Crispin Murray’s weekly Aussie equities outlook
Here’s what’s impacting Aussie stocks at the moment, according to Pendal’s head of equities Crispin Murray (pictured above). Reported by portfolio specialist Chris Adams.
- Equity and bond markets remain in a holding pattern at an aggregate level, with the S&P/ASX 300 at -0.1% for last week
- A weaker shift in the US dollar was the catalyst for a shift higher in gold and prompted signs of rotation from growth to value
- In the US there are early indications that case-load growth and hospitalisations are peaking in the worst-affected states
- Domestically we saw extensions of the JobKeeper and JobSeeker packages; while the RBA has clearly signalled its intention to continue providing policy support
So far the Victorian government has refrained from imposing Level 4 restrictions, but the growth in cases remains disappointing.
There are signs restrictions in Melbourne are slowing economic activity, while voluntary behaviour is having the same effect in Sydney.
This in part prompted clear policy signals last week. The federal government extended its packages, however comments from RBA Governor Phil Lowe were of most interest.
Lowe emphasised the view that social costs and degradation from recession and persistent unemployment were too high to allow the normal clearing mechanism of labour and capital markets. Instead, policy makers must do everything in their power to mitigate the effects of this crisis.
This shift in thinking away from a free market approach may be driven by considerations around the social effects of income inequality. It could also be driven by a view that labour markets are too rigid to react in a timely fashion to a shock of this nature.
Regardless, it suggests policy makers will continue to shore up growth, with Governor Lowe suggesting there are several more tools available if needed.
New daily US cases have levelled off over the past week and hospital occupancy rates remain stable in hotspot states such as Florida, Texas and Arizona. If the market starts to believe the health situation is moderating, it should be positive for sentiment.
Nevertheless US economic data was softer. Jobless claims rose week-on-week for the first time since March.
Real-time indicators such as restaurant bookings suggest momentum has stalled after an initial surge. However, the environment is uneven. Demand continues to grow in sectors such as housing.
The next tranche of policy support appears to have been delayed while the Republicans seek agreement on a package. We are now likely to see a gap of a week or two between the end of payments under the previous package and the start of the new.
Elsewhere, the speed and scale of a €750 billion package announced by the EU came as a pleasant surprise given the debate between the “Frugal Four” northern states and southern countries likely to be the main support beneficiaries.
The weaker US dollar was driven by a combination of factors:
- Worse Covid case load in US vs Europe, and its expected impact on economic recovery
- Positive policy surprise in Europe versus delays in US
- Growing uncertainty about the upcoming US election
- The impression that ineffective fiscal policy in the US puts more pressure on the Fed to ease in various forms.
Weakness in the USD adds to the bull case for gold. It is increasingly evident that virus spread is hampering economic re-opening in the US and is becoming a limiting force on growth.
Unlike places such as China, which have effectively eradicated the virus, it is making it harder to return to pre-Covid levels of economic capacity.
However policy-makers are baulking at allowing this to trigger a significant recession and are falling back to stimulus such as more debt and more money supply growth.
This has several important effects, including question marks over longer-term strength of the dollar. This is seeing strength in the value of real assets. In some ways this is positive because it suggests expectations around policy-supported growth remain reasonable.
A reversal in US dollar weakness would suggest a flight to safety on increased concern.
Inflation expectations have been rising in recent weeks, but have only recovered to pre-crisis levels. Further increases in inflation expectations would require people to start factoring in tighter labour markets, which appears unlikely at this point.
That said, inflation is showing up in areas such as real assets.
Value had a small bounce versus growth in equity markets last week. There is a case for further value outperformance if we see US cases plateau, more fiscal stimulus — and if US tech earnings don’t bring any further upside to already high expectations.
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.
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