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 I am here with UniSuper economist and investment manager, David Colosimo. David, welcome.
David: Thank you, Lyndon. Good to be back
Lyndon: Now, David, regular listeners will know that each month, you bring us up to speed with what's been happening in investment markets as well as what you and the team are looking out for in the month ahead. There are quite a few things to talk about today, because the US Federal Reserve has finally cut rates and I saw that Chinese policymakers have delivered a big stimulus, and Japan even has a new Prime Minister—all of which I'm sure will form part of our discussions today. Should we get down to it, David?
David: Let's do it.
Lyndon: Alright. Well, how about we start with Australia and the US because it looks like, once again, the market was able to shrug off some volatility early in the month and post a solid gain in the end.
David: Yeah Lyndon, the US especially. At one point, US shares were down more than 4%, but they did recover—they finished up about 2% in September. Australian shares were also up about 2%, so, a solid month all round.
Lyndon: And now the big event in the US of course, was that first interest rate cut by the Federal Reserve. They decided to go for a 0.5% cut rather than the I think it was a 0.25% cut that was expected there. Did that surprise you, David?
David: Yeah, it was a bit of a surprise. When it comes to interest rate moves, the Fed's usually quite good at shaping market expectations in the lead-up to their meeting—it likes to avoid those big surprises. But in this case, there was a lot more uncertainty. Financial markets were still very split between whether it would be a 0.25% or 0.5% cut.
Even the Fed actually seemed quite undecided—so for the first time in nearly 20 years, the decision wasn't a unanimous one. One Fed governor voted for a smaller 0.25% cut.
Lyndon: And so what sort of signal does that bigger cut send about how the Fed is thinking?
David: I think it confirms how much their priorities have changed. For the last three years, it's been all about getting inflation back under control—that was the biggest factor driving monetary policy. That can actually be a dangerous place for policymakers because they might be reluctant to cut rates, even as they see growth softening. You can miss a big deterioration in the economy.
But now, the Fed's effectively declared victory against inflation, so looking forward, it's going to be more attentive to growth and the labour market rather than inflation. That's a better position to be in because if the economy does falter, it's more likely that they’ll cut rates faster and harder.
Lyndon: In terms of shares, David, are rate cuts normally good for shares?
David: Well, I think that depends. If you look through history, share markets are usually weak when the Fed starts cutting rates, but that's because the economy's either in recession or about to be in recession. Recessions are bad for earnings, so rate cuts aren't going to do much to offset that. Occasionally, though, the Fed manages to cut rates and avoid a recession. In that case, earnings stay quite solid. You combine that with rate cuts—it means that shares actually do quite well, and that feels like the situation we're in at the moment. The Fed looks like it'll navigate a soft landing. Employment growth has softened a little bit—it's not quite as easy to find a new job—but at this stage, not many people are losing their jobs, so it still suggests the economy's holding up quite well. I've said that's usually a good environment for shares, but I would add that the US share market’s already up more than 50% in the last two years, so maybe a lot of that good news is already reflected in the share prices.
Lyndon: So, David, turning to China now and as I mentioned before, Chinese shares have been pretty strong in the last week after those big stimulus measures that policymakers made. What prompted them into action, finally?
David: We've covered the economic problems in China quite a few times over the last couple of years. The economy's been undergoing a painful adjustment in the housing sector—so there's an oversupply of housing, property developers have been failing, prices and construction activity have been falling. On top of that, local government revenues have been very weak, and the economy's been close to deflation because there's a lot of excess supply within the economy.
Traditionally, when policymakers have wanted to boost the economy, they've resorted to a few familiar playbooks. They encourage housing, or they build government infrastructure, or they look to boost exports. But they've been reluctant to push too hard here because a lot of those policies would just make the existing problems worse. We've seen only piecemeal easing policies thus far, and none of them seemed quite powerful enough to break the weak cycle
Lyndon: So what changed there, David? Why are the policymakers so intent on boosting growth now?
David: I think it just became clear that things were getting worse rather than better. Recent economic data made quite clear that they were going to miss their 5% growth target for this year, and when you've got the Fed cutting, it also makes it a little bit easier for policymakers there to cut interest rates because you've got less pressure on exchange rates
Lyndon: In terms of the actual stimulus measures, David, what are some of the measures that they've delivered?
