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Crispin Murray: what’s driving Australian equities this week

Here’s what’s driving Australian equities this week according to Pendal’s head of equities Crispin Murray. Reported by portfolio specialist Chris Adams.

FIVE ISSUES played on the minds of investors last week, leading to a weaker equity market:

  • ASX earnings season: Last week’s results were more mixed than the previous week. But it was still a net positive. Management teams continue to indicate that lockdowns are not having as harsh an impact as many feared.
  • Domestic Covid situation: A deterioration has led to greater restrictions and more risk to economic growth and earnings.
  • Vaccines: New studies suggest vaccine effectiveness in preventing Covid fades relatively quickly, leading to calls for booster shots.
  • US Fed: Signalled a more hawkish stance in regard to tapering Quantitative Easing.
  • China: Beijing continues to reinforce the notion of “common prosperity,” seen by some as a risk of further market-unfriendly regulation.

The outcome was a 1.94% fall in the S&P300 last week. The S&P 500 was down 0.55%.

It feels like we are approaching a key juncture for equity markets.

The constructive case for equities is based on the view that we are near a nadir of sentiment regarding Delta cases and the sell-off in cyclicals. From here policy supports, signs of peaking cases, resilient economic momentum, earnings growth and liquidity will drive markets higher into year end.

The negative take is that markets are extended on the back of excess liquidity. Coupled with some early warning signals in the data, deteriorating market breadth, more speculative sectors rolling over, growth risks from Covid or inflation and policy tightening it could spell a softer period for equities.

We should have a better read on this by the end of September.

By then we will have a better idea of Delta cases in the US, strength in US employment as benefits roll off and the market’s reaction to tapering by the Fed.

In Australia, resources fell 10.7% last week, driven by lower commodity prices and exacerbated by BHP’s plan to consolidate its Australian and UK listings.

The rest of the market held up reasonably well.

Australia’s Covid situation

The rise in Melbourne cases is concerning. Extended restrictions will mean about 40% of the national economy is now locked down. The acceleration of cases in Melbourne will provide insight on whether lockdowns can achieve Delta variant elimination.

Either way, we are discovering lockdowns now need to be harder and longer to get the desired effects.

The focus on vaccinations is yielding results, particularly in NSW.

The seven-day moving average of daily vaccination rates is now running at 1% of the population and 1.4% for NSW. This is similar to peak rates in Israel and Canada.

In NSW 57% of people have had one dose and 30% two doses.

Assuming current vaccination rates persist, we should hit 70% of the population with one dose by early September and 80% three weeks later.

There is about a five-week lag to achieve the same proportions for two doses.

The debate now is about how far restrictions can be pared back once we reach these levels.

International Covid situation

National case numbers continue rise in the US. But there signs of stabilisation in States that were hit first.

The key question is whether we see evidence of US cases peaking in the next two weeks — as occurred in India and UK. Return to school is a risk to that outcome.

The US hospital system is under some strain. The daily rate in new hospitalisations continues to climb, albeit it at a slowing rate.

A number of southern States are now in a critical position in terms of ICU capacity. This is beginning to affect people’s behaviour and sentiment.

Find out about

Crispin Murray’s Pendal Focus Australian Share Fund

Israel’s experience offers an important perspective for Australia. With a high degree of the population vaccinated, new cases were negligible in June. But as soon as they opened the borders — even with strict controls — the Delta strain took hold and new cases surged.

Hospitalisations have also risen dramatically in Israel, although not to the extent of previous waves (despite similar case numbers).

This highlights the challenges Australia faces in the next phase, especially since Delta is already established here.

Vaccine effectiveness

Israeli data continues to suggest that vaccine immunity to Covid wanes at about 20 per cent per month for Pfizer and 7-8% for Astra Zeneca.

Protection against severe infection seems to remains in place, however.

A booster program for over-60s appears to be working. But we don’t know whether the waning immunity issue will persist or if boosters will be necessary for younger people.

The key point is that ongoing management of Covid remains difficult — especially once restrictions are removed and borders are even partially re-opened.

Until we see a Delta-specific vaccine — or we can demonstrate boosters do not wane — we are set to see only limited re-openings, particularly in countries like Australia.

Economics and policy

US sentiment surveys show a marked shift in people’s behaviour in response to the growing Delta wave. Interest in restaurant dining, for example, has fallen 33.5% since July.

The US economy remains strong, however. The Atlanta Fed GDP predictor is still implying 6% annualised growth.

The Fed’s minutes were more hawkish than expected.

Concern over inflation may see Quantitative Easing tapering start in November with an aim of completion by mid-2022 (rather than late 2022). This would provide the Fed with an ability to raise rates by the end of 2022 if inflation warranted it.

There was little in the way of new economic data last week.

Markets

The high degree of uncertainty makes markets hard to call near-term.

The bull case is built on strong economic growth and earnings revisions, coupled with muted expectations. There is some technical support for this case, since the market has pulled back to a trend line that has been a buying opportunity eight times in 2021.

The more cautious view is that the market is not as healthy as it may appear.

Market breadth has deteriorated, though it remains high by historical standards. An equal-weighted version of the S&P 500 — removing the distortive effect of the largest stocks — actually rolled over in May.

There are some early warning signs in credit markets as BB spreads have widened, though this is small.

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Pendal Australian Shares Portfolio
Winner – SMA Australian Equities

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Winner – Australian Property Securities

We are also seeing the US dollar break higher, weighing on commodities and potentially reflecting some risk aversion.

Bond yields remain low. The question is whether this is the result of central bank buying, or a harbinger of disappointing growth as inflation throttles demand and stimulus effects wear off.

Over the next month we should get a better read on three factors that will guide us on which way the market breaks:

  • Whether the US delta wave peaks, boosting consumer confidence
  • How the US labour market performs as benefits roll off
  • Whether the Fed will prioritise inflation risks or slowing growth
Australian equities

Earnings season is still going well, although there were a few more disappointments than the previous week.

Overall, the proportion of companies beating expectations is running above historical averages, although disappointments are in line.

Resources have performed best in terms of earnings. But similar to February, this hasn’t been reflected in stock moves since commodity price falls have dominated. Financials have so far done better than industrials.

Capital management is positive. About 41% of companies have beaten dividend expectations, versus a 27% historical average. There have been $12.7 billion worth of buy-backs announced, which is supportive for markets.

Earnings downgrades are lower than historical averages, but upgrades are running at average levels.

This reflects falling commodity prices and lockdowns.


About Crispin Murray and Pendal Focus Australian Share Fund

Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

Find out more about Pendal Focus Australian Share Fund here.  

Contact a Pendal key account manager here.


This article has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and the information contained within is current as at August 23, 2021. It is not to be published, or otherwise made available to any person other than the party to whom it is provided.

This article is for general information purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation.

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