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 with me in the studio is UniSuper’s Head of Fixed Interest, David Colosimo, to talk investment markets and all manner of things, really, given the month we've had. David, welcome.
David: Thanks, Lyndon. Good to see you.
Lyndon: You too. Now, David, would you believe that this episode actually marks three years since we've been doing this investment market podcast? A bit of a happy birthday milestone moment for us.
David: I'm sorry I didn't bring a cake, Lyndon!
Lyndon: That is all good, David, you bring so much else. We have seen a lot of ups and downs in the market over the last three years of this podcast, but I have to say, the last month has pretty much taken the cake because we've had Trump's so-called Liberation Day tariffs, and there's the whiff of interest rate cuts in the air, and of course, even a federal election coming up this weekend so I'm sure you've got a lot to cover off, David. So, shall we jump onto the rollercoaster and start with shares, perhaps?
David: I think rollercoaster is the right word there, Lyndon. The US market was down less than 1% in April. Australian shares are actually up more than 3.5%. So at face value, that actually seems like not a bad month. But, as you suggested, it just really doesn't convey how crazy a month it's been. It all kicked off with Donald Trump's tariff announcement on 2 April, and in the four days after that tariff shock, US shares fell more than 12%. Here in Australia, shares were down 7.5% in three days.
Lyndon: Yes. Many of our regular listeners will recall that, a few weeks ago, I recorded a special edition podcast with UniSuper's Chief Investment Officer, John Pearce, immediately after that fall and talking through the initial impact that that had on share markets and UniSuper's response. We'll actually share a link to that podcast in the show notes, by the way. But can you take us through what's happened since then?
David: First of all, I'd encourage anyone who hasn't already listened to that podcast to do so. But since then, there's been even more volatility. So, after those big falls I mentioned, we saw a single-day, 9.5% rebound when President Trump announced a 90-day pause to the bulk of those tariffs. That was actually the biggest daily increase in 17 years. I think it's the tenth strongest single-day increase in the history of the US market. Over the second half of the month, we had another 5.5% fall and then nearly an 8% rebound, so a rollercoaster as you said. A lot of that volatility was driven by the back and forth on tariffs, but I don't think that was the only thing. President Trump during the month had a lot to say about Fed Chairman Powell, and various sources in the administration seem to be implying that he would be fired. It's fair to say the market would respond pretty negatively if Trump actually did try to fire Powell. Shares got another boost when Trump came out and openly ruled that out.
Lyndon: And speaking of boosts, David, actually, John did say in the podcast that we recorded that markets can really bounce back very suddenly, but I can't get over that shares went up nearly 10% in a single day. Is that unusual?
David: It certainly feels counterintuitive, but it's not as uncommon as you'd think. History actually shows that the strongest daily gains occur in down markets. A lot of the best days in shares have occurred right in the middle of the Great Depression and the Global Financial Crisis. I think in situations where sentiment is so negative, shares can become quite oversold and they will respond very positively to good news.
Lyndon: We do tend to focus on share markets on this podcast but I know as the Head of Fixed Interest, David, bond markets are very close to your heart and we don't often get to talk about them. What was going on with bonds in the midst of all this?
David: I actually think bonds were even more interesting than shares this month. They can be a good diversifier—they help protect the downside of shares.
Lyndon: And by that, you mean that bonds behave differently to shares? Is that right?
David: Yeah, exactly. Bonds often have a negative correlation to shares. When share prices fall, bond yields also fall, which means that their prices are rising. That's certainly what happened initially after the tariff announcement. But after a few days, that relationship really broke down. Shares were still falling but bond yields suddenly changed direction and increased by 0.5% in a single week. That's the biggest weekly increase in more than 20 years, and it's equivalent to about a 4% fall in the price of a 10-year bond. The correlation went positive—shares and bonds were both falling at the same time.
Lyndon: And what was causing that David was there's someone out there selling? What was going on there?
