Crispin Murray: what’s driving ASX equities this week
Here’s what’s driving Australian equities this week according to Pendal’s head of equities Crispin Murray (pictured above). Reported by portfolio specialist Chris Adams.
WE SAW markets consolidate last week as the S&P/ASX 300 shed 0.6% and the S&P 500 lost 0.8%.
Ironically, this came in combination with sign of exuberance in some pockets — notably the US IPO market.
Nevertheless, weaker economic data, chatter about the possible timing of a Fed taper and concerns over delays in vaccination programs weighed on sentiment.
This generally manifested in a rotation from cyclicals and value back to growth and defensives, rather than a material sell-off. This emphasises the strong degree of support markets continue to enjoy.
Economics and policy
President-elect Biden proposed a new stimulus bill of US$1.9 trillion with measures including a federally-mandated minimum wage. His current approach would require a degree of Republican support, so this initial package is likely to be watered down.
Expectations are the final bill will be between US$1.1 trillion and $1.6 trillion and the minimum wage legislation will be dropped. However the stimulus is still materially above the US$800 billion to US$1.4 trillion many had been expecting.
As it stands, nominal disposable income is expected to surge in Q1 2021 to levels above that of Q2 2020. Coupled with pent-up demand as lockdowns and restrictions are rolled back in the northern Spring, this is likely to provide stiff economic tailwinds.
Goldman Sachs last week upgraded its 2021 US GDP estimate from 4.1% to 6.6%, with 10% growth in Q2 and 9% in Q3.
At this point, however, economic data continues to reflect previous stimulus payments rolling off, as well as rising Covid cases and pre-election uncertainty.
US December retail sales provide the most recent example, falling 0.7% versus an expectation of 0%. Consumer sentiment surveys also remain soft.
We expect these indicators to improve as a combination of stimulus, vaccines, accommodating central banks and pent-up demand should win out.
The scale of stimulus is also reflected in higher inflation expectations, prompting some concern that the Fed might have to “taper” its bond purchases sooner than otherwise thought.
The fear here is of a 2013-style tantrum in markets. A number of Fed officials have downplayed this risk, including Chair Powell and Richard Clarida who is widely tipped to be Powell’s successor.
Covid and vaccines
Case numbers fell last week — while still remaining at high levels — as the impact of lockdowns took effect. US hospitalisations are also falling for the first time since September, although several areas remain under strain.
The impact of the vaccine roll-out on hospitalisations is the key issue to watch. Vulnerable parts of the population such as the elderly comprise a disproportionately high segment of hospitalisations and deaths.
Concentrating vaccinations on this cohort may mean that hospitalisations start to fall in February even if cases do not. Mortality rates may also start declining, with a lag.
The rate of vaccinations in the US doubled in the last week. Some 11.1 million Americans have now been vaccinated (about 3% of the population) up from 6 million people a week earlier.
Importantly, half of the phase 1A population — deemed the most vulnerable — and a third of long-term care residents have had their first doses.
We may reach a point in late February where a number of economies can consider re-opening, since Covid will no longer be straining the health care system.
In this vein, it’s been noticeable that government rhetoric has focused on a vaccine’s ability to prevent severe infections, rather than preventing infection entirely.
There have been reports the Oxford vaccine may produce better results in the more thorough AstraZeneca trial, than the 70% efficacy achieved in earlier iterations. However nothing has yet been published here.
Johnson & Johnson released data from its phase 1 trial — but we are still waiting to hear the results of the larger phase 3 trial. The latter is worth watching because it’s a one-dose regimen, which looks to deliver neutralising antibodies in line with the AstraZeneca/Oxford two-dose vaccine.
We think it’s fair to expect more positive developments on the vaccine front in coming weeks which may help calm concerns about vaccine availability and the timing of a roll-out.
Sentiment swung about last week, seeing some rotation between the cyclical reflation trade and the growth trade.
Valuation remains a key concern in some quarters.
The scale of expected earnings coming through for the next few quarters is helping alleviate some of this. The MSCI World P/E, for example, is still well below its 2000 peak. It is also important to remember that high valuations are concentrated in the growth part of the market, with value nowhere near as extended.
Bond yields remain the key driver of growth stock valuations — and therefore remain a key factor to watch.
The recent rise in bond yields has been driven by inflation expectations rather than a shift in nominal yields.
This is important because inflation expectations are highly correlated with performance of cyclicals — suggesting they can continue to do well while the market believes the Fed will accommodate stimulus. Nominal yields remaining low is an issue for financials.
Real yields (nominal minus inflation expectations) drive growth stock valuations. The massive increase in fiscal stimulus takes some pressure off monetary policy, which means real rates may not decline further from here.
This may mean growth stocks stop outperforming. But it does not necessarily mean they sell off materially. A shift to 2% yields may prompt this, but we remains some way from that point.
It is worth noting that a value rotation is likely to benefit the Australian equity market in comparison to the US, given our higher proportion of value stocks.
The ASX was off slightly last week. Banks and energy performed best; staples and health care the worst.
Energy stocks continued their recovery, helped by higher spot LNG prices. Recent strength in prices is likely to be temporary — reflecting a cold North Asian winter and a coincidence of maintenance-related supply disruptions.
Gold stocks fell on fears of rising bonds yields; bonds themselves were relatively flat on the week.
US dollar sensitives also fell, more as a funding source for banks, energy and resources.
Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and a strong track record leading Australian and European equities funds.
He manages a number of our flagship funds along with one of the largest equities teams in Australia.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.