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. I’m Lyndon, and with me is David Colosimo. Hi David.
David: Hi Lyndon.
Lyndon: David is UniSuper's Head of Fixed Interest, and he's also an economist. As usual, he's here to talk us through what's been happening in investment markets lately, as well as what's on the horizon. David, let's not mess about because I can see your agenda over there and it does look like there's possibly even more to talk about than usual. So, if you don't mind, shall we just get straight into it?
David: Let's do it.
Lyndon: Excellent. Alright, let's start with some share market moves in October. Share markets seemed to start the month really strongly, but then they eased back a bit in the end didn't they?
David: That's right. Share markets in both the US and Australia—they hit new highs at the beginning of the month but then did soften and in the end, US shares were down about 1% and Australian shares slightly more than that. But it is worth keeping in mind this does come after a really strong run. The US market’s still up more than 36% since this time last year, and Australian shares up more than 20% over that time.
Lyndon: So not too much action in share markets there, David. What did we see in bond markets though? Was there any action there?
David: Yeah, we actually did see much bigger moves there. Government bond yields were up around 0.5% in both Australia and the US—that's a very big move in the space of just a month. But what makes it even more unusual is that it followed the beginning of interest rate cuts in the US, and when that happens, you actually expect bond yields to fall.
Lyndon: And so if that is unusual, what was driving the increase?
David: I think we can point to a few different things. The first one is the economic data—both the labour market and the inflation data were quite strong. That meant a lot of those expectations for really rapid or aggressive rate cuts by the Fed, they had to be wound back. A month ago, markets were looking for another seven rate cuts by the US, Fed by the middle of next year—now, that's only four. Second, I think that there were a lot of traders who were actually betting for those lower bond yields, and what we find in financial markets is when everyone's betting in the same direction, you can end up with a sharp move in the other direction when everyone winds back that bet. I think the third thing during the month was that there were increased expectations that not only would Donald Trump win the election, but the Republicans could also control both houses of Congress. You ended up seeing some common Trump trades, and one of those is higher bond yields. That's because he's talking about tax cuts and tariffs so that's really going to increase government spending and add to inflation.
Lyndon: And so with those higher bond yields, David, did they impact share markets at all?
David: Not necessarily at the aggregate level, but you can definitely see when you're looking at some of the sectors. Often the most defensive sectors are actually more sensitive to bond yields—utilities are a good example there. They were down 1% in the US, but 7% in Australia. APA and AGL were down more than 10% in the month.
Lyndon: Okay, let's switch gears. It is US reporting season. How are things going there?
David: We're a bit more than halfway through so far, and we're still following the familiar pattern. Usually, you get more companies beating analyst expectations than miss them, and we are seeing that play out again this quarter—and the number of beats, it's broadly in line with the usual kind of pattern.
Lyndon: And are there any highlights, David—anything standing out to you?
David: If we were to pick a couple, I think the banks have shown some big upside surprises, their share prices reflect that. JP Morgan and Bank of America, they're both up 5% this month. Wells Fargo is actually up 15%. On the big tech side, three of those big six tech companies – Google, Microsoft and Meta – they've now reported. They all had strong positive surprises in earnings in the quarter, but in some cases, there were a few concerns about the outlook for future earnings. Tonight, we get Apple and Amazon reporting—so that's 1 November. It wasn't long ago that those big six tech profits were growing at nearly 70%. That's slowed a bit – still 25% – that's obviously very strong. I think we'll probably see it slow further from here, but they're big enough now that that will drive a slowdown in earnings in the total market.
If you look past the tech sector—without tech, earnings would actually be close to flat overall because we're seeing earnings in some of the cyclical sectors really dragging on the overall market. Earnings in the energy sector, they’re down about 20% over the year.
Lyndon: Anything else of interest in the US there David, or are we ready to move on?
David: I don't think we can have podcast and not talk about AI. Nvidia doesn't report for another month, but it was up another 9% in October. That AI theme, it keeps broadening in really interesting ways. The big cloud providers that house those AI servers, they’re sometimes known as the hyperscalers – so think of names like Amazon, Microsoft, Google – they're the biggest ones there. They require an enormous amount of energy to power these servers and that's only going to increase. As a result, we're seeing these three big tech companies investing in nuclear energy to power their data centres, so nuclear stocks are actually a bit of a flavour of the day at the moment. Companies like Oklo and Centrus, they surged in October. Oklo was up more than 175% in the month.
Lyndon: I feel like that's a topic we could probably do a whole bonus episode on, David, but we'll leave it there for now. Back home now, it is AGM season in Australia. What's going on here?
David: Australian companies are about halfway through the AGM season, so that's annual general meetings. These mostly run through October and November. It's mainly about governance and voting, but companies will often give trading updates and possibly even update guidance at the same time.
Lyndon: And what are the companies saying, David? Is there anything coming out there?