David: It's been a real coordinated policy effort across lots of different branches of government, and it's all been delivered in the space of just a few days. You've seen lower interest rates, including a 0.5% cut to mortgage rates. You can now have a lower down payment if you want to buy an investment property. There was more financing for governments to buy unsold private housing. There's funding to buy shares. There's talk of an injection of capital into the banks. Finally, there have been some cash handouts for the very poor. Some of those policies are just more of what the government's already done, but it's the last one for me, those cash handouts, that I think are the most interesting. From the outset, the Chinese government's been reluctant to go down this path, and that actually seemed like ideological reasons. But if you have a problem with deflation, that suggests there's too much supply, and not enough demand. In the last few years, the experience of western economies has shown that if you give direct cash handouts to households, it's very effective at creating demand and generating inflation.
Lyndon: Some might say a little too good, David!
David: In our case it was definitely too much inflation! But given all the problems in China, I actually think it's probably the most effective policy to get demand going.
Lyndon: Equity markets certainly seem to like it. Can that last?
David: They certainly did like it. Chinese shares are up 25% in the space of one week alone, but I think there are market dynamics at play there as well. A lot of international investors were underweight their China exposure, so some of them had to buy to cover that risk. Now, whether that share market rally sustained depends on how successful the policies are at putting a floor under house prices, whether those policies can boost demand, and whether they can end deflation.
Lyndon: And bringing all that back into a local context, David, Australian resources companies, as we know, have a pretty big exposure to China. What's the impact been like on the Australian share market?
David: Resource companies are up more than 9% in September. The big names like BHP and Rio were up 13% and 16% respectively. Given that strength, you've had to see a bit of a rotation out of Australia's banks. They're down a bit more than 1% in the month, so this is a big reversal on the trend that we've seen for the first eight months of the year, when banks beat resources by more than 40%.
Lyndon: Speaking of trends, David, are there any more that you'd like to highlight? For example, I've seen a few government ads about those electricity subsidies and so on. Have you seen much of an impact from tax cuts coming through?
David: By the time our listeners hear this, we will have received some official retail sales data in Australia. That will give us some indication on whether people are spending or saving those tax cuts. But up until then, I have seen some analysis suggesting the tax cuts are largely being saved rather than spent.
Lyndon: Right.
David: We did have Premier Investments—they own a lot of clothing retailers—they reported earlier this month. The chairman there noted that consumers are the most stressed he's ever seen them. Its shares were down more than 12% in the month. Woolworths and Coles shares were also down 7% and 4% respectively this month, but that was after the ACCC announced it has commenced proceedings against them.
Lyndon: Rounding out our busy month then, David, just quickly, a new prime minister in Japan.
David: Yeah, the Liberal Democratic Party chose Shigeru Ishiba as the new prime minister of Japan. He's previously spoken a lot about raising corporate taxes. That helps explain why Japanese shares were down 2.5% in September.
Lyndon: Alright. Looking ahead to October, David. Any Fed or RBA meetings that we need to have on our radars?
David: The next monetary policy meetings for both the RBA and the Fed aren't until early November so still some time away. Earlier we were speaking about the Fed—they've declared victory against inflation when they started cutting rates but the RBA is still fighting that battle. They noted in their September meeting that the board was still vigilant about inflation risks—so basically, underlying inflation is still too high here and falling only slowly. That makes the inflation report that's due out on 30 October pretty crucial for the RBA. The headline numbers are going to come down, we've seen those government subsidies on electricity pushing down prices. But the RBA has been quite clear that it wants to focus on underlying inflation measures. It doesn't feel like we'll see a near-term rate cut here just yet.
Lyndon: It feels like no sooner did US reporting season finish than it's about to crank up again, David. Is there anything to note there from you as well as maybe any other final thoughts?
David: It does come around very quickly. The big banks are going to be the first to report from the middle of October. The big tech companies report closer to the end of the month. I would also note that we are getting ever closer to that US election—that's on 5 November. That race still looks very tight, so could still be impacting markets going forward. Finally, still paying close attention to what's happening in China—do they follow up with any more measures, how do they see those through? We do have an important policy meeting of the National People's Congress in late October.
Lyndon: Done and done. Well, David, it is always great to catch up with you. Thank you for coming in—only two more episodes to go for the year. We’re nearly done for 2024!
David: The year does go very quickly!
Lyndon: Far too quickly for my liking. Anyway, thank you again for joining us and we'll see you next month! And that's it for this episode. Don't miss out on future UniSuper Podcasts. Subscribe to us wherever you get your podcasts or check unisuper.com.au/podcasts at the start of each month. 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 will 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.
