Disclaimer: What you're about to read is of a general nature and doesn't take into account your personal financial situation, needs or objectives. We recommend you seek financial advice before making any decisions about your super and consider the relevant UniSuper PDS and TMD.
Lyndon: Hello, this is Super Informed Radio, the official UniSuper podcast. My name is Lyndon, and being the first business day of the month, I'm here in the studio with UniSuper economist and investment manager, David Colosimo, to cover off what's been happening in investment markets recently, and what might be on the horizon. David, welcome.
David: Thank you Lyndon, great to be here.
Lyndon: David, I feel like more seems to have happened in the last month than what might normally happen in the space of a month. We've had some big developments in US politics, for one. There's been some news, I think, in the last day or so on the outlook for interest rates and what the RBA might or might not do next week, and we've also had that global IT outage. You must have a fair bit to cover off today.
David: Yeah, it certainly feels a lot busier than normal, Lyndon.
Lyndon: Alright—let's jump straight in then. We'll start with July and shares, if that's cool. They seemed to do pretty well here in Australia.
David: Yeah. Australian shares were actually up 4% in July, so that's actually a very strong number. That beat US shares, which were up just 1%.
Lyndon: And on US shares, David, only a small rise in shares in July. Was anything in particular behind that?
David: We did actually see some quite big changes under the hood. There was a real rotation away from the big tech names. The one big investment theme over the past year or two has really been the dominance of the mega-cap tech names in the US—so Microsoft, Apple, Nvidia, Google, Amazon and Meta, often referred to as the ‘Big Six’. That changed really quickly this month. In July, Microsoft, Meta, Google, Nvidia—they were all down about 5-6%, Amazon was down about 3%. But during the month, the actual falls were much bigger than that, so at one point, Nvidia was down more than 16%, for example. Of the Big Six, it was only Apple that managed a gain—it was up around 5%.
A lot of the smaller semiconductor or computer chip companies also got caught up in this weakness. Names like Advanced Micro Devices and Qualcomm—they were down 11% and 9%, respectively.
Lyndon: And what triggered such an abrupt change, David—because we did see some big falls in share prices, didn't we?
David: When you're talking about the computer chips, we can point to a few things. President Biden was suggesting further trade restrictions on chip makers that are selling US technology into China. Presidential candidate Trump was commenting that Taiwan—which is where all the best computer chips are manufactured—wasn't paying enough for US protection from China, but I think that actually masks the bigger issue.
The AI boom had been going on for a long time and increasingly, the trade became very crowded—and by that, I mean there were too many investors all positioned in the same way for it to keep going up, and many of these investors had probably borrowed to fund those positions as well. In that situation, it doesn't take much to force an unwind. Everyone rushes for the exit at the same time to lock in profits or to avoid losses, and you really did see a couple of other trades get caught up in that as well. They all unwound around the same time.
Lyndon: And what trades were they, David?
David: Things like the hype that we've seen around weight loss drugs, for example—that also suffered. There's a company from Denmark called Novo Nordisk, they produce Ozempic. That was down 9% in July, and then US pharmaceutical company, Eli Lilly, was down 11%. The long copper trade, which has been quite strong recently, and the weaker Japanese yen trade, they also reversed really quickly at the same time.
Lyndon: Okay. So, if all the biggest US tech companies and all the semiconductor names fell so sharply, David, how did the US market still manage to finish up in July?
David: Well, basically every other company did well, as investors rotated into those shares as well. Keep in mind that during the month, there was some softer US inflation data—that boosted expectations that the US Federal Reserve is going to cut rates, so that's normally a good environment for shares. So, while we saw the big tech names were weak, actually, nine out of the 11 different sectors in the US market actually finished up. There was that really broad based increase in the rest of the market. A good way to see that is that there's this US equal weighted index. That was up by more than 4%, which is much stronger than the index that measures by market weight, which as I said, was up by only 1%. I suppose you had a high number of smaller shares that went up in price versus a small number of the bigger shares that went down in price. In fact, it was many of the out-of-favour sectors that actually did quite well. The US small caps index was up by more than 10% in July, and the smaller regional US banks, which until recently had been quite weak, they rebounded really strongly. PNC and Truist, for example, they were up 15% or 16% each in the month.
Lyndon: The bigger dynamics seemed to be in the US then. Did those dynamics contribute to the strong month that we had here in Australia?
David: Australia doesn't really have a big tech sector like the US, so the gains outside of tech had a bigger impact on the Australian market. In Australia, the strongest sector was actually consumer discretionary, so we're now starting to hear reports that household spending is really starting to pick up given the benefit from those mid-year tax cuts. Names like Wesfarmers, JB Hi-Fi, Harvey Norman—they were all up between 13-15%. In Australia, it was really only the utilities, energy and the resource sector that fell. Resources in particular are struggling on continued concerns around commodity demand from China. I did mention in our last podcast that there were two big policy meetings coming up in China in July. So, there was the Third Plenum—that only happens every five years—and there was also a Politburo meeting. Following those meetings, policymakers did deliver some interest rate cuts but there's just such structural problems in China—around housing in particular—that we wouldn't expect those small interest rate cuts to be as effective as, say, for example, a big fiscal package from the government.
