Global equity markets rebounded last week. The MSCI World rose 2.7%, the US S&P500 Index rose 2.6%, and the tech-heavy Nasdaq rose 3.3%. The broad European STOXX 600 finished the week 2.9% higher. The Chinese market underperformed global peers, rising 1.3%.
The Australian ASX200 finished the week up 2.8%, while the Small Ordinaries index outperformed larger peers, rising an impressive 5.8%. The hard-hit Technology sector continued its recent strong performance increasing 7.1%, and Financials rose 4.4%. Sectors that are considered more defensive such as Healthcare (-0.5%), Consumer Staples (-0.2%), and Utilities (0.5%) underperformed. In company news, ANZ agreed to purchase Suncorp’s (SUN) bank for $4.9billion, with the deal subject to ACCC approval. Overall, we think the deal looks fair and believe it will act as a positive catalyst for SUN to close its valuation gap with other listed insurers. SUN has historically traded at a ~50% discount to insurance peers owing to the lower ROE bank division. Newcrest Mining (NCM) reported stronger than expected Q4 production, with costs coming in lower than feared. It was an operationally strong result after several weak quarters. Santos’s (SAN) guidance for production and sales volumes for the upcoming quarter were slightly lower than consensus expectations at the midpoint. Still, lower expected upstream production costs were a positive surprise.
In economic news, the European Central Bank delivered its first interest rate hike since 2011, raising rates by 50 basis points. It also announced a transmission protection instrument aimed at stabilising bond spreads between the strongest and weakest EU economies. The interest rate hike came off the back of high inflation readings driven by energy prices, with headline inflation +8.6% YoY and core inflation +3.7% YoY. UK inflation continued to march higher to 9.4% YoY in June. These higher-than-expect inflation figures maintain pressure on the Bank of England to hike rates, with a 50-basis point increase on the cards when they next meet.
US initial jobless claims continued to tick higher, indicating a weakening but still healthy labour market. Australian, US, and EU preliminary Purchasing Manager Index (PMI) data fell significantly. US and EU readings now point to contraction as EU manufacturing fell below 50, the level that splits expansion and contraction for this reading, and US services fell to 47 compared to the 52.6 consensus estimate. PMIs finally look to be collapsing after holding up well for many months despite poor sentiment and expectations. The key for markets now will be how far they fall and how long they remain in contractionary territory.
US second-quarter earnings releases ramped up during the week, with nearly 20% of the S&P500 index reporting so far. Overall, earnings releases have indicated a slowing economy. Still, corporate profits and forward outlooks were more resilient than feared. This led to a pickup in investor sentiment and buoyed markets. It is another big earnings week ahead with the mega-cap tech stocks reporting results.
Critical economic releases for the week ahead include Australian June quarter CPI inflation which is expected to rise strongly due to higher food and energy costs. US June quarter GDP will also be released and may show the second consecutive quarterly decline. US consumer spending and consumer confidence will give us a read on the US consumer and whether interest rate hikes are having the desired effect. Finally, the US Federal Reserve will likely raise interest rates by 75 basis points when they meet this week.
Excessive levels of pessimism?
According to Bank of America’s July monthly fund manager survey, investors are demonstrating “dire levels of investor pessimism”. The survey shows that investor expectations of economic growth and corporate profits have tumbled to the lowest on record.
Further, cash allocations are at the highest, and equity allocations are at the lowest since before the Global Financial Crisis (GFC). Interestingly, the percentage of Fund Managers who feel like they are taking lower than normal levels of risk has also crashed to GFC lows.
Some market analysts suggest that such high levels of pessimism are bullish for markets. The thinking goes that investor sentiment is likely close to its lows. Once it does eventually trough, which it may have already, the only way left to go is up. When investor confidence eventually turns the corner, buying pressure builds as they re-enter the market, fuelling the next rally. The narrative that pessimism has come close to peaking has helped the recent stock bounce.
The question then arises – is now the time to start increasing equity allocations? While we agree that high levels of investor pessimism are a positive signal, it is only one of the data points that we look at. In our opinion, it is likely still too early to be adding aggressively. Central Banks across the globe are still early in their hiking cycle. With the aggressive pace many countries are raising rates, there is an increased risk of a policy error of raising rates too high and crushing consumer demand. In addition, there have been some positive signs that inflation may have peaked, with supply chain pressures starting to ease and commodity prices falling. However, inflation readings have shocked the market to the high side multiple times this year. What matters is how quickly inflation falls and where it will settle at, both questions, in our opinion, remain too difficult to answer.
We believe markets will likely remain volatile with high uncertainty levels over the next few months. And as such, we think it would be unwise to chase the recent rally and would rather wait until economic data supports this call.
Monday 25 July 2022, 2pm
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This information is general in nature and is provided by Bentleys Wealth Advisors. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decision based on this information.