David: Thank you, Lyndon. Good to be back
Lyndon: Now, David, regular listeners will know that each month, you bring us up to speed with what's been happening in investment markets as well as what you and the team are looking out for in the month ahead. There are quite a few things to talk about today, because the US Federal Reserve has finally cut rates and I saw that Chinese policymakers have delivered a big stimulus, and Japan even has a new Prime Minister—all of which I'm sure will form part of our discussions today. Should we get down to it, David?
David: Let's do it.
Lyndon: Alright. Well, how about we start with Australia and the US because it looks like, once again, the market was able to shrug off some volatility early in the month and post a solid gain in the end.
David: Yeah Lyndon, the US especially. At one point, US shares were down more than 4%, but they did recover—they finished up about 2% in September. Australian shares were also up about 2%, so, a solid month all round.
Lyndon: And now the big event in the US of course, was that first interest rate cut by the Federal Reserve. They decided to go for a 0.5% cut rather than the I think it was a 0.25% cut that was expected there. Did that surprise you, David?
David: Yeah, it was a bit of a surprise. When it comes to interest rate moves, the Fed's usually quite good at shaping market expectations in the lead-up to their meeting—it likes to avoid those big surprises. But in this case, there was a lot more uncertainty. Financial markets were still very split between whether it would be a 0.25% or 0.5% cut.
Even the Fed actually seemed quite undecided—so for the first time in nearly 20 years, the decision wasn't a unanimous one. One Fed governor voted for a smaller 0.25% cut.
Lyndon: And so what sort of signal does that bigger cut send about how the Fed is thinking?
David: I think it confirms how much their priorities have changed. For the last three years, it's been all about getting inflation back under control—that was the biggest factor driving monetary policy. That can actually be a dangerous place for policymakers because they might be reluctant to cut rates, even as they see growth softening. You can miss a big deterioration in the economy.
But now, the Fed's effectively declared victory against inflation, so looking forward, it's going to be more attentive to growth and the labour market rather than inflation. That's a better position to be in because if the economy does falter, it's more likely that they’ll cut rates faster and harder.
Lyndon: In terms of shares, David, are rate cuts normally good for shares?
David: Well, I think that depends. If you look through history, share markets are usually weak when the Fed starts cutting rates, but that's because the economy's either in recession or about to be in recession. Recessions are bad for earnings, so rate cuts aren't going to do much to offset that. Occasionally, though, the Fed manages to cut rates and avoid a recession. In that case, earnings stay quite solid. You combine that with rate cuts—it means that shares actually do quite well, and that feels like the situation we're in at the moment. The Fed looks like it'll navigate a soft landing. Employment growth has softened a little bit—it's not quite as easy to find a new job—but at this stage, not many people are losing their jobs, so it still suggests the economy's holding up quite well. I've said that's usually a good environment for shares, but I would add that the US share market’s already up more than 50% in the last two years, so maybe a lot of that good news is already reflected in the share prices.
Lyndon: So, David, turning to China now and as I mentioned before, Chinese shares have been pretty strong in the last week after those big stimulus measures that policymakers made. What prompted them into action, finally?
David: We've covered the economic problems in China quite a few times over the last couple of years. The economy's been undergoing a painful adjustment in the housing sector—so there's an oversupply of housing, property developers have been failing, prices and construction activity have been falling. On top of that, local government revenues have been very weak, and the economy's been close to deflation because there's a lot of excess supply within the economy.
Traditionally, when policymakers have wanted to boost the economy, they've resorted to a few familiar playbooks. They encourage housing, or they build government infrastructure, or they look to boost exports. But they've been reluctant to push too hard here because a lot of those policies would just make the existing problems worse. We've seen only piecemeal easing policies thus far, and none of them seemed quite powerful enough to break the weak cycle
Lyndon: So what changed there, David? Why are the policymakers so intent on boosting growth now?
David: I think it just became clear that things were getting worse rather than better. Recent economic data made quite clear that they were going to miss their 5% growth target for this year, and when you've got the Fed cutting, it also makes it a little bit easier for policymakers there to cut interest rates because you've got less pressure on exchange rates
Lyndon: In terms of the actual stimulus measures, David, what are some of the measures that they've delivered?
