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 welcome to this, our final investment markets podcast for 2023. I am not quite sure where the year has gone, but with me one last time in the studio to recap last month and the next couple of months—it's economist and investment manager from UniSuper's Investment team, David Colosimo. David, welcome back.
David: Thanks, Lyndon. Great to be back.
Lyndon: David, it has been a pretty eventful year in markets, hasn't it? You must be looking forward to a bit of time off.
David: Yeah, it's a great opportunity to spend some time with the family.
Lyndon: Excellent. Alright then, let's get into it, David. Let's start with last month being November. What did we see in markets?
David: So, you'll remember from our last couple of podcasts that share markets have been very volatile over the last couple of months. We had quite a few months of weakness, but we saw a big reversal, a big surge in November in share prices.
Lyndon: In fact, I do remember that, David. Has that big reversal of weakness been right across the board?
David: Yeah, across most countries, but the US share market in particular, which is the world's largest, that's been the strongest of them all—that was up nearly 9% in the month. That's the biggest monthly increase in more than a year, and it's almost completely made back the combined falls of the previous three months. So, US shares are only about 0.5% off their highs for the year, which we saw around the end of July. Now Australian markets, they were only about half as strong, up 4.5%, and they've only made back about half of the falls that we saw between August and October, so, still not quite near those year highs. And if we look across global share markets, they're a lot more like Australia than the US. Those mid-single digit gains were quite common. The exception, I suppose, was China, where share markets were down about 2%.
Lyndon: And what do you put that strength down to, David? What's behind it?
David: I think it's a combination of a few things and many of them are interrelated. I suppose the first one—we've spoken about bond yields a lot this year, they fell sharply in the month. They were down 0.6% in the US in the month alone. Then, we've had much better news on inflation this month—the most recent inflation prints in the US, the UK, Canada and even Australia, they were all weaker than expected, but at the same time the activity data is still being quite resilient. So, the economy is certainly slowing but no signs of it falling off a cliff. After the US Federal Reserve held rates steady for a second consecutive meeting in November, the market’s just becoming a lot more confident that the US Federal Reserve has finished its hiking cycle. In fact, now the market is actually starting to think there might even be rate cuts coming up in the first half of next year. And I think as with anything, there's a lot of swings in confidence in markets—when you get three consecutive monthly falls, the market can get a bit one sided in how negative it is, and it can be primed to rebound on a bit of good news. So, you put all of that together, a lot of different factors at play—but if you try to simplify it to one thing, I just think investors are becoming more confident that the US economy in particular might be able to achieve a soft landing. And when I say that, I mean it could avoid a recession in the near future.
Lyndon: So, do you think that's realistic then, that the US economy can avoid a recession?
David: Yeah, it's certainly starting to look that way. There are still tail risks and there are two in particular. There's still a chance that inflation stays stubbornly high, so central banks around the world need to deliver more rate hikes. And then there's also the possibility that the lags from the rate hikes that we've already seen finally start to have a big impact and slow the economy more sharply.
Lyndon: Okay, so not quite plain sailing just yet. Turning back to the US markets for a sec, David, and that strength that you were talking about earlier, what were the strongest sectors?
David: Well, in the US in particular, the gains were very broad, but it was some of the more beaten-up sectors that fared the best. All those mega-cap tech names like Google, Apple and Microsoft, they were strong—up between 7% and 20% in November. The US banking sector, so that's names like JP Morgan and Citibank, that was up about 13%. And even the real estate sector, which has had a really tough run this year up to October, that was up 11% in the month.
Lyndon: Now if I've learned one thing over my time with you, David, it's that surely it won't all have been positive news. Were there any sectors that were weaker in November?
David: Yeah, there were definitely some patches of weakness, but not many in the US. Global oil prices were down 5 to 6% in November, so the US energy sector where we see companies like Exxon and Chevron, that was down 1.5% in the US. And in fact, in Australia, it was even weaker, down 7.5%, the two biggest companies here—Woodside and Santos—they were each down close to 10% in the month. Also, pockets of the US health care sector were weak; pharmaceutical company Bristol-Myers Squibb, for example, was down 4%. But otherwise, the bad news stories were all company specific in sectors that otherwise did well. Cisco, for example, bucked the strong technology trend—it was down 7% in the month after management cut their guidance for next quarter's revenues, and similarly, while the consumer sector was otherwise solid, Walmart fell more than 4% when management comments alluded to a sharp falloff in sales in late October.
Lyndon: Were any Australian companies down, David? You were talking about overseas ones there, what about in Australia?
