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 we are back for another year. So, hello to our regular listeners, and of course, a big welcome to any new listeners who may be joining us. Now, there has been quite a bit happening in investment markets since we last checked in with David Colosimo from UniSuper's Investment team. He is our resident Economist, Investment Manager and general guru—David, welcome back and happy 2024!
David: Great to be back, Lyndon, thanks for that introduction.
Lyndon: I've actually been really looking forward to getting back into the studio with you, David, because in recent days I've been hearing about inflation starting to slow down and there's all this chatter around potentially no interest rate rises this year. There is a lot to cover off, so I reckon let's jump straight in. In fact, let's begin with share markets because they're at an all-time high, aren't they?
David: Yes, since we last did our last podcast, it's actually been a great two months for shares, December in particular. So, US shares were up about 4% in December and Australian shares are up more than 7%. And that was really across the board; almost every sector in both countries was higher. Now, while the more cyclical sectors pulled a little bit ahead, it actually did just feel like everything was ripping higher. So, in January things were a bit more balanced. US shares were up about 2% across the board, but only five of the 11 industry sectors were higher. IT and communications services were the biggest gainers there, but actually, that means that six sectors were down. As you mentioned, the US market did break new highs during the month and that's breaking that previous peak set back in early 2022. The Australian market gained just over 1% in January, but even that 1% was enough to see the Australian market also break new highs. That last peak was back in August 2021. So, new highs for shares in both Australia and the US.
Lyndon: So that all sounds like pretty positive news but what actually was it that drove those markets higher?
David: Well, I think if we're going to put it down to one thing, I would say that one thing is inflation. Now, almost every country has an inflation report that comes out once a month, and it does feel like the last couple of months, almost across the world, every report has inflation slowing more quickly than was previously expected. The standout here is actually the US. So, the Federal Reserve, they focus on this special core measure of inflation. At its peak in 2022, that was running at 5.5% and they actually target 2%, so it was well ahead. But if you actually average over the last three months or six months, it's actually running below that 2% target again. That's happened very quickly given that we had very sticky inflation during the pandemic. Suddenly, the market's thinking maybe the inflation battle's been won, and it actually didn't take a recession to do it. The economy's still holding up really well, but even so, if you've got weak inflation, maybe the market's thinking rate cuts could happen as soon as March in the US. Whether you call it a soft landing or immaculate disinflation, when you put rate cuts together with an economy that's actually still pretty solid, that's going to be a great environment for share markets.
Lyndon: And so, David, of course, many of us are going to be interested in the Australian context. Can we expect rate cuts here as well?
David: Yeah, I think probably sometime this year for sure. Growth is neither hot nor cold here, inflation's also coming down. But at this point I think rate cuts in Australia will probably start well after the US and probably places like Europe, the UK and Canada as well.
Lyndon: And why is that?
David: I think there's a few reasons. First of all, our rates here are a full percentage point below the US so they don't have as far to fall. And secondly, while we're heading in the right direction, inflation is taking longer to come down in Australia than the US. I mentioned the recent US inflation numbers are already below the Fed's target. The latest inflation number in Australia was really good, certainly consistent with inflation slowing, but even if you just look at that number on its own, it’s still above the top of the RBA's 2-3% target. And then finally, I think there's also a reasonably sized tax cut coming here in July, on some estimates that's almost 1% of income. If growth holds up, I'd expect the RBA would want to see the impact of that tax cut before they act.
Lyndon: Okay, and David, January is the start of US reporting season. What are you seeing there?
David: Well, in the lead up to reporting season, earnings estimates in the US were still being downgraded, so that's a bit of a contrast to the strong performance of share prices that we were seeing during that time. Now that reporting season proper has commenced, we are starting to see some earnings above expectations. But it still looks like earnings overall are quite moderate. And where we are seeing the strength, it's in the so-called Magnificent Seven. We've spoken a lot about those seven mega-cap tech names that dominated the market in 2023—they're getting the lion's share of the growth. If you look through that, everything else is actually a bit softer. Now, if we're looking ahead, if you think about an environment of softer inflation, that's generally not very positive for revenue growth.
Lyndon: And are there any other names or sectors or points of interest, even, David, that are worth calling out there?