Lyndon: Alright, David—we're about halfway through US reporting season and we haven't covered that off yet. Any updates or comments from you there?
David: To some extent it's really followed the usual pattern. There's more companies that are beating analyst expectations compared to those that are missing expectations—but this time around, the size of those surprises hasn't actually been that large. The ‘Big Six’ tech names are actually still dominating. In aggregate, they'll probably deliver earnings growth of about 25% this year whereas across the rest of the market, earnings growth is probably only just marginally positive. Many of the big tech names like Microsoft and Google—they’re actually still beating expectations, but sometimes they're still having a negative market reaction on the day. In Google's case, it was actually concerns over how much they’re going to need to spend in capital expenditure on AI and whether they're actually going to get enough financial return on that spending.
Lyndon: Alright, looking at what's on the horizon for the month ahead now, David—we have Australian reporting season coming up too. What are you expecting there?
David: So, these are the results for last financial year. Over the last couple of months, expectations have been pared back, and now the market expects that across the total market, earnings probably fell about 5% or 6% last year. That's really driven by the resource sector, where earnings are down by about 20%, but bank earnings are also slightly softer. If you exclude those two sectors, as well as the property sector, you'll see earnings growth across the rest of the market probably in the high single digits.
Lyndon: So, David, if earnings fell last year, what's been behind the strength in the market?
David: At a certain point, the market starts looking forward to next year's earnings, and things are looking much better here. Analyst expectations are currently for earnings growth of about 10% across the whole market. That's being driven by a strong rebound in resource earnings. Earnings growth in the property sector’s also probably going to accelerate after a couple of lean years, though bank earnings are forecast to stay quite soft.
The key for the market will be those forward-looking comments and how that impacts analyst expectations for the current year. Keep in mind, Australian households did enjoy that tax cut at the beginning of July. Management have now had enough time to assess the initial impact, and we are starting to see some comments from some results about a pickup in sales. The usual pattern is for earnings expectations to be scaled back over the course of the year and in August in particular—so it really becomes a question of the magnitude of that, that will have the impact on markets.
Lyndon: Okay, well perhaps we'll have a chance to get a rundown of how reporting season went in our next podcast, David. Turning to central banks now, as we often do—the US Fed met last night, didn’t they?
David: Yeah. They held rates steady for the eighth consecutive meeting. Their next decision is due on 18 September, and unless we get some stronger inflation numbers between now and then, all indications are that they will actually deliver their first rate cut at that meeting. Towards the end of August, the US Federal Reserve host an important meeting of global central bankers that's held every year in Jackson Hole, and we think at that point, Fed Chairman Powell is probably going to lay out the case for that rate cut so we’ll be watching that quite closely.
Lyndon: And now the big one David, the RBA—we’re all, I think, waiting for your thoughts there.
David: As we mentioned last month, there had been this real risk that strong inflation may force the RBA to a position where they had to contemplate a rate hike at their next meeting on 6 August.
Lyndon: But it sounds like that risk may have subsided a bit. Is that right?
David: Yeah. Just yesterday, we had this really favourable inflation report for the June quarter. Inflation's actually still running broadly in line with the RBA's forecasts and given the signs of weaker inflation we've seen elsewhere in the world, it looks like the RBA will continue to be patient and just leave rates on hold again this month.
Lyndon: Okay. Well perhaps some relieving news for Australian mortgage holders then. David, as always, thank you so much for being here. We really do appreciate you coming in every month and sharing your insights, and we look forward to hearing from you again this time next month.
David: See you then, Lyndon.
Lyndon: And that’s it for this episode, don't miss out on future episodes. Subscribe to us wherever you get your podcasts or check unisuper.com.au/podcasts at the start of each month. Before we go, UniSuper’s Chief Investment Officer, John Pearce, put out his latest investment update video last week. So, if you haven’t seen that already, do check it out. It’s available on our website and we’ll also put a link to it in our show notes as well.
We are UniSuper, the place where bright minds and passionate people strive to think great and create a future worth retiring for. If you'd like more information about our investments, visit unisuper.com.au. Thank you again for listening, we’ll see you next time, and until then—look forward, think great, with UniSuper.
This podcast is general in nature, and it doesn't take into account your financial situation, needs or objectives. So, before you make any decisions about your super, we recommend that you seek financial advice first. Also, make sure you've had a read of the Product Disclosure Statement and the Target Market Determination that's relevant to you. They are all available on our website. It goes without saying that the past performance of any investment options that we talk about isn't indicative of their future performance, and it's worth noting as well that just by talking about certain companies, we aren't endorsing them for you to include in your own portfolio.