David: Yeah, here in Australia, falls were more widespread, but when I looked down the list of the weakest stocks in the month, the thing that I notice is there were quite a few lithium names. For example, Liontown, which was down nearly 15%, and that's because quoted lithium prices are down as much as 80% over the past 12 months as more supplies come on stream and demand is softened.
Lyndon: In terms of Australian banks, David, a few of them reported their results last month as well. How did that go?
David: Yeah, not bad, the sector had a 4% gain in the month. Measures of arrears are starting to tick up, but at least for the moment it just doesn't seem like there's big issues on credit quality for Australian households—bad debts remain quite low. Margins are coming under a bit of pressure with increased competition, and we actually saw some differentiation in strategy between the banks. ANZ appears to have sacrificed mortgage margin to attract loan growth. Meanwhile, CBA were more intent on maintaining their margin, but that costs them some market share. Now, I'd note that ANZ was the weakest of the majors in the month, that was down more than 1%, while CBA was the strongest, up more than 8%. Now, across the sector, you’re really starting to see strong cost growth given the strength in wages, and they've all started to have a renewed focus on cutting costs moving forward. Moving forward, there’s also a big concern that there's going to be ongoing margin pressure. So,the banks benefited from some discounted funding arrangements during the pandemic, and they're all starting to expire over coming months.
Lyndon: And what about China, David? You mentioned shares were a bit weaker there, what's been happening?
David: Well, I think there's been a few interesting developments. I mean, from a political perspective, it feels like China's really been working hard to restore its diplomatic relationships with a lot of countries, not the least of which are Australia and the US. President Xi met with his counterpart in both countries in a matter of weeks this month. And over the month, the central Government’s also been a lot more proactive in supporting the economy, so they’re pledging support for local governments that are in a lot of debt and also an approved list of property developers. Now, despite this support, economic momentum does appear to be fading a little bit. So, during the month we saw activity indicators like industrial production and fixed asset investment, and they were relatively soft. So, as I mentioned earlier, the Chinese share market was one of the few that fell in November.
Lyndon: Alright, so we're only a few weeks away from the Christmas and New Year holiday period, David. What do we have to look forward to as we head swiftly towards the end of the year?
David: Well, here in Australia, we’ve got the Government delivering their mid-year budget update. Now, we are expecting a real continued improvement in the Government's finances. So, that does mean that they won't have to issue as many bonds. Meanwhile, in China there's another high-level policy meeting—that’s the Central Economic Work Conference. So, their authorities will set out a growth target for 2024 and hopefully an agenda for policy action as well. The Chinese economy continues to struggle under price deflation, a weak property sector, and those funding pressures for local governments I mentioned earlier.
Lyndon: And last but not least, David—you accurately predicted the RBA's rate hike last month, dare I ask what you're thinking for the RBA's December meeting?
David: Yeah, so after pausing for a few months, the RBA actually hiked again last month. They noted that both the economy and inflation were a lot more resilient than they previously had expected. Now, their next meeting is on December 5th, and the US Federal Reserve follows up on December 13th. We're not expecting any change from either central bank. Now, the RBA, just like ourselves, get to have January off, so we'll see them back in early February, so there's a long time between now and then for them to assess current conditions.
Lyndon: Excellent. Well, I look forward to covering all of that off with you when we reconvene next year, David, but in the meantime, can I just say a huge thank you to you. We are just so fortunate to have you here in the studio with us at the start of each month, sharing your analysis and insights. You are truly a great mind of UniSuper, so on behalf of our listeners, thank you so much and I look forward to doing it all over again with you in 2024.
David: Looking forward to it, Lyndon. See you next year.
Lyndon: See you then. And that wraps up this episode and the podcast for the year. A big thank you also to you, our listeners, actually, for joining us each and every month. We're truly honoured to bring this podcast to you, so we hope that you enjoy what we do. Speaking of which, if you have any feedback for us, feel free to shoot us an email at podcasts@unisuper.com.au. As David just mentioned, we're going to be taking a break over Christmas and the New Year—we will be back in February. So, if you don’t want to miss out when we are back, feel free to subscribe to us wherever you get your podcasts or check unisuper.com.au/podcasts at the start of each month. For the last time this year, 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 will see you next time. We hope you have a lovely, safe and restful break, and until then, look forward, think great with UniSuper.
This podcast is of a general nature. It doesn't take into account your personal financial situation, needs or objectives, and we recommend you seek financial advice before making any decisions about your super. Also, remember to consider the Product Disclosure Statement and Target Market Determination that's relevant to you—they are available on our website. The past performance of any investment options that we discuss in the podcast isn't indicative of their future performance, and it's worth noting that just by talking about certain companies, we're not endorsing them for you to include in your personal portfolio.