David: There was some initial speculation that it might have even been the Chinese government selling down—they are the second biggest holders of US debt after Japan. While we can't rule that out, I actually think the big part of the move was more likely the type of trading activity you'd see in hedge funds. When you look at the interaction between bonds and derivative markets, it looked like a lot of holders who had borrowed money to buy the bonds had to quickly close out those positions, and so all at once, everyone's trying to reduce risk—they're selling bonds. The reason why I raise these bond moves, though, is that it really seemed to spook the Trump administration. In last month's podcast, listeners might remember, I talked about the idea of a ‘Trump put’—that there might be a large enough fall in share markets that would cause Trump to change direction. But I actually think it was the instability in the bond market that made him re-evaluate his tariff policy this month. The other market that was interesting this month was also oil, which was down more than 18%. We're seeing worries about slower growth—perhaps Saudi Arabia will do less to prop up the price. So unsurprising, then, that the energy companies were the weakest sector this month. Exxon, for example, was down 11%.
Lyndon: So, David, at one point, US shares were down 19% from their peak, and I think they're still, I don't know, down around 9% or something. Is that the sort of level that suggests that maybe a recession is coming or on the cards?
David: I think in the immediate aftermath of the tariff announcement, there did become a general consensus that the magnitude of the tariffs would be enough to send the US economy into recession. Since then, we've seen a lot of those tariffs walked back. Aside from China, the retaliatory tariffs are on a 90-day pause. There's been some exemptions for a lot of goods from China as well. But even if he turned around tomorrow and cancelled all tariffs, it's still not clear that the damage can be undone. I think the prospect of a recession will probably stay with us until proven otherwise, and so there's a lot of uncertainty. Consumers are very nervous and worried about the inflation impact of the tariffs. If you look at company surveys, that suggests that companies are really scaling back on their capital investment plans. We're seeing anecdotes that shipping between the US and China is on hold. That could cause product shortages in the US. We're seeing international tourists seem to be avoiding the US now as well. But to get back to your question, I don't think the current market is actually priced for a recession. The PE ratio is still at quite a historically high level.
Lyndon: And that's price-to-earnings ratio.
David: That’s the price-to-earnings ratio, yep. Earnings estimates, while they've been revised lower in the last couple of weeks, in a recession, they'd probably have to be revised much lower again.
Lyndon: Alright. Well, with so much talk about tariffs, we've almost lost sight of the fact that US reporting season is on David, and we do often get you to highlight trends from that and so on. What's caught your attention this month?
David: We're halfway through US reporting season now. I think to some extent it's following the regular pattern that we always see. As we're coming into reporting season, you see earnings estimates being downgraded so that companies can beat their expectations on the day, and that's actually what's been happening. It looks like when all is said and done, earnings will probably increase by about 10% from last year. If you look at earnings growth in the big six tech names, they've been slowing, but they're still likely to top 20%. At the other end, earnings in the energy sector—they're down nearly 20% given weaker oil prices.
If I wanted to highlight some of the unique things this quarter, it would be that because of the tariff uncertainty and general lack of visibility, very few companies are providing guidance for earnings next year. As a result of that, there's been much larger than usual downgrades to the forward earnings estimates during reporting season.
The other strange thing this quarter is the market reaction. Usually, a company's share price will be rewarded if the company beats consensus estimates, and they'll be punished if they miss them. This quarter, there have been companies like the rail operator CSX, home builder D.R. Horton and EV producer, Tesla—who I'm sure most of our listeners would know—they all missed expectations but their share price actually increased. Tesla's share price is actually up 9% in April, so a big gain. You contrast that to a company like Google—they beat earnings estimates by a massive 40% but the share price barely moved on the day, and its share price is up actually only 3% in April.
Lyndon: Alright, so that's the US covered for the moment. But we haven't had a chance, David, to talk about Australian shares yet. How are they going?
