Equities had a positive week, with the ASX200 rising 1.5%. The best performer was the Utilities sector, which rose 5.7%, followed by Materials and Energy, which increased by more than 5%. The worst performers were the Health Care sector which fell 2.5%, and Industrials, which fell over 1%. The US market also rose strongly over the week, with the S&P500 up 1.8%, with technology stocks continuing their rebound from recent lows. Bond yields rose further as the US Federal Reserve became more hawkish. The yield curve continued to flatten, with short-term rates rising faster than long-term rates.
In economic news, Fed Chair Powell admits Fed “widely underestimated” how long inflationary pressures would last. The Fed is now willing to move more aggressively by raising more than 25bps at a meeting if Fed deems it necessary. Opening the door for faster and higher interest rate rises to combat inflation. UK inflation was higher than expected in February, coming in at 6.2% year over year. Business condition indicators were above expectations in the US, Europe and Australia but still indicate slowing growth.
National Australia Bank (NAB) completed a $2.5billion on-market buyback and will commence a further $2.5billion on-market buyback. After this move, NAB’s balance sheet will remain strong with its Core Equity Tier 1 (CET1) ratio staying well above the “unquestionably strong” threshold defined by APRA.
Fisher & Paykel Healthcare (FPH) provided FY22 revenue guidance below consensus. Margins will also remain pressured with ongoing supply chain issues. Premier Investments (PMV) half-year results demonstrated their retail businesses remained resilient in difficult trading conditions with lockdown related store closures. EBIT margins continue to improve with rental rebasing negotiated with landlords and a higher proportion of online sales.
For the week ahead, investors will closely review the Australian Federal budget. The US jobs data is expected to show a further decrease in the unemployment rate. At the same time, US GDP and consumer confidence releases will help assess the state of the economy. China Purchasing Manager Index figures will show the impact of continued Covid lockdowns.
What is stagflation?
You may have seen stagflation mentioned in the financial press recently. Some market commentators fear that this 1970s crisis may again rear its ugly head with high inflation figures and rising oil prices. We thought it would be helpful to explain what this concept means and the likelihood of it occurring in the current environment.
What is stagflation?
Stagflation is a combination of the two words stagnation and inflation. It occurs when the economy is experiencing falling output (or slow growth), high unemployment, and high inflation all at the same time. Stagflation is feared as this combination of factors creates a lot of pain for households and is difficult to solve. Many people lose their jobs while at the same time the cost of living rises. And poorer households are hit particularly hard as they have less of a savings safety net. Stagflation presents a complex problem for central banks and governments to fix. The standard method of fighting inflation, raising interest rates, risks a slowdown of the economy and greater unemployment. Further, the usual way of stimulating the economy, cutting interest rates, risks exacerbating inflation.
What causes stagflation?
There is no consensus view amongst economists on the cause of stagflation. The most accepted explanation is a combination of a supply shock and poor monetary policy.
A supply shock often involves a critical commodity such as oil. A sudden reduction in supply pushes up prices, which feeds into broader price pressures, given its crucial role in the economy. It also dampens economic growth by making production more costly and less profitable, reducing business investment.
Poor monetary policy, such as increasing the money supply too quickly, also plays a role in inflation and can lead to a price and wage spiral.
Are we likely to see stagflation now?
The critical question is how effective central banks will be at taming inflation. And whether in fighting inflation, rates will need to rise to a level where they hamper economic growth and lead to higher unemployment levels.
Central banks worldwide have started raising interest rates, or in the case of Australia, flagged that they will soon begin the process to tackle high inflation figures. Taking decisive early action is viewed as key to bringing down inflation in a controlled manner.
As we have run through in recent updates, the Australian economy remains strong. We have a buoyant jobs market and robust economic growth as we continue to benefit from a post-Omicron wave rebound. The US economy remains healthy. China has also started to ease monetary policy, likely leading to an economic growth recovery in the coming months. Also, consumers around the globe have record levels of savings and should be able to withstand rising rates.
Further, the current supply-side oil shock resulting from the Ukraine war is less impactful than previous oil shocks in the 1970s when stagflation last occurred. Commodity prices have eased back slightly from recent highs but remain elevated compared to pre-invasion levels.
Considering these factors, stagflation is not our current base-case scenario. However, its probability has risen over the last couple of months. Inflation remains stubbornly high, and much uncertainty remains about the path forward with the war and how successful central banks will be at controlling inflation.
We responded by making slight adjustments to our asset allocations last month to protect client capital. We are also adding some alternatives exposure to help diversify the portfolio. We recognise the difficulty of timing the market and we strongly believe that investors should remain invested throughout the cycle and over the long-term. However, we felt it was prudent to make these adjustments to manage overall portfolio risk.
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Tuesday 29 March 2022, 10am
For more information on the above please contact Bentleys Wealth Advisors directly or on +61 2 9220 0700.
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.