David: It's been a real coordinated policy effort across lots of different branches of government, and it's all been delivered in the space of just a few days. You've seen lower interest rates, including a 0.5% cut to mortgage rates. You can now have a lower down payment if you want to buy an investment property. There was more financing for governments to buy unsold private housing. There's funding to buy shares. There's talk of an injection of capital into the banks. Finally, there have been some cash handouts for the very poor. Some of those policies are just more of what the government's already done, but it's the last one for me, those cash handouts, that I think are the most interesting. From the outset, the Chinese government's been reluctant to go down this path, and that actually seemed like ideological reasons. But if you have a problem with deflation, that suggests there's too much supply, and not enough demand. In the last few years, the experience of western economies has shown that if you give direct cash handouts to households, it's very effective at creating demand and generating inflation.
Lyndon: Some might say a little too good, David!
David: In our case it was definitely too much inflation! But given all the problems in China, I actually think it's probably the most effective policy to get demand going.
Lyndon: Equity markets certainly seem to like it. Can that last?
David: They certainly did like it. Chinese shares are up 25% in the space of one week alone, but I think there are market dynamics at play there as well. A lot of international investors were underweight their China exposure, so some of them had to buy to cover that risk. Now, whether that share market rally sustained depends on how successful the policies are at putting a floor under house prices, whether those policies can boost demand, and whether they can end deflation.
Lyndon: And bringing all that back into a local context, David, Australian resources companies, as we know, have a pretty big exposure to China. What's the impact been like on the Australian share market?
David: Resource companies are up more than 9% in September. The big names like BHP and Rio were up 13% and 16% respectively. Given that strength, you've had to see a bit of a rotation out of Australia's banks. They're down a bit more than 1% in the month, so this is a big reversal on the trend that we've seen for the first eight months of the year, when banks beat resources by more than 40%.
Lyndon: Speaking of trends, David, are there any more that you'd like to highlight? For example, I've seen a few government ads about those electricity subsidies and so on. Have you seen much of an impact from tax cuts coming through?
David: By the time our listeners hear this, we will have received some official retail sales data in Australia. That will give us some indication on whether people are spending or saving those tax cuts. But up until then, I have seen some analysis suggesting the tax cuts are largely being saved rather than spent.
Lyndon: Right.
David: We did have Premier Investments—they own a lot of clothing retailers—they reported earlier this month. The chairman there noted that consumers are the most stressed he's ever seen them. Its shares were down more than 12% in the month. Woolworths and Coles shares were also down 7% and 4% respectively this month, but that was after the ACCC announced it has commenced proceedings against them.
Lyndon: Rounding out our busy month then, David, just quickly, a new prime minister in Japan.
David: Yeah, the Liberal Democratic Party chose Shigeru Ishiba as the new prime minister of Japan. He's previously spoken a lot about raising corporate taxes. That helps explain why Japanese shares were down 2.5% in September.
Lyndon: Alright. Looking ahead to October, David. Any Fed or RBA meetings that we need to have on our radars?
David: The next monetary policy meetings for both the RBA and the Fed aren't until early November so still some time away. Earlier we were speaking about the Fed—they've declared victory against inflation when they started cutting rates but the RBA is still fighting that battle. They noted in their September meeting that the board was still vigilant about inflation risks—so basically, underlying inflation is still too high here and falling only slowly. That makes the inflation report that's due out on 30 October pretty crucial for the RBA. The headline numbers are going to come down, we've seen those government subsidies on electricity pushing down prices. But the RBA has been quite clear that it wants to focus on underlying inflation measures. It doesn't feel like we'll see a near-term rate cut here just yet.
Lyndon: It feels like no sooner did US reporting season finish than it's about to crank up again, David. Is there anything to note there from you as well as maybe any other final thoughts?
David: It does come around very quickly. The big banks are going to be the first to report from the middle of October. The big tech companies report closer to the end of the month. I would also note that we are getting ever closer to that US election—that's on 5 November. That race still looks very tight, so could still be impacting markets going forward. Finally, still paying close attention to what's happening in China—do they follow up with any more measures, how do they see those through? We do have an important policy meeting of the National People's Congress in late October.
Lyndon: Done and done. Well, David, it is always great to catch up with you. Thank you for coming in—only two more episodes to go for the year. We’re nearly done for 2024!
David: The year does go very quickly!
Lyndon: Far too quickly for my liking. Anyway, thank you again for joining us and we'll see you next month! And that's it for this episode. Don't miss out on future UniSuper Podcasts. Subscribe to us wherever you get your podcasts or check unisuper.com.au/podcasts at the start of each month. 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 will 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.