David: They were one of the best performers in April, up 3.6% in the month—so quite a turnaround given shares were down more than 6% this month at one point. I think Australia's just been seen as a bit of a safe haven in all of this tariff noise. Australia doesn't actually export that much to the US but I would note that we do have quite a big exposure to China, so it would be a real concern to Australia if the Chinese economy slows sharply.
Lyndon: Alright, David, let's look ahead to the month of May. What can we expect from the central banks this month?
David: The Fed announce their next rate decision on 7 May. President Trump's been trying to pressure the Fed to cut rates, but the economic data still seems resilient, and the Fed does seem concerned about the supply shock from tariffs and the impact that could have on inflation, so I don't think the Fed will be looking to cut rates as soon as next week.
The RBA, they meet on 20 May. In Australia, we're in a very different position. The most recent inflation report shows that underlying inflation is finally back within the 2% to 3% target band—that's for the first time in three years. Looking forward, tariffs are definitely inflationary if you're in the US but they're actually probably disinflationary for Australia. China is going to have to find alternative export markets for all the consumer goods that it produces so that could put downward pressure elsewhere. I think in Australia we will probably see a 0.25 basis point cut.
Lyndon: Okay. So, we've got the last half of us reporting season to go, David—what about here in Australia? Is there anything coming up here?
David: We do have three of Australia's four major banks reporting their half-year results over the next week or so. I'd expect those results to be okay. Credit quality in Australia is still quite strong. But moving forward, if we do see the RBA carry through with interest rate cuts, that'll probably put interest margins under a bit of pressure for the banks. Otherwise, most Australian companies don't report until August. But they would now start to have some visibility about how the first six months of the year have been, and there's an important conference next week, a lot of Australian companies will present there, and generally they'll take an opportunity to give a trading update or provide new guidance on how the year is going.
Lyndon: Very good. And before we go, David, I can't pass up the opportunity to ask—do you have any last-minute thoughts on the Australian election? I know you're the type of person that will be ready and raring to pick a winner…
David: Nice try, Lyndon! No, I'm not in the habit of picking elections. I pay most attention to the market impact.
Lyndon: Very good.
David: In terms of the potential market impact, I wouldn't see as large a difference between the parties as we would in the US. But it does seem that whichever party forms government, they are going to have to make some pretty tough decisions. The credit rating agency, Standard and Poor's, they did fire a warning shot, suggesting Australia's deficits will need to be reined in or there is actually a risk of downgrade to Australia's Triple-A credit rating. If you think about funding the climate transition, Australia's probably going to have to increase its defence spending, we've got the NDIS, there's an ageing population… there's a lot of structural spending the government's going to have to make, and that's going to keep a lot of pressure on the deficit.
Lyndon: Well, David, it's going to be an interesting month and an interesting time for all of us. But look, thank you again for coming in over the last three years to do this every single month. It's genuinely a privilege to be able to speak with you and help you share your thoughts with our listeners, because I think in uncertain times like these, I always feel a little bit better about the world when I’ve heard your clear-headed and learned take on what's going on. So, thank you so much.
David: Thank you, Lyndon. It's a privilege to be here.
Lyndon: And that's it for this episode. Thank you to all our regular listeners. We appreciate you too, sharing our podcasts with your family, friends and colleagues and listening. Don't forget to subscribe to us though, wherever you get your podcasts, or check unisuper.com.au/podcasts at the start of each month.
We were talking earlier about Chief Investment Officer, John Pearce. Would you believe, he's actually about to release his next investment update video in a couple of weeks’ time, so do keep your eye on our website or on your inboxes for when that is released.
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 to learn more about our investments or investing more generally—particularly relevant in times like these—head to unisuper.com.au.
Thank you again for listening, and we'll see you next time.
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. Certain information contained in this podcast may include forward-looking statements, and we do not guarantee that these statements will eventuate. UniSuper has no obligation to provide updates or changes to the information in this podcast.