The US market took a hit following a night of disappointing earnings as investors weighed through the numbers to evaluate the strength of corporate America in the face of higher interest rates – heavyweights Microsoft (MSFT US) and Alphabet (GOOGL US) reported after the bell with both being decent beats. The standout losers were First Republic Bank (FRC US) -49%, General Motors (GM US) -4%. and UBS Group AG (UBS US) -4.7% while for the bulls PepsiCo Inc (PEP US) +2.2% beat expectations. Bonds rallied sending the US 2 years back under 4% as recession fears lifted in the wake of weak stocks.
Equities started to consolidate recent gains last week with the ASX200 slipping -0.4% while the S&P500 advanced just +0.1% where reporting season produced plenty of volatility on the stock as opposed to the index level. Bonds have dictated sector performance through 2023 with some extra spice thrown in by the banking crisis which was primarily focused on US regional banks. It’s been a fascinating year so far which we believe will deliver plenty more stock & sector rotation.
In March the ASX200 Property Accumulation Index undeformed the ASX200 by -6.6% leading to today’s question of whether enough is enough. At this stage of the cycle, we believe real estate is all about how bad things can get i.e. if a company is trading well below the value of its asserts by definition a significant degree of bad news is already built into the stock. Analysts are understandably largely preferring companies with funding certainty that are well-positioned for a higher rate environment but there can always be opportunities when the crowd jumps from one ship to another.
A month ago we posed the question “When should we rotate between gold, coal, and lithium – Part 2.” After watching gold slip $US40 like a proverbial knife through butter in the early hours this morning we thought this morning was an ideal time to revisit the sector especially as we hold a chunky 8% of the Flagship Growth Portfolio in Evolution (EVN) and Newcrest (NCM). Although we believe gold is likely to retrace its recent advance short term we believe second-guessing such a move could easily prove costly with regards to portfolio performance i.e. at MM we are investors, not traders.
The Australian market retreated on Tuesday with heavyweights BHP, CBA, and CSL all closing lower during another lacklustre session that saw over 60% of the mainboard retreat but only 2% of the ASX200 moved by over 5%. The markets are enveloped in negative sentiment yet the Australian market is only ~3.5% below its all-time high as investors await the perceived “inevitable correction”. However, as we’ve been saying if too many people are overweight cash and looking to buy dips such moves are usually shallower than expected.
The new Australian Treasurer has inherited a whole pile of debt from the Liberal Party post-COVID and as would be expected he’s looking for pots of gold to replenish the coffers. The oil & gas industry is both cash rich and unpopular as we strive to live in a greener world i.e. it’s a prime candidate trumping the likes of Super and negative gearing in any popularity contest. We believe it’s inevitable the government will plunder their earnings as the huge profits roll in for the industry, yesterday Macquarie Group estimated such an increased tax would devalue heavyweight Woodside (WDS) by 2-5%, but we believe this is already largely priced into the sector.
Growth stocks and in particular the tech space are inversely correlated to bond yields, in other words when interest rates rise the likes of Apple & Google struggle. Bond yields have experienced a decent correction over the last month with the rate-sensitive 2 years falling from above 5% to sub 3.6% which has translated to an extension of the period of outperformance by growth stocks over value which commenced in Q4 of 2022 when yields simply slowed their ascent – the US 2 years closed back at 4.1% after the hawkish comments from the Fed on Friday.
On Wednesday, we switched our tech-facing Altium (ALU) position to Ramsay Healthcare (RHC) with the Healthcare operator having sat on our Hitlist over recent weeks. The move reduced our direct/indirect tech exposure back to 13%, still significantly above the market weighting which is less than 4%. We had adopted a bullish and overweight tech position since Q4 of 2023 and this was the first step of MM migrating our Flagship Growth Portfolio to a more in-line market stance now.
Healthcare stocks are in the same growth basket as tech without steroid-like volatility. Over the last 5 years apart from COVID rising bond yields has been the bane of the sector leading to sharp corrections in both 2018 and late 2021. However, we believe central banks are close to a rate pivot which should be supportive of healthcare stocks e.g. as we showed earlier the US 2-year yield has pulled back from over 5% to sub 4% in recent weeks theoretically creating a tailwind for healthcare stocks as a whole.
