ASX Market Update 29th August 2023
Global Market Commentary
Chart: S&P 500 as at 28/08/23
A bearish tone has beset global equity markets since we last spoke with the S&P500 falling 5.5% at its lows and the NASDAQ 8.1%. This was on the back of stronger than expected macro data in the US which sent yields higher with the 10yr hitting 4.35%, levels not seen since November last year. The 2yr also crossed back over 5% for a brief period as well. This also caused a rally in the USD against most currencies but especially the Yen, Yuan & AUD. Consequently, the Fed has set a slightly more hawkish tone and the current sentiment in markets is one of higher rates for longer. Thus, it was mostly good news is bad news again as it raises the possibility of further rate rises this year. On a technical note the SPX has traded below the 20/50dma for the first time since March and despite the bounce the 200dma comes into play at around 4150.
The US economy has proved resilient, especially the consumer, and it seems to have troughed in Q2 and gained momentum again this quarter. However, there are storm clouds ahead and I’ll touch upon that below.
The above chart, provided by JP Morgan, paints a grim picture for the US consumer and households. In short it shows the massive build up in excess savings during covid lockdowns and the slow depletion since. It is now estimated that US households have exhausted excess covid savings and are eating into their regular savings with those savings growing at a much slower rate than pre-covid. This is a result of a combination of a slowing of wages growth + higher prices eating into the household budget. The US consumer is 70% of the economy and drives everything so if there is a slowdown in spending in a significant way this will send the economy into recession. Now the jobs market remains strong, although the pace at which jobs are being added has slowed dramatically as well.
I have spoken about how important the housing construction industry is to US jobs and how usually that is where it starts when it comes to job losses pre-recession. Well, I think we could be close to starting to see these losses accumulate. Housing permits are 16% lower than July 2022 and mortgage applications at their lowest since 1995. The housing market has stalled with transactions down up to 70% in some major capitals. Logically it makes sense as most mortgage holders are locked into a rate of 4% or below. The current 30yr fixed mortgage rate is 7%+, so unless you were forced to move why would you want to refinance at current rates. This will see less demand for housing construction, which means less demand for construction jobs, and we go from there. Remember the US system is the opposite to here in Australia with most mortgages being on 30yr fixed rates vs our variable rate domination. It’s also why I feel the US consumer has been more resilient as rate rises in the US don’t immediately impact households due to that rate being locked in. It’s more a trickle-down effect whereby it hits corporate and asset debt first and trickles down to lower wages growth and eventually jobs being lost.
Finally on top of current pressures on US households we have student loan repayments starting again in October which will tighten budgets even further, especially when some thought they would never have to pay these back again and racked up other forms of personal debt.
So whilst the US consumer has prevailed against the odds this year I feel like it is about to come tumbling down towards the end of 2023 and we may see the US in recession in the first half of 2024.
S&P/ASX 200
Chart: S&P/ASX 200 as at 29/08/23
The XJO has felt the pressure from global equity markets and softness in the Chinese economy seeing a 4.7% pullback from recent highs. Technically we are now trading below the 20/50/200dma and are trading in a range we have been stuck in for the better part of 2023. Our chart shows a bit of bullishness as we have made higher lows in March, July and August. This would suggest that there could be some surprise to the upside in coming months, but also note seasonality would suggest September is usually tough. However, a catalyst such as stimulus in the Chinese economy could see us build to the upside and reverse that. Again, we are probably trading at a fair price at 14-15x forward PE and 4.2% forecast yield.
We are just wrapping up our major earnings season here and I will update you all on final numbers and opportunities next time around but wanted to touch upon a few themes.
1. Retail slump- Companies such as JBH, SUL, BBN, ADH, HVN etc are all reporting major slowdowns in sales, foot traffic and online sales. This makes logical sense as household budgets are under pressure due to higher prices and mortgage repayments.
