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 as usual, I'm here to help bring you up to speed with what's been happening in investment markets as well as what our investment team is looking out for in the month ahead. I am joined once again here in the studio by UniSuper Economist and Investment manager, David Colosimo. David, welcome.
David: Thank you, Lyndon.
Lyndon: And I'd also love to welcome a very special guest to the podcast today. So, it is company reporting season at the moment, so for UniSuper as an investor, that means that folks from our Investment team have been meeting with some of Australia's largest companies over the last month or so, and Penny Heard is UniSuper's Head of Australian Equities, and she and her team have been in the thick of all those meetings and we are absolutely thrilled to welcome her today to share her insights. Penny Heard, welcome to Super Informed Radio.
Penny: Hi Lyndon, it’s great to be here.
Lyndon: We'll come to reporting season shortly, Penny. But first, I think let's start with you, David, in terms of recapping share markets over the last month. On the surface it kind of looked like plain sailing, but is it maybe a case of ‘looks can be deceiving’?
David: That's very true, Lyndon. The US share market is a great example of that. It was up over 2% in August—sounds pretty good. It's the fourth month in a row of positive returns, so, as you say, on the face of it, that sounds like plain sailing. But that hides some pretty violent moves in both directions in August, which I'm sure many of our listeners are aware of. After reaching all-time highs in mid-July, the US share market fell nearly 8.5% in less than three weeks. But the good news is that it's already made almost all of that back—we're almost back to all-time highs.
The Australian market's pretty similar to that, actually. It was basically flat in August, but at one stage it too was down nearly 6%, and that happened in just two days. But again, just like the US share market, it's made almost all of that back and we did see sharp moves in a lot of other markets as well, Japan in particular.
Lyndon: We are often talking about volatility on this podcast though. Penny, are wild swings really that unusual?
Penny: Well, from my perspective, I don't think the size of the falls are all that unusual. On average, you would expect to see drops of more than 5% at least a couple of times during the year. What was unusual was the speed of the move on the way down, and then speed of the move on the way back.
David: Yeah, and I think that points to how much of the move was driven by what we would call technical factors rather than fundamentals. You might have heard about the Japanese carry trade—we've been hearing a lot about that over the past month. That's when investors borrow in a low interest rate country—in this case, Japan, where rates have been virtually zero—and then they invest in higher returning investments. To be successful, Japanese interest rates will need to stay low for that trade to continue to be successful. At the end of July, the Bank of Japan delivered a surprise interest rate increase of 0.15%, so rates are now 0.25%. That is still very low, so I don't think that on its own would be enough to explain the moves.
To me, the bigger issue was that we went through an unusual period of calm before that. The market was very stable, we hadn't seen any large pullbacks for a while—so to me, the funny thing about financial markets is that too much stability can actually set up an environment for instability, because investors become more emboldened, and they start to take more risk. Some of that is driven by their computer trading algorithms, some of it's just human nature. You do find more and more people taking bigger and bigger bets, often in the same direction, and they often borrow to do it.
Penny: Yeah, David. And when that happens, it really doesn't take much of a trigger to impact the market, as too many people are just rushing for the same exits.
Lyndon: And in terms of the trigger this time, what was that trigger?
David: In this case, I think it was that Japanese rate hike that I mentioned. There were also concerns about some weak employment data in the US, so that raised recession worries again. Geopolitics may have also played a role. In another environment, all of these things may pass unnoticed, but in this case it was enough to trigger that unwind. When you do get through that wave of technical selling, the market will revert back to the fundamentals.
Lyndon: What do you think's going to happen from here, David. What are the fundamentals actually suggesting?
David: In the case of both Australia in the US, the economic data is continuing to suggest that inflation is falling, the economy is slowing and that's been enough to convince markets that rate cuts are coming. But the economy's not slowing by enough to imply imminent recession. When you've come from an environment of strong demand, tight capacity, red hot inflation, a bit of softness to bring the economy into balance is actually welcomed. Rate cuts and modest growth are actually a pretty good environment for shares and that explains why the US and Australian share markets are nearly back at all-time highs.
I'd contrast that with what happened with Japanese share markets. In the wave of the selling, they got hit much worse than Australia and the US. At one stage, shares were down 24%, and that included the worst single day in the Japanese market since 1987. Japanese shares have now bounced—they’re still more than 7% below the peak, though, and I think that again reflects the fundamental. The yen has risen by more than 10% and that will hurt company earnings for Japanese exporters.
Lyndon: Okay, turning to Australian reporting season now Penny—as I mentioned in the intro, you and your team have been pretty busy this month meeting with the management of Australia's largest companies. What have been some of your key takeaways from reporting season?
Penny: Company earnings actually fared better than many had expected. We actually saw more results exceeding expectations than not, so it's a pretty good outcome. However, we have started to see the impact of that quite aggressive hiking cycle coming through from the RBA starting to impact some of the companies. So really Lyndon, you just have to have a look at what market expectations were for growth next year. At the start of the month, the market was expecting sort of double-digit growth to be coming through in company earnings next year. That's now being revised back to somewhere closer to 3% on the back of some pretty conservative outlook statements coming through from the companies.