As we often state the ASX moves far more in tandem with the likes of the UK FTSE as opposed to US indices – it’s not rocket science, similar to the Australian market European indices have a larger market weighting of resource stocks as opposed to tech which now dominates most US indices. On the relative performance front, Europe is winning hands down even as war rages in Ukraine e.g. The UK FTSE is less than 2% below its pre-COVID high just above 7900 compared to the US which is -14.5% below its equivalent milestone.
Equities started to consolidate recent gains last week with the ASX200 slipping -0.4% while the S&P500 advanced just +0.1% where reporting season produced plenty of volatility on the stock as opposed to the index level. Bonds have dictated sector performance through 2023 with some extra spice thrown in by the banking crisis which was primarily focused on US regional banks. It’s been a fascinating year so far which we believe will deliver plenty more stock & sector rotation.
In March the ASX200 Property Accumulation Index undeformed the ASX200 by -6.6% leading to today’s question of whether enough is enough. At this stage of the cycle, we believe real estate is all about how bad things can get i.e. if a company is trading well below the value of its asserts by definition a significant degree of bad news is already built into the stock. Analysts are understandably largely preferring companies with funding certainty that are well-positioned for a higher rate environment but there can always be opportunities when the crowd jumps from one ship to another.
A month ago we posed the question “When should we rotate between gold, coal, and lithium – Part 2.” After watching gold slip $US40 like a proverbial knife through butter in the early hours this morning we thought this morning was an ideal time to revisit the sector especially as we hold a chunky 8% of the Flagship Growth Portfolio in Evolution (EVN) and Newcrest (NCM). Although we believe gold is likely to retrace its recent advance short term we believe second-guessing such a move could easily prove costly with regards to portfolio performance i.e. at MM we are investors, not traders.
The Australian market retreated on Tuesday with heavyweights BHP, CBA, and CSL all closing lower during another lacklustre session that saw over 60% of the mainboard retreat but only 2% of the ASX200 moved by over 5%. The markets are enveloped in negative sentiment yet the Australian market is only ~3.5% below its all-time high as investors await the perceived “inevitable correction”. However, as we’ve been saying if too many people are overweight cash and looking to buy dips such moves are usually shallower than expected.
The new Australian Treasurer has inherited a whole pile of debt from the Liberal Party post-COVID and as would be expected he’s looking for pots of gold to replenish the coffers. The oil & gas industry is both cash rich and unpopular as we strive to live in a greener world i.e. it’s a prime candidate trumping the likes of Super and negative gearing in any popularity contest. We believe it’s inevitable the government will plunder their earnings as the huge profits roll in for the industry, yesterday Macquarie Group estimated such an increased tax would devalue heavyweight Woodside (WDS) by 2-5%, but we believe this is already largely priced into the sector.
Growth stocks and in particular the tech space are inversely correlated to bond yields, in other words when interest rates rise the likes of Apple & Google struggle. Bond yields have experienced a decent correction over the last month with the rate-sensitive 2 years falling from above 5% to sub 3.6% which has translated to an extension of the period of outperformance by growth stocks over value which commenced in Q4 of 2022 when yields simply slowed their ascent – the US 2 years closed back at 4.1% after the hawkish comments from the Fed on Friday.
On Wednesday, we switched our tech-facing Altium (ALU) position to Ramsay Healthcare (RHC) with the Healthcare operator having sat on our Hitlist over recent weeks. The move reduced our direct/indirect tech exposure back to 13%, still significantly above the market weighting which is less than 4%. We had adopted a bullish and overweight tech position since Q4 of 2023 and this was the first step of MM migrating our Flagship Growth Portfolio to a more in-line market stance now.
Healthcare stocks are in the same growth basket as tech without steroid-like volatility. Over the last 5 years apart from COVID rising bond yields has been the bane of the sector leading to sharp corrections in both 2018 and late 2021. However, we believe central banks are close to a rate pivot which should be supportive of healthcare stocks e.g. as we showed earlier the US 2-year yield has pulled back from over 5% to sub 4% in recent weeks theoretically creating a tailwind for healthcare stocks as a whole.
As we often state the ASX moves far more in tandem with the likes of the UK FTSE as opposed to US indices – it’s not rocket science, similar to the Australian market European indices have a larger market weighting of resource stocks as opposed to tech which now dominates most US indices. On the relative performance front, Europe is winning hands down even as war rages in Ukraine e.g. The UK FTSE is less than 2% below its pre-COVID high just above 7900 compared to the US which is -14.5% below its equivalent milestone.
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