The Point

Crispin Murray: Four issues driving the economic outlook for Aussie equities

Australian stocks have proven remarkably defensive over the past year, compared to global shares and other asset classes, delivering a 6.5 per cent return in the year to February, says Pendal’s Crispin Murray.

A material decline in shares is unlikely in 2023, says Crispin in his new biannual Beyond The Numbers webinar.

Earnings are on track for 2% growth in 2023 and 1% in 2024, he believes.

“However, if we do get the RBA forced to hike rates far higher than the economy can absorb, and we do get a downturn, then we’re going to see much more material downgrades. But it’s not the scenario we expect.”

Four issues will drive the underlying economic picture for Australian companies, he says:

Aussie equities: What we can expect from earnings in the second half

Australia’s economic cycle has gone on longer than expected – and it showed in the recently ended ASX earnings season.

Somewhat surprisingly, most parts of the economy are still in reasonably good shape despite a string of interest rate rises.

The strong jobs market is a factor, helping prop up consumer spending.

“But the expectation is that higher interest rates will likely hurt earnings in the rest of the financial year,” says Brenton Saunders, who manages Pendal MidCap Fund.

“Across the market as a whole, revenue beats were pretty widespread even though many companies missed earnings forecasts at the bottom line. Revenue beats were much higher than profit beats.

“We saw profit margins reduce and that relates to higher costs. In many cases, despite high product price increases, costs increased at a faster rate, resulting in margin pressure.”

Michael Blayney: We’re not in the clear yet on a recession. Here’s why

For all the talk, the US hasn’t fallen into recession.

Corporate earnings haven’t been crushed, despite inflation and a string of interest rate hikes.

It’s looking like the US, Australia and other major economies might escape a recession, right?

Not so fast, says Pendal’s head of multi-asset Michael Blayney.

“A recession is still likely, but it’s going to be pushed further out,” Michael says.

Higher inflation and interest rates take time to hit the real economy, he says.

Turning points in economic cycles normally involve plenty of “noise” – information that can be contradictory and not always conducive to good investment decisions or policy making.

“If you look at the lead story on the television every day and invest on the back of that, you probably won’t get a good result,” Michael says.

“But if you have a disciplined process and follow it consistently through time, you should make money in the long term.”

What’s driving Aussie equities this week

THE odds of a 50bp US rate hike next week increased markedly after hawkish comments by Fed chair Jay Powell – but that didn’t last long.

Powell last week told US Congress that if the data indicated faster tightening was warranted, “we would be prepared to increase the pace of rate hikes”.

Stronger-than-expected data suggested “the ultimate level of interest rates is likely to be higher than previously anticipated”, he said.

The comments drove two-year US Treasury yields above 5% for the first time since 2007.

The spread between two-year and 10-year bond yields inverted to -107bp – the biggest inversion since 1980 when then Fed chair Paul Volcker was trying to kill inflation.

However, all this was reversed after the collapse of Silicon Valley Bank (SVB) late in the week, which saw yields fall.