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 have just ticked over into March. It is the first business day of the month, which means we are back in the studio with our resident economist, investment manager David Colosimo from UniSuper's investment team, to cover off what's been happening in investment markets and to take a look at the month ahead. David, welcome back.
David: Great to be back. Thank you, Lyndon.
Lyndon: David, when we caught up this time last month, markets had finished January with record highs and it kind of looks as though that continued into February. Is that right?
David: Yeah. You look at share markets around the world, February's returns are actually very solid. US shares were up another 5%—they again made new all-time highs. Japanese shares were up nearly 8% and they broke through their previous record highs from 34 years ago, so a big historical moment there. And even Chinese shares, they've been languishing since their peaks about three years ago, but they managed to rebound more than 9% this month.
Lyndon: And how are things in Australia, David? Were we as buoyant, if that's the right word?
David: No, I think things are a lot more subdued here. We basically finished flat. Now if you include dividends, the Australian market returned just slightly less than 1%.
Lyndon: Alright, so let's dig into that a fraction. Why was it that Australia fell behind?
David: Well, a big part of it is composition. The resources sector is very big in Australia, it's about one quarter of the Australian market and that was down more than 6% in the month. Now, in contrast, the Australian technology sector—that actually performed quite strongly. But it's only 3% of the Australian market, whereas if you compare that to the US, where depending on how you measure it, technology is as much as 40% of the market. So even though Australian technology shares were up more than 18% in February, it just doesn't have that big an impact on the broader market. But even if you adjust for that, the Australian market was probably still a bit weaker than the US. We did go through reporting season in both countries, and we're just not quite seeing the strength in the Australian economy that you're seeing in the US.
Lyndon: Now whenever you mention reporting season, David, I am always keen to hear your highlights. What were they this time around?
David: Well, the highlight continues to be the ‘Magnificent Seven’. They're the biggest seven technology related stocks in the index. So, names like Apple, Microsoft, Google, Amazon. Now, these companies have been benefiting from the artificial intelligence boom, and the reporting season certainly shows that to be the case. So as a group, earnings for those Magnificent Seven stocks were up nearly 60% compared to the same quarter last year, and that's despite earnings falling at one of those companies, which is Tesla. Now, if you compare that to the other 493 companies that make up the main US share index, their earnings are actually slightly down compared to the same quarter last year. So, you've got a lot of earnings growth coming from a few large select names.
Lyndon: Does that mean that those Magnificent Seven companies also had the biggest price gains?
David: Some of them, yeah. But remember, in reporting season, it's not about the absolute strength of the earnings growth, but it's really about whether the company beats what's already priced in that drives the incremental share price moves. And there were plenty of companies across the market that beat estimates, and they showed positive returns. Now, in contrast, sometimes strong absolute growth doesn't necessarily translate to price gains, and I'd call out Apple here as a good example. It was down 2.5% in February, so earnings were up quite strongly, particularly in Europe and the Asia Pacific, but sales in China were down quite sharply. They're facing a lot of local competition there and management also downgraded their forecast for next quarter. Now at the other end of the spectrum was a company like Nvidia. They make the computer chips that are widely used for artificial intelligence. It had very strong growth, but it also beat already lofty expectations. Now, the result was so strong that the value of the company jumped $277 USD billion in a single day. Now, that's the biggest single day increase for any company ever. Now, if we're putting that in context, the two biggest companies in Australia are BHP and CBA—Nvidia added the entire market value of both companies combined in just one day.
Lyndon: That is quite incredible. It all sounds pretty positive, you know, when you talk about it, but are there any negatives that you might have in the back of your mind there, David?
David: Well, I think really the only negative is still the commercial real estate issues. They've been around for a long time now. So, the value of office buildings have really suffered post-pandemic as the ‘working from home’ trend has really settled in. That flared up again; we saw banks in the US, in Japan, in Germany all reporting losses because they had to write down the value of those office loans. So, there were some price falls in the banks with the worst exposure, some of the smaller banks, but it didn't necessarily spread or have an impact on the bigger banks.
Lyndon: Okay. So, you were talking, I think, about reporting season overseas a moment ago, David. What about Australian reporting season? Was there anything of note happening here?