Lyndon: And in terms of key themes that you've been seeing, Penny, are there any that maybe stand out?
Penny: Certainly. One to call out would be the resilience in the Australian consumer. The market's really been anticipating a pretty sharp slowdown starting to come through, but in reality, we just haven't seen that yet. The July trading updates, for example, suggested consumers are still willing to spend, and the stage three tax cuts have really helped with sentiment. But there is a very clear preference for good deals.
Lyndon: Whereabouts have you seen those preferences for good deals, Penny?
Penny: We've really seen them coming through for the retailers that have a value offering—that would be JB Hi-Fi, Bunnings and Kmart. JB Hi-Fi specifically was the top performing retailer for the month, up some 17%.
Lyndon: And what about some of the results that have been disappointing?
Penny: We saw some meaningful downgrades in the material sector. If you think back 12 months ago, there was a lot of focus on electrification and EVs—so lithium in particular was in strong demand. As it stands now, the demand for EVs has been underwhelming and we're seeing increased supply in lithium coming out of markets such as Africa and China, which is contributing to pretty significant weakness in prices. Mineral Resources, which is a key player in this sector, was down more than 26% over the month. Then outside of materials, we saw Seek issued a material downgrade of around 12% for next year—so not a great outcome for those guys.
Lyndon: Switching to the US then, Penny—how did the end of US reporting season finish up?
Penny: I'd say the US reporting season also showed resilience and probably even more sustainable growth. The strength in the US market has in no small way been driven by the strength in the tech sector and more specifically, the ‘big six’—so we’ve finally seen the last of these six, Nvidia, report last week. Nvidia grew earnings in the quarter by more than 150% and raised guidance for the next quarter. However, despite this, the stock was actually down 6% on the day, which, Lyndon, you'd be forgiven for wondering what was going on. But in reality, the market has just got so used to this company in particular more-than-beating expectations.
David: I think what else was interesting in the US results is we did see a bit of a broadening out in the companies delivering earnings growth. We talk a lot about the big six tech companies in the US and they were still very strong. But for the first time in more than a year, earnings outside of the big six were positive so that's quite an encouraging sign for the market. One that I would highlight is that Walmart, which is a big box retailer—they finished up more than 12% after delivering a much better than expected result, showing that some consumers in the US are holding up well, but like in Australia, looking for value. The strength in these earnings is partly why, unlike in Australia, the market's actually a lot more optimistic about the recovery. Growth in earnings for the US is expected to be double digits this year.
Lyndon: Alright, let's look forward now to the months ahead being September. David it's been quite the journey to get to this point but it sort of does look like the US Federal Reserve might actually deliver its first rate cut this month.
David: Yeah. The Fed announce their decision on 18 September. About a week ago, Chairman Powell gave a speech at the Fed's annual conference in Jackson Hole, and he could not have been any clearer when he said the time has come for policy to adjust. So, a rate cut looks inevitable—the only question is whether it will be a 0.25% cut or a 0.50% cut. Personally, I'm thinking they start with that smaller cut. The most interesting line for me in that speech was when he actually suggested the Fed is not seeking or welcoming any further cooling in labour market conditions. Keep in mind, the Fed has been attempting this delicate balancing act over the past few years. They've been trying to slow the economy enough to reduce inflation, but not kick the economy into recession, and Chairman Powell sent quite a clear signal that he's seen enough of a slowdown. Now, it's time to prioritise keeping people in jobs.
Lyndon: And in terms of Australia, David, what about the RBA? Last I heard it sort of sounded like we might have a bit longer to wait for a rate cut. Is that right?
David: Yeah. The RBA announces its next decision on 24 September. It is pretty clear the RBA isn't looking to cut just yet. They've had the same delicate task as the Fed over recent years—the economy was too tight, demand was too strong for supply. They've been trying to slow the economy down to bring it back into balance.
In contrast to Fed Chairman Powell, who thinks that the Fed has done enough, RBA Governor Bullock is still quite adamant that they have not done enough yet. They still want weaker demand to bring it back down in line with supply. Even at the last meeting, the RBA was still considering whether they wanted to hike rates, so still some way off from a cut. Keeping in mind that the RBA didn't raise interest rates anywhere near as much as the Fed on the way up, they did keep rates lower, but that actually means their first cut’s probably further away.
Lyndon: Brilliant. Penny, anything else on your radar or any final thoughts before we wrap up?
Penny: Thanks, Lyndon. Yes, I would agree that the Fed's decision is paramount to where the market goes from here. The other thing myself and the team are keeping a key eye on is the recovery in China and whether we're seeing any signs of life there yet.
Lyndon: Very good. Alright. Well, I think that wraps us up for today. David and Penny, thank you both so much for being here and sharing your insights. David, I'll see you again next month, and, Penny, it's been so good having you here. Thanks for joining us—and, hey, maybe let's do it again sometime.
Penny: Absolutely.
David: Thanks, Lyndon.
Lyndon: Alright, so while 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 again for listening, we’ll see you next time, and until then—look forward, think great, with UniSuper.
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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.