.
Travel is enjoying a strong recovery after being basically shut down through COVID with travel bookings proving resilient despite extremely high prices e.g. the Australian Bureau of Statistics just reported that domestic holiday prices increased by 25% in March year on year while international soared an incredible +38%. We are clearly spending our pandemic savings and spreading our wings after being couped up by COVID for over 2 years.
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