ASX Market Update 6th November 2023

Global Market Commentary

Chart: S&P 500 as at 05/11/23

What a wild ride in markets it has been over the past week, especially in the US. The S&P500 rallied 5.8% and the NASDAQ saw 6.5% in gains as markets responded to largely softer than expected macro data, plummeting yields, a balanced Fed and short covering. This was the best week for the year to date for both indices. The XJO, whilst a bit more modest, also had a strong week up 2.2% driven by overseas markets.

Macro data in the US such as mortgage applications, ISM PMIs, ADP Jobs & NFP jobs data all came in much softer than expected and fueled the expectations that the Fed is now done hiking. There is now only a 4% chance of a hike in December and 10% chance in January being priced in, whilst a cut is fully priced in by June 2024. The Fed, also as expected, held on their cash rates and remained very balanced in their statement + Powells speech. There were both hawkish and dovish tones to take away from it with Powell announcing there still may be more to do if inflation doesn’t keep coming down but also recognizing the steepening of the yield curve doing a lot of the work for them. No nasty surprises though and the market seemed comfortable with it all.

Chart: US 10yr Treasury Yield as at 06/11/23

As mentioned above, and as you can see from the chart, 10yr yields plummeted 36bps in three days and are now 45bps from their highs made a little over a week ago. Again, reacting to the much softer than expected economic data, especially ISM Manufacturing PMIs which saw new orders print their lowest figures since June. The of course the weak NFP jobs data fueled bond purchases which of course drove yields down. Finally, there was talk last week Government bond issuance would fall into the end of the year helping to take pressure off liquidity.

Whilst Australian 10yr yields also fell, it was nowhere near as pronounced, falling 25bps to around 4.71%. They also now sit 14bps higher than their US counterparts and for the first time since July. This is obviously with the expectation there is more hikes to come from the RBA with the all-important Melbourne Cup meeting being held tomorrow. Almost all economists are saying the RBA will hike tomorrow based on the Q3 CPI data being stronger than expected, but the market isn’t as convinced only pricing in a 60% chance. I for one believe they will HOLD as many one-off factors played into that CPI data, plus the general trend is down and they have cited they want them back at 3% by mid-2025, so have plenty of time. Macro data is becoming really soft here in Australia as well as higher mortgage repayments, prices and fuel hit household budgets hard. My view is also a hike will not hit the target market it needs to with wealthy immigrants + retirees fueling consumption. The later would only benefit from a rise as cash rates would soon follow giving them more disposable income. Regardless of if there is a hike, I believe it is walked back in 2024 with two rate cuts.

Chary: S&P 500 Q3 Earnings results courtesy of @FactSet

With 81% of the S&P500 having now reported Q3 earnings we can put a line through that as a potential risk event with no nasty surprises coming from it thus far. 82% of companies reported better than expected earnings, which is well above the 5yr average of 77%. Remember generally analysts in the US are too pessimistic in the short term and optimistic in the longer term when it comes to earnings. Overall earnings are +3.7% for Q3 after it was expected we would see a 0.5% fall before reporting started. The lower income consumer is cutting back on spending whilst middle to high are generally ok. The strong USD is still wreaking havoc on those with 50% or more revenue coming from overseas with those companies seeing a 4.7% fall in earnings vs those with less than seeing a 6.8% rise. The tech giants are still seeing healthy growth in earnings, especially cloud with 20%+ growth rates still being seen there. Advertisers are also returning with google search seeing double digit growth for the first time since Q1 2022.

Overall, it paints a healthy picture but not one we didn’t expect. However, the S&P500 still trades at 17.8x forward earnings estimates, which is below the 5yr average (18.7x) but above the 10yr (17.5x). As I mentioned above analysts are generally too optimistic with their longer-term forward earnings estimates so I don’t think the SPX can live up to 10%+ earnings growth aspirations in 2024. The US economy has lots of headwinds in the next 12 months and I believe those figures are slowly revised down and hence that multiple will expand if we remain here. Not a cheap market at all.

S&P/ASX 200

Chart: S&P/ASX 200 as at 06/11/23

Despite a strong 2.2% rise in the XJO last week, technically the top 200 is still in a bearish down trend butting up against the top of the trend today and well below the 200dma. We have severely underperformed global equities as we don’t have the ‘Magnificent Seven’ tech stocks holding the index up, China’s economy is soft leading to lower commodity prices and earnings are expected to fall 5-6% in the 23/24 financial year. I do think this does bode well for us in 2024 as the worst is already factored in with earnings upgrades to come if China does recover, as I expect, and demand for commodities returns. We trade on a 14x forward multiple with 4.2% forecast yield, so hardly an expensive proposition. Bank earnings have started to drop with Macquarie & Westpac being first up.