David: Well, I think the one obvious trend is that we're now starting to see an improvement in global computer chip orders. We're seeing that across a number of global companies. Nvidia is a big US company, it hasn't reported yet, but it actually surged 24% in January, riding that global wave. At the other end, Tesla disappointed the market. It missed on its earnings in the quarter and warned that sales growth in 2024 is going to be notably lower than 2023. Now, keep in mind this follows press reports this month that the Chinese company, BYD, has actually overtaken Tesla as the world's largest electric vehicle producer. So, Tesla was down more than 24% in January, and it's now down more than 50% from its peak. And finally, another stock that's actually really struggling is Boeing. It reported a loss this quarter, and that follows those reports of some really significant mid-flight malfunctions on its planes early this month. It was down 19% in January.
Lyndon: And again, coming back to the Australian context, David, what are some of the more interesting themes that you're seeing happening here?
David: Well, for me, the most interesting space continues to be lithium. We're seeing an ongoing plunge in lithium prices, and that's really wreaking havoc across the sector. Core lithium, for example, has announced it’s temporarily halting mining operations at its mine in the Northern Territory. Also, banks who were providing a debt facility for Liontown Resources for a mine in Western Australia—they made the decision to terminate that loan due to a change in lithium price expectations. That's forced the company to undertake a review of their expansion plans. If you're looking at those two companies, they were down 37% and 22% respectively in January. Another sector of interest is retail—the data is showing that Australian retail sales are actually still quite soft, and the trading updates actually bear that out. So, you look at Australia's largest retailers, they've been a bit mixed, but they're definitely tending towards the softer side. A good example here is Baby Bunting; they're a specialist nursery retailer that I think most parents in Australia would be familiar with—they're down more than 20% in January.
Lyndon: And we haven't covered off China yet, David. It's sort of been traveling in a bit of a different direction to Australia and the US, hasn't it?
David: Yeah, it's a very different situation there. Chinese stocks fell about 8% in the past two months. So, in contrast to the record highs that are here in the US, Chinese stocks are actually at a five-year low, and they're now more than 40% off those 2021 peaks.
Lyndon: So what's been going on there?
David: Well, I think overall the economy's been suffering as a result of the property downturn there, and there's also some price deflation going on given weak demand. Many of our listeners will remember from our previous podcasts that over the past several months, there's been a stream of small policy adjustments, and that's continued in the last couple of months as well, be it fiscal support, liquidity injections, monetary easings, and more recently actually, bans on short selling in share markets. But after all of that, policymakers are still reluctant to ease too much because the economy does have to structurally adjust. Several times, I felt that all of these policies added together will help turn the economy around, but perhaps actually what's necessary is just the time that it will take for these adjustments to work through the system.
Lyndon: Okay, looking ahead to February now, David, what's on the cards?
David: Well, we've got the rest of the US reporting season, and then Australian reporting season also kicks off. So here in Australia, earnings are actually expected to fall this year, weighed down by resources and banks.
Lyndon: And for the central banks?
David: The RBA have their first meeting for this year on February 6th. After that soft inflation print I mentioned before, I actually see very little chance of a move here. It's probably also too early for them to acknowledge the chance of rate cuts later this year. Now, the Fed, they actually just met and so they don't meet again until March. Fed Chairman Powell is pushing back on the idea that they'll cut then, but it's actually still a possibility.
Lyndon: Alright. Now, finally, we've talked about shares hitting record highs and so on, is there anything on the horizon that could upset the market, David?
David: Well, record highs aren't actually a problem themselves. Over time, economies grow, prices rise, profits rise, and so, of course, share markets rise. But if I'm thinking about things to watch out for while we're here, I would think that if the inflation data accelerates again, share markets wouldn't like that, given how well they're priced at the moment. And those recent developments in the Red Sea, while contained for now, could also spread more broadly through the Middle East. We do have a lot of elections coming up this year around the world, but particularly in the US, and you know, we haven't even spoken about the frontrunner for the Republican presidential candidate yet!Lyndon: And what do you know? We seem to be out of time, David. We'll have to save that one for a future episode. Look, thank you so much for joining us—it's great to have you back, and we'll see you next month.
David: Looking forward to it, Lyndon.
Lyndon: And that wraps up this episode, thank you for tuning in. A quick reminder, our Chief Investment Officer, John Pearce, he's going to be sharing his next investment update video in around about mid-February. He'll be giving a broad overview of what's been happening in markets and his thoughts as well, so do keep an eye out for that on our website. Don't miss out on future episodes of this podcast. Remember, you can subscribe to us wherever you get your podcasts or check unisuper.com.au/podcasts at the start of each month. You are also very welcome to share this podcast with your family, friends and networks. We are UniSuper, the place where bright minds and passionate people strive to think great and create a future with 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.