ASX Market Update 14th March 2024
Global Market Commentary
Chart: S&P 500 as at 13/03/24
Global equity markets have been on a tear to start the year with the S&P500, Nasdaq, DAX, Nikkei225 & S&P/ASX 200 all reaching record highs. It is quite remarkable to see such strength in the markets given some of the macro backdrops we have, but we stay fully invested and enjoy the upward momentum. Surprisingly the NIKKEI225 leads the way +15% for 2024 with the S&P500 & Nasdaq both up 8%+ in the same period. US markets have bounced hard from their October lows with the SPX +25%. The XJO is up just 1.8%, but +14% since our October lows. Concerns over the Chinese economy have seen losses in our resources sector which obviously has such a large weighting on our index.
So, what reasons do I see behind the strength in equity markets? The first being rate/yield related. The market is still pricing in at least three cuts in the US and two here locally. This is obviously positive for equities as it means debt becomes cheaper, which means earnings could benefit from expanding margins again. This is especially true in the growth sectors. The Fed has acknowledged that holding rates too high for too long could be more detrimental to the economy than beneficial. The RBA is not there yet but given our macro backdrop I feel the pivot is coming soon. The EU and BOE have also signaled rate cuts are on the way, so it seems as if the tightening part of the cycle is over, and some easing is on the way.
The second reason, which I will expand on later, is the AI trade. This has seen huge momentum build in the tech sector on the premise this is the dawn of a new era in human evolution and will drive higher margins, productivity, earnings, and new industry globally. Obviously, it is too early to say definitively what impact AI will have on humanity, but I did underestimate the amount of legs it would have. I thought it would have exhausted itself by now.
Thirdly earnings expectations remain high with earnings expected to grow by 11% in 2024 on the SPX. I still believe this is too high and Goldman’s recently published their forecasts of around 5-8% growth which I feel is closer to the mark. FY25 have similar low double digit growth expectations as well so this is what the markets are feeding off, although it probably doesn’t have a lot of real data behind it. Companies are still not giving clarity around guidance like they were pre-pandemic, and this means analysts are now having to guess more than ever. I feel this leads to earnings expectations being reined in as the year progresses and as we get more real-time data.
Finally, I believe the rhetoric behind the macro backdrop is changing. Especially in the EU and China. The US economy continues to be a beacon of light showing resilience when most, including myself, thought they would have real concerns by now. The ‘Goldilocks’ scenario seems to being playing out whereby the economy is not too hot or cold, but just right. Not to say there aren’t pockets of softness, especially with small business, but overall, the consumer continues to spend, and the economy is expanding at a decent clip. It also helps that the Biden administration continues to run huge fiscal deficits which obviously feeds momentum in the economy. I now can’t see a recession before the election in November and probably until we are well into 2025. The Fed must be commended for sticking the landing thus far in what I would perceive to be one of the most difficult periods in economic management in modern history.
We are also starting to see what I feel are ‘green shoots’ in the EU & China, especially in trade data and PMIs. Even the CPI data out of China saw some inflationary pressures last month which is a change from the disinflationary/deflationary data we have been seeing. The consumer seems to be solid as well. Travel for the lunar new year smashed 2019 records and we are also seeing strength in electricity usage, transport, mobile phones and retails sales. Obviously, the property sector is still very soft but there is a lot of bond issuance and regulatory easing still to flow through which hopefully sees a turnaround very soon.
S&P/ASX 200
Chart: S&P/ASX 200 as at 14/03/24
As I mentioned above whilst we have lagged our US & Asian peers the XJO has enjoyed a very healthy bull run itself since our October lows. We are +1.8% for the year and +14% since those lows and if it wasn’t for the resources sector we could have been a bit higher. We just finished our half-yearly earnings period which gave us some insight into our earnings backdrop.
· Generally, earnings were better than expected with 1.4x beat vs miss ratio according to Morgan Stanley.
· This seems to be the earnings trough for Australia with about half the usual rate of downgrades for future earnings being reported.
· Still forecast earnings to fall 5% FY24 but lifting by 4% in FY25 & 5% FY26
· AI mentions in earnings results doubled from the last corresponding reporting season.
· Inflation mentions lowest since Q3 21
· Consumers seem to be holding up ok with discretionary spending nowhere near as bad as forecast.
· Staples, Discretionary Retail & Tech had the most beats whilst Energy had the least.
Like our overseas peers the current rise in markets can only really be put down to multiple expansion rather than quality of earnings. If China does turn it around then there is the case for upgrades to resources & energy sectors in the more immediate term but, at least, until the second half on 24 consumers will still find it tough and reign in discretionary spending. Tax cuts + likely rate cuts should ease the burden and see some earnings growth return to the discretionary sector in 2H 24.