David: The interesting thing for me is that we've seen tax cuts in the last few months and government subsidies for electricity bills, yet consumers still seem to be under pressure from cost of living. There's a bit of variation, but when you're looking at the updates from retailers, they still seem a bit weak on balance. Woolworths put out a first quarter sales update—their gross margins have actually started to fall. Its shares fell by 8% in October. Flight Centre, Supercheap Auto—they also indicated softer conditions. They're both down 28% and 20% respectively. But in the other direction, JB Hi-Fi had a strong sales update and they were up 2.5% in the month. Aside from that, it's actually management scandals that were the biggest driver of share price moves. The CEO of WiseTech, which is Australia's largest tech company, he stepped down—their shares fell 13%. And there was a tax evasion scandal which drove a 24% fall in Mineral Resources.
Lyndon: Okay, David, turning now to the month ahead. There is a lot going on in November, I think we can safely say, but I don't suppose we can really go past the US election.
David: No, I don't think we can avoid it. Voting is on Tuesday 5 November. Results will start filtering through over the course of that Australian daytime on Wednesday the 6th.
Lyndon: And, David, are you brave enough on this podcast to make a prediction, either on the election itself or on the impact on the market?
David: Nice try, Lyndon! No. No predictions here.
Lyndon: I had to give it a go.
David: I would note the following couple of things, though. The first is it's not just about who wins the presidency, but also who controls the House and the Senate because that dictates whether the new president is going to be able to advance their agenda or whether we see a little bit of policy gridlock. From that perspective, if Donald Trump wins, he's actually more likely to have control of both houses of Congress. That's often referred to as the Republican sweep. The reason for that is because the structure of the Senate makes it a bit easier for Republicans to win, but a Democratic sweep is a lot less likely, so a Harris administration is probably a little bit more hamstrung on policy than a Trump administration.
Secondly, it's still really hard to know which Donald Trump you're going to get. He speaks a lot, promises a lot of things. But the experience from his last presidency is that he doesn't follow through necessarily with a lot of those things.
The third thing I think that's really important—and this gets back to your question about the impact on the market—whether it's real or imagined, over the past month, the market's actually thinking that Trump has been pulling ahead of Harris. More importantly, it's also started to price that Republican sweep.
Lyndon: And what does a Republican sweep potentially look like?
David: You'd be seeing policies like higher tariffs, big corporate and personal tax cuts, a lot less regulation, more drilling for oil, more government borrowing. You put all those policies together and you get a collection of market moves, the so-called Trump trades—so higher bond yields, a stronger US dollar, stronger US equities, especially against non-US equities. Some of those impacts have already started to be priced in. If he does win, you'd probably get even more of the Trump trades, even higher bond yields, for example. But maybe not as much as you'd see the unwind that would happen if Harris wins—so the impact might be a bit asymmetrical.
Lyndon: Okay. Packing the crystal ball away for the moment, David, what is happening in Japan and China? We often talk about Japan and China. What's going on there?
David: I think we're seeing a lot of uncertainty in both countries. In Japan, the ruling LDP Party, they've had a period where they've had a really strong parliamentary majority. They've been able to execute their policy agenda. But we did have a recent election and they've lost that majority, and actually, no party won enough seats to form a majority. Negotiations are now ongoing to see whether we can see a coalition that will form, or maybe they'll be a minority government, but I fear that we're probably looking at a lot of political instability in Japan until we get a more stable government situation.
In China, shares fell a little bit in October. You might recall from our last podcast that we saw a real concerted policy stimulus effort by Chinese authorities in September and the share market surged. That was a really good start, but it's clear that the market only sees this as the beginning, and it's been waiting for a much bigger direct fiscal stimulus. The natural forum to announce that will be the National People's Congress—that's being held from 4 November to 8 November. If we don't see a big stimulus coming out of that, I think it's really likely that Chinese shares are at risk of a fall there.
Lyndon: Alright, any final comments before we wrap up, David?
David: In Australia, we're coming into an important sales period. We've got Singles Day, Click Frenzy, Black Friday, Cyber Monday all over the next month—they’re all going to be quite pivotal for the retail stocks. Also, we've got Australia's major banks reporting their own full year results in the next week or so. Bank balance sheets are still very strong. We expect that boards would probably be looking for further ways to get more capital back to shareholders, so potentially buybacks or special dividends.
Lyndon: Alright, well I better start getting my Black Friday shopping list together then, it sounds like. David, I think we're going to have to call it there. Thank you so much for your insights as always, it's going to be an eventful month, and we'll see you at the start of December for our final podcast of 2024.
David: Thanks, Lyndon. See you then.
Lyndon: And that is it for this episode. Thank you for listening. Don't miss out on future UniSuper podcasts. You can like and subscribe in your favourite podcast app or check unisuper.com.au/podcasts at the start of each month. Also, our Chief Investment Officer, John Pearce, released his latest investment update video a week or so ago so if you haven't already, do yourself a favour and check that out as well—it's available on our website and as always with John, it's a really interesting and insightful watch. 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 for joining us. 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.