Macquarie Group

*Chart: Macquarie Group as at 06/11/23

MQG 1H 23 earnings were very soft last Friday and missed consensus considerably by 15-20% with a 49% fall in earnings. This was mainly on the back of some unexpectedly higher costs and extra tax paid. Financial markets normalized across the first half, which saw less trading, due to subdued volatility and lower volumes across major share exchanges. Their green investments also saw less realized income. M&A was also down due to the higher rate environment, making such transactions less attractive. A dividend of $2.55ps was generally better than expected and a $2bill on market buy-back also helped market sentiment. This is being classed as a hangover from some very generous trading environments from 2020-2022 and management expects it pass quickly. Morgan Stanley has them trading on 13.5x FY25 earnings + 4.2% yield. This makes MQG an attractive investment proposition with management having a lot of runs on the board and most of this year’s result being out of their hands. I would look to accumulate MQG around these levels.

Westpac Group

*Chart: Westpac Banking Corp as at 06/11/23

Westpac released their FY23 results today and were largely inline with consensus, albeit with cautious commentary. Earnings were up 26% largely driven by net interest income, lower operating expenses, and a healthy corporate division. Their NIM was only up 2bps, but core NIM was +12bps. A 72cps final dividend sees them yield around 6.4% at current prices. It was noted they aren’t seeing mortgage holders stressed and falling behind in payments yet but sees a challenging environment continuing into 2024. A very strong capital position sees an unexpected $1.5bill on market buy-back announced which saw the stock also jump 4% today. I just can’t get excited about any of the banks here outside of CBA, and maybe ANZ. It’s a hold for me here with significant headwinds ahead due to continued fixed rate mortgage roll overs only being about half done.

Lithium

The lithium sector is tough to pick at the moment with mixed signals coming from the industry. Chinese spot/futures prices remain soft with 11 days straight of falls recently, however commentary from some of the largest producers and M&A activity has seen some positive sentiment return to stocks. Albemarle reported their Q3 earnings last Friday and whilst they were very soft, due to falling prices, their commentary was upbeat. They noted, as the chart above depicts, that lithium inventory levels in China have fallen considerably and that destocking is basically over in their view. They would expect to see increased demand moving forward as battery/car manufacturers have to build inventory again. Also, BYDs Q3 results, the worlds largest EV maker, showed there is still massive demand for their cars with 2.4mill car produced for the first three quarters this year vs 1.4mill for the same time last year.

Finally, M&A activity is rife here in Australia with mixed fortunes. Albemarle tried to take over Liontown Resources (LTR) but was blocked with Gina Reinhart building a 20% blocking stake. SQM then came swooping in making a huge bid for Azure Minerals (AZS), but then Gina again came in with a 18% blocking stake again. To top is all off Mineral Resources (MIN) have now also built a 12% stake as well making it a messy proposition for SQM. MIN also have large stakes in a few micro-cap companies and recently put a down payment on the old Bald Hill lithium mine which went bust under Alita a couple years ago. No one knows Gina’s or MIN strategy when it comes to AZS and LTR but what I found remarkable is how early stage AZS is and its subject to such takeover movement. They have put a few drills down but don’t even have their maiden JORC out yet. Their exploration estimate is for 100-240mt @ 1.5% Li, which is a decent sized project. The large producers in the industry are using the suppressed stock prices as opportunities to add their future production capabilities and I would expect more.

For me players such as Patriot Battery Metals (PMT) & Winsome Resources (WR1) could also be takeover targets with companies like Pilbara Minerals (PLS) admitting they are on the hunt and are loaded up with cash. I think they are worth adding at current prices as very speculative, high-risk plays, and own them personally and for existing clients.

Everywhere you look there is a different story and different take on markets. I feel that just adds to the uncertainty of where we are at. I am not convinced this rally is anything but a bit of relief and short covering. Whilst markets have reacted positively to the initial notion of lower yields and cuts being priced in again, eventually if data continues to soften then earnings revisions will come down and markets will have to head lower. I believe the best buying opportunities are ahead of us.

We had a busy weekend as we ventured out into the city at 4am on Saturday to get a prime position for the Christmas Pageant. It was well worth it in the end as the kids had a terrific time, and the jolly fat man came to town. Our Christmas trees are up, and we are ready for the festive season. Yes, we have two trees, one for the kids and one for the family. This is my favourite time of the year, and I really can’t wait for the festivities to go up a notch. I hope you all have a wonderful and safe week. I will speak to you all soon. Go Crows!

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.