AI & Tech
Chart: NVDA as at 13/03/24
It’s no secret that AI and tech have been the driver behind a lot of the gains we have seen since October. In fact, the posterchild for it all, Nvidia (NVDA), can be attributed to around a third of the S&P500 index gains to start the year. It now has a larger market cap than the likes of Tesla, Meta, Amazon & even Google. A notion that would have seemed unthinkable 12 months ago. The gains have not been limited to NVDA though with the likes of AMD, Dell, Broadcom, Super Micro, TSMC, Meta etc. seeing large gains off the narrative as well. If seems to be spreading through the SPX into other sectors. If you look at the performance of stocks, over the last 12 months, vs the index, only 20% have beaten it, however if you narrow that down to the last month it’s 40%. A sign that the positivity is spreading to other sectors.
What I am hearing questioned a lot of late is the sustainability of this rally in AI & whether it’s a bubble. Both have fierce advocates on either side of the fence for the latter. Sustainability is really tough question to answer. Valuations do look stretched and technical indicators might be showing some sign of exhaustion, but markets can stay irrational for long periods of time. However, is this a bubble? Not in the slightest. Yes, you can draw some comparisons from the dot com market, but they are stretched. This rally is not only predicated on AI hype but also earnings quality. Earnings for these companies are growing at phenomenal rates, and the likes of NVDA are growing into those very lofty earnings multiples. Trailing PE for NVDA is 75x but forward PE is only 36. Dell also noted in their Q4 earnings call that the backlog for their servers had more than doubled from last quarter and they are not seeing any sign of slowing down.
The concern for NVDA was when China sales were significantly reduced, as they were in Q4, was there enough demand from the rest of the world to sustain their growth. In short there is, and it looks as if there is a long tailwind of demand to come even with capacity increases in 2025. In fact, the big tech guys in the US now account for 40% of all NVDA revenue. Eventually the sector will mature, and growth rates will slow but I still feel they will run at a decent clip for a few years yet. This is not an overnight fad that will blow over any time soon. It is a generational change in the way we live our lives and will have a huge impact for decades to come.
Finally, are we too late to invest? Not in the slightest, as I said before there are huge implications for this technology to come and a strong tailwind. However, I would wait for a correction as valuations do seem stretched on a technical basis and something like NVDA could pull back from the $908 it closed at last night to around $680 if the market decides to pull back. Use these corrections to jump into AI related stocks and trickle your money in. Secondly, I think stick to the ‘picks & shovels’ of the industry for now. The ones making the hardware, GPUs, servers etc will have the largest demand and need for now. We still aren’t exactly sure of the use for AI at a consumer level is. For now, its chat bots and assistants in existing software but we know it will go on to do much greater things. Similar to when the internet first launched. We knew it was important and would revolutionize the way we live but not the exact applications it would have on a commercial scale. No one knew in 2000 that a tiny company in Netflix would ultimately end the physical VHS/DVD/Bluray era as it delivered entertainment to us at our fingertips in an instance. Same can be said of Amazon. A tiny online store selling books out of a garage would become a global retail behemoth commanding 5-10% of global retail sales.
Chart: AAPL as at 13/03/24
Also look to those unloved tech stocks that maybe haven’t been caught up in the current AI uptrend. My pick of the bunch would be Apple (AAPL) which is currently down 11% for the year and 14% from its highs. The market seems very focused on China iphone sales for now, which are down 24% on year, and the fact that AAPL really haven’t planted their flag in the ground when it comes to AI. My thesis is they eventually do and like with any of their products it will be of high quality and in high demand. Think of their latest VR headset. Only a first iteration but highly commended and despite its lofty price tag selling very well. They were very late to that market but will make their mark. I don’t expect them to wait too much longer to announce their AI project, I have full confidence it will be this year, but when they do I expect a re-rate higher. Secondly this AI boom will push a new wave in hardware sales for phones, tablets, PCs, TVs etc. AI is very power hungry and needs the latest chips and software running these devices to give them access to AI services. This means people will have to upgrade their phones, tablets, PCs etc. Finally, India is a new frontier for AAPL and one I expect to be much larger than China ever was. They don’t come with the bureaucracy of China and have a much younger population. This will grow to scale in hardware and services over the coming years and help drive AAPL earnings growth.
