Crispin Murray’s weekly equities outlook: what’s driving the ASX
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.
- Crispin Murray names the big policy shifts driving equities
- Find out about Pendal’s Focus Australian Share Fund here
OPTIMISM over stimulus and the rate of economic re-opening in the US has continued to drive equity markets higher.
The US$1.9 trillion American Rescue Plan Act was signed into law last week, while the EU increased its bond purchase program.
Locally the federal government announced its “PlaneKeeper” program to support the tourism industry. It was met with mixed reviews. The headline figures do not seem to match the details revealed so far and market impact was muted.
The S&P/ASX 300 rose 1.03%. Most sectors were up, although real estate and energy lost a little. The S&P 500 gained 2.69%.
Covid and vaccine outlook
The US retains positive momentum. New daily cases are down 73% from their peak while hospitalisations have fallen 71%.
Mobility data is picking up quickly, reaching its highest level since March last year. This is undeniably good for economic recovery.
About 21% of the US population have had a single dose and 11% have had two. This raises the risk of a second wave given the speed of re-opening.
The vaccination rate is closing on 3 million people per day as the broader supply arrangements take effect. Vaccine supply was up 140% in March versus February. April is expected to be up another 60%.
At these rates the US could reach herd immunity in June as long as demand for vaccinations exists.
The UK is experiencing similar trends in new cases and hospitalisations. Europe’s sluggish program remains a concern with a pick-up in new cases in Italy and part of Eastern Europe. The divergence between the US and EU is helping support the US dollar.
Economics and policy outlook
The big news from the US was the passing of the $1.9 trillion stimulus Act.
Some $400 billion worth of $1400 cheques will be disbursed by the month’s end. This is the single biggest weekly surge in stimulus spending so far — almost double the previous high in April 2020.
We expect some of this cash to find its way into the stock market and — if history is a guide — into the more speculative tech names.
To provide some context around the scale of stimulus, the US cumulative response stands at 36% of 2019 GDP. Europe has done 30% but with greater skew to loans rather than fiscal transfers.
This is driving the debt/GDP ratio back to levels not seen since World War II.
Expected nominal GDP growth in the range of 10% this year will help alleviate some of this. But the government remains vulnerable to any spike in bond yields. This is why the market remains focused on the outlook for inflation.
This stimulus package was in reaction to the depths of the crisis in December and January, but it comes as real-time economic indicators are recovering.
Company surveys are already picking up and the lead indicators for jobs growth are strong. Rising house prices are also supportive, judging by the surge in equity being cashed out of homes.
There are some concerns over the supplementary leverage ratio (SLR) in the US, which dictates the amount of capital large banks must hold against their loans.
Last year the Fed allowed the temporary exclusion of US treasuries and deposits held at the Fed from the ratio’s calculation.
This exclusion is due to expire at the end of March. This could potentially become a binding constraint on capital and distributions, which could see banks selling treasuries and being unable to make markets as efficiently.
This is a risk to watch, although the expectation is for some sort of transition period which would mitigate any near-term effects on the bond market.
Elsewhere, the EU announced it would significantly increase Quantitative Easing purchases in the next quarter to offset higher moves in the yield curve. However they did not raise the overall amount planned through to March 2022.
This helped improve EU bond yields, but leaves a confusing policy conundrum later this year if growth doesn’t accelerate materially.
Markets and stocks outlook
The key issue in markets is the degree to which concerns over bond yields offset huge cyclical tailwinds.
Moves were generally subdued last week, though a sell-off in bonds at the end of the week pushed US 10-year treasury yields up 6bps. This did not have an impact on equities.
The US dollar is at an interesting juncture. The dollar index — which measures the USD versus a basket of currencies — slumped over the second half of 2020, but has risen since January.
There is debate as to whether recent strength is a temporary rally, followed by more weakness — or whether the strength in the US recovery will see the greenback rally further. A stronger US dollar could prove a headwind for commodities.
Comments on bond yields from this week’s Fed meeting will be a key signal for currency.
There is an interesting trade developing within the broad rotation from value to growth. In growth, large-cap tech stocks are outperforming smaller, more speculative names for the first time since April last year.
It is important to remain mindful that today’s market is not just a case of simply “buy value, sell growth”. Plenty of value companies are structurally challenged.
There are also signs of a divergence between profitable growth companies with strong cash flow versus the longer duration, more speculative names.
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 , as this graph shows:
Source: Pendal. Performance is after fees and before taxes. *From 01 Apr 05; **as at 28 Feb 21. Past performance is not a reliable indicator of future performance.
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