David: Well, I think a similar story to the US. On average, there were more companies beating expectations than missing them, but that was probably off some lower expectations. One trend that I found quite interesting was that despite concerns about the impact of higher interest rates and the cost of living squeeze on household budgets, a number of consumer companies actually did quite well. Now, this was particularly for those that are orientated towards good value products. Names like Wesfarmers and JB Hi-Fi—they were up 14% and 7% respectively in the month. So, we're seeing supply chains improving again and both companies were able to control their costs and expand margins. One other interesting insight that the Commonwealth Bank observed, from their own customer data, was that customers over the age of 55 have been increasing their spending despite these apparent budget pressures. But it's the younger adults, so 34 years old and younger—they've been most impacted by higher interest rates and cost of living pressures and they've actually decreased their spending in response. This probably plays out in a company like Baby Bunting, which caters to new parents—they reported falling revenue and their shares were down 1% in February.
Lyndon: And David, I guess it's also fair to say there's been quite a bit of focus on supermarkets recently.
David: Yeah, that's true. Woolworths had a slightly disappointing result when they reported, but this was really overshadowed by the departure of its CEO and numerous industry inquiries into their profitability. It was down 9% in February. Meanwhile, though, Coles did have a stronger result compared to expectations, but they are coming from a weaker starting point. They were up 6% in the month.
Lyndon: And you mentioned earlier before, David—before we sat down to record actually—that we were seeing more takeover activity in Australia. Are you able to expand on that a little?
David: Yeah, it's particularly in the building sector. Seven Group has made an offer on the 30% of Boral that it doesn't own yet. And then French company Saint-Gobain has made an offer for CSR. Now they were up 13% and 20% respectively in the month. Meanwhile, Japanese company Renesas has bid for a software design company, Altium, boosting their share price by more than 30%. And finally, ANZ also won the right to complete their purchase of the banking arm of Suncorp, so Suncorp was up more than 7%.
Lyndon: I just want to come back to China for a second there, David, because in the last couple of months we've been talking about housing and share market weakness there. But you mentioned before that shares have rebounded, I think it was 9% this month, can you take us through that a bit more maybe?
David: Yeah. So, policy makers there for quite a number of months now, they've really been focused on stimulus measures to get the economy and especially the housing market going again, and that's continued this month. We saw a 0.25 percentage point cut to the interest rate that impacts new mortgages. There's also now talk of new subsidies to boost spending on cars and home appliances. But if you're looking at stock market strength, I think most of that has actually been due to regulatory intervention in the market itself. So, the market regulator has banned some quant trading strategies and now they're stopping big institutions from being net sellers at the beginning and end of each day. So personally, I'm not sure that those type of policies that are trying to control the market functioning are going to help in the long run unless you see an improvement to economic fundamentals as well.
Lyndon: Alright, David, looking ahead to this month being March—what's on your importance radar this month?
David: Well, sticking with China for now, we've got the National People's Congress. That starts on 5 March, it can run for as long as two weeks so can take quite some time. They do release a document known as the Government Work report on the first day of that meeting and that sets out a series of targets on growth, on inflation, fiscal spending, as well as any key policy priorities. We do expect to see another fairly sizable fiscal spending package announced.
Lyndon: Okay, and central banks, what are they up to? We were hearing a month ago a few predictions about what interest rates were or weren't going to be doing in 2024.
David: So, we get Australia's RBA announcing interest rates on 19 March and the US Federal Reserve one day later on the 20th. It was only about six weeks ago that the market was expecting a rate cut by the Fed as soon as this March meeting and a total of seven interest rate cuts this year. But developments since then mean it's very likely we'll see a move by either bank. Growth has been actually quite resilient and in the US at least, the data on inflation has turned higher again. Both banks are sending a fairly clear message that they believe that they've probably hiked rates enough, but they just can't be confident that inflation is moderating quickly enough. The risk to inflation from cutting rates too quickly—they're probably still seeing that as a bigger risk to the economy than from keeping rates too high for too long. So, the market now expects only three cuts this year by the US Fed, most probably starting in June, and less than two rate cuts in Australia.
Lyndon: A delicate balancing act, as always. Alright, well thank you so much, David, for being here today. I am looking forward to catching up with you and doing it all over again next month.
David: Look forward to it, Lyndon. See you then.
Lyndon: And that wraps up this episode. Thank you for tuning in. Before we finish up, just a reminder that our Chief Investment officer, John Pearce, released his investment update video a couple of weeks ago, so do head to our website to check that out. We’ll pop a link in the show notes for you as well. Don't miss out on future episodes of this podcast—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 worth retiring for. If you'd like more information about our investments, visit unisuper.com.au.
Thank you for listening, 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.