Chart: GOOG as at 13/03/24
The next unloved stock I am keen on is Alphabet or Google (GOOG) for those unfamiliar with the parent company’s name. Concerns have arisen about the impact of AI on GOOG almost monopolistic search platform which represents about 60% of their revenue. I feel this is a case of the market selling first and asking questions later a bit like the situation with ResMed and the weight loss drugs. These fears are mostly unfounded and GOOG has many strings to their bow including search, YouTube, hardware + their new cloud business. They also have their own AI offering which will compete with ChatGPT in Gemini. It’s not without its hiccups, as they all have had, but many experts in the field have said they prefer GOOG offering over ChatGPT. Only time will tell who comes out on top but given GOOG dominance in search, browser (Chrome) & email (Gmail) I am sure they will get more than enough traction.
The stock has underperformed the market this year as it is relatively flat. Its recent earnings were solid and beat on both EPS and revenue but were sold off due to margin concerns and increased capex spend. I feel this is an opportunity to pick up another quality company cheap, like AAPL. It trades a mere 20x FY24 earnings and only 15x FY25. Historically it has traded closer to 30x so even by its own standards it looks cheap. Its search advertising revenue has swung to double digit growth again after going backwards for a couple of years and YouTube is also seeing strong advertising growth. If the US economy is to continue its growth path advertising spend will hold up. Not to mention it’s an election year so there is extra spending coming from that this year. I believe GOOG will re-rate again as the search business concern dissipates and Gemini has time to prove itself.
Unfortunately, we simply don’t have the exposure to AI on the ASX that they do over in the US, but I feel one stock that could benefit from it the most, and quite quickly, is Promedicus (PME). After their results last month, we got an opportunity to jump into PME at a much lower price, sub $90, but they have bounced again. PME are one of my favourite tech stocks on the ASX and I’m keen on them on sell offs.
Copper
Chart: Copper Futures as at 13/03/24
Just quickly I want to touch upon copper and its recent performance. As you can see from the chart above copper prices have seen a breakout in the last two weeks. This is all on the back of China’s major copper smelters coming together and deciding to significantly cut production due to the inability to source concentrate and smelter fees crashing. This is also due to huge smelter capacity, around 1.7mt, coming online outside of China throughout this year. Smelter fees and the copper price usually have an inverse correlation. Add in a lower USD and a chance China is turning the ship around you have a bullish case to make for copper again. Unfortunately, with BHP taking over OZ Minerals pure copper plays on the ASX are left to Sandfire (SFR) and a few small/micro caps. Hence if you want copper exposure my favourite is WIRE (Global X Copper Miners ETF) or BHP, which below $45 looks decent value here. I am going to cast my eye over the copper specs again over the next few weeks and will come back to you with a few favs next time.
Uranium
Chart: Betashares Global Uranium ETF (URNM) as at 14/03/24
Finally, a quick update on the Uranium sector since my last note in February. There has been a sharp sell-off in the spot price and consequently equities. Most have seen a 20-30% decline at least. It was on the back of Cameco’s earnings report where they stated they aim to buy only 3mlb of uranium from the spot market this year vs 13mlb last. Frankly I don’t believe them and those who know the sector well don’t either. They have very lofty production guidance for 2024, which they won’t meet, and hence will have to step into the market to buy more to fulfill contract obligations. Regardless it’s a tiny bump in the road when compared to the overall thematic I spoke about in my last note. We will also have more clarity after Kazatomprom’s (KAP) earnings report tomorrow night. They will update us regarding their sulfuric acid situation, production guidance and inventory levels. I believe this will help stablise the market if not turn it around. This sell off presents an entry opportunity and the likes of URNM, PDN, BOE, LOT etc. remain the best exposure on the ASX. Again, I am in favour of trickling into your position as the trend is still bearish at this point.
I must apologise for the lengthy update again. Lots to cover in markets, as per usual. In some special news our daughter has started walking properly and is getting into everything now she is more mobile. I feel like last time we spoke she was taking her first few steps but now she has full confidence in her abilities. I couldn’t have imagined she could get any cheekier but again she has surpassed our expectations. Footy is also back for real this weekend after the weird half-baked opening round. I can’t wait to sit down and watch my Crows play again. I have high hopes we make finals this year, but as we all know sport can be a cruel mistress. I hope you all have a wonderful weekend and stay safe. Look forward to speaking with you all soon. Go Crows!
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Important Notice
Any advice in this article should be considered General Advice only and does not consider your personal needs and objectives or your financial circumstances. You should therefore consider these matters yourself before deciding whether the advice is appropriate to you and whether you should act upon it. I am happy to assist you in this process. To do so, I will need to collect personal and financial details from you before providing my recommendations. Please note the author may own shares in the companies mentioned in the above blog.