2. Resources- Lower commodity prices have impacted earnings in a big way seeing profits down 20-40% among the big end of town (BHP, RIO, FMG).
3. Banks- Net interest margins remain under pressure, especially in 2H 23. Loan growth is going backwards, and we are starting to see 90+ day arrears creep up, although nothing too concerning. However, the banks remain very well capitalized with ANZ 13.5% & CBA 12.2% Tier 1 capital ratios.
4. Energy- Like resources have seen a large fall in profits due to oil/gas prices falling throughout 22/23. WDS did report a rise in profits on the back of much higher production being able to incorporate the BHP oil assets into their full year accounts for the first time.
Earnings expectations were for around 3-5% growth going into this season, and I think we will end up around there. FY24 & 25 are much less promising at this stage, forecasting no growth in that period. However, if resources/energy pick up and we see loan growth return in the housing sector things could change. Our economy is healthy, despite the obvious pressure the consumer is feeling. We do still have a large excess covid savings buffer and our jobs market remains resilient as well. High net immigration will also keep a floor under the housing market and boost retail sales and services.
China
Chart: CSI 300 Index as at 29/08/23
You can’t read a financial publication now without hearing about the troubles in the Chinese economy, especially their property sector. We are seeing developers miss debt repayments with ‘Country Garden’ stealing the headlines with $138bill in debt. We also saw Evergrande relist yesterday with its share price falling 80%+ and it filed for bankruptcy in the US just last week. The property sector is very important to the Chinese economy making up around 25% of GDP. China needs to get on the front foot here and start providing some stimulus and support for the sector. We may have seen the start of that with rate cuts, reserve ratios lowered, the government also looking at easing requirements for mortgages and encouraging its banks to issue more credit. Much more is needed and probably in the form of grants and/or handouts for buyers. I am confident it will come, it’s just painful until it does. The market wants to see a concrete plan from the PBOC before it starts to gain any confidence again, instead of continuously teasing us with empty promises.
When stimulus does arrive this should provide support for resources prices and our resources stocks which is something to look forward to. I will note that iron ore prices, steel production and iron ore inventories all seem to have remained very solid over the past 6 months despite the troubles in the property sector. Iron Ore remains around $110t and inventories at lower levels. Steel production is +8% on this time last year but margins remain low as input costs are high (iron ore/coking coal) and demand subdued. One could think that China steel mills are building inventory for an upswing in demand to finish the year.
Many are predicting apocalypse for the Chinese economy and its property sector, drawing parallels with Japan in the 1980s. Whilst I agree there are a lot of similarities, there are also a lot of differences. I believe the Chinese government will not let this topple their economy and in fact are using this to deleverage and remove some of the concentration of debt within the economy. I think what comes out the other side will be very aggressive and bullish so being positioned accordingly will be important.
To sum things up I think the Chinese economy bounces hard and recovers in 2024. The US sees a mild recession also in the first half of 2024 and Australia sees a slow down but no recession for the rest of the year and into 2024. As for markets, if there in fact is a recession in the US and recovery in China the XJO could very well outperform as tech multiples are dragged back down and resource companies outperform.
I hope you have enjoyed this market update and feel free to share with family and friends if you like. I plan on doing a closer look at the Australian market and our latest earnings season next time around. Will also put together what I feel are good opportunities in our market.
We have been blessed with a few days of glorious weather here in Adelaide as we start to enter spring, but the royal show is on next week which usually brings the rain with it. Its Father’s Day on Sunday so a shoutout to all the dads out there. Have a great day! I know being a father is my greatest accomplishment in life and there isn’t anything I wouldn’t do for my kids. I am lucky to have been given three beautiful children to share my life with.
I hope you all have a wonderful week ahead and stay safe. I look forward to speaking with you all soon. Go Crows!
‘My dad taught me to never steal kitchen utensils… But it’s a whisk I’m willing to take.’
heath@hlminvestments.com.au
0413 799 315
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.
