February, 2022 - Macarthur Wealth Management

Stay up to date with our latest blog on political, economic and market news:

RUSSIA INVADES, SANCTIONS TO FOLLOW

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

MARKETS

Local and global equity markets weakened this week as escalating European tensions saw Russian troops enter Ukraine.

In local stock news, Magellan reported a net profit after tax of $251.6 million for the 1st half, an increase of 24% on the prior period, whilst the company declared an interim dividend of $1.10 per share, up from 97c. The fund manager is considering an on-market share buy-back.

AGL Energy has rejected a surprise $3.54 billion takeover approach from billionaire Mike Cannon-Brookes (Atlassian) and Canada’s Brookfield Asset Management in favour of a plan to split in two this year. A tech guy running an energy company……what could go wrong……

QBE Insurance reported a net profit of US$750 million for calendar 2021, compared with a US$1.5 billion loss in the previous year. Investors were unconvinced by the result.

Super Retail Group had first-half profit fall 35% and warned higher freight and transport costs will continue to affect margins, with lockdowns and higher costs contributing to the weaker result.

Telstra and TPG will share their regional networks in what they claim will provide better service to people outside of major cities. The two companies revealed a 10 year network deal which will improve coverage without the need for costly network rollouts.

Coles reported a better than expected performance for the 1st half of its financial year but rising costs from covid wiped gains from improved sales. Woolworths reported lower 1st half profit due to virus-related costs with the company warning that it’s inevitable food prices will rise.

Seven Group improved 1st half earnings and is banking on its large stake in Boral to deliver better full year numbers. The company posted a 21% increase in net profit, which doesn’t include the 69% stake acquired in Boral.

Rio Tinto reported an improved full year profit of US$21.09 billion and announced a special dividend of US62 cents per share, which will be paid in addition to the final dividend of US$4.17 per share.

Scentre Group returned to full year profit benefiting from an uptick in property valuations. Net profit after tax was $887.9 million, with revaluation gains of $81 million. Investors will receive a higher distribution.

Oil prices surged above US$100 a barrel for the first time since 2014 following Russia’s invasion of the Ukraine before settling back down to trading levels earlier in the week on news that the US is considering a potential release from its strategic oil reserves in coordination with allies.

The Australian dollar fell this week as is normally the case when global risks rise, investors seeking out safety in the Japanese Yen, Swiss Franc, and US dollar.

ECONOMIC

CBA lending data for January showed that growth in new lending for housing eased, primarily driven by owner-occupiers, whilst higher fixed borrowing rates saw a decline in the share of fixed rate lending. Consumer lending growth softened whilst business lending growth remains solid.

A key Australian consumer confidence index fell 1.4% despite the easing of virus restrictions and re-opening of international borders, with concerns regarding inflation hitting home for consumers. The drop in confidence means household spending might be weaker in the period ahead.

Australian construction data showed that building work done fell by 1.7% in the 4th quarter because of a 3.7% fall in private sector residential work. Work completed on renovations also eased in the quarter but remains at a high level. Engineering work completed lifted driven by stronger public sector activity.

Australian wages rose by 0.7% in the 4th quarter, with the annual rate stepping up to 2.3%. Both private and public sector wages grew at the same pace in the quarter. Including bonuses, the annual rate lifted to 2.8%, but remains below headline inflation numbers. The labour market has tightened again over the last few months.

The volume of capital expenditure in Australia rose by 1.1% in the 4th quarter, with mining investment increasing by 2.6% and non-mining investment increasing by 0.5%.

A private US data firm said its manufacturing data rose to a 2-month high in February, suggesting the US economy regained momentum.

Prices charged for goods and services in the Euro area jumped by a record amount in February as an easing of pandemic restrictions led to a strong rebound in economic activity.

China’s central bank has kept its benchmark lending rates unchanged in February, in line with market expectations, after cutting rates a month earlier.

Hong Kong will boost support for consumers and the unemployed by allocating more than US$6 billion as a covid outbreak dents the economy. The government has banned travel from several countries, closed schools, and imposed a range of other restrictions.

POLTICS

Russia invaded Ukraine after 2 regions close to the Ukraine/Russia border declared themselves autonomous or independent, thus seeking support from Russia whist on Ukrainian land. Not a smart move from the Russians as sanctions could become crippling, but equally damaging for the West in terms of embarrassment and the sanctions that will now follow which will add further pressure to current high oil and gas prices and broader inflation. Sanctions could also force the US to reluctantly enter into a nuclear deal with Iran to ease oil supply concerns. China said it opposes the sanctions and called US actions “immoral”.

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

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US inflation highest in 40 years

MARKETS

Equity investors outside of the US seemed to take the highest US inflation in 40 years in their stride, helped by strong returns earlier in the week.

A generally positive US earnings season has helped support stocks. With results in from about 60% of the largest 500 companies, analysts expect profits rose 30% in the 4th quarter from a year earlier. This is up from estimates for 21% growth at the end of September.

In local stock news, Magellan Financial Group shares fell again as Hamish Douglass announced he would step down as chairman and take a medical leave of absence. He will be replaced by REA Group chairman Hamish McLennan whilst investment management duties will fall to Chris Mackay and Nikki Thomas, who have re-joined, and other senior portfolio managers within the business.

Macquarie reported a record 3rd quarter, helped by its markets-facing businesses, with Macquarie Capital earnings helping offset a decline in the annuities divisions such as banking and financial services.

Suncorp posted a near 21% fall in 1st half net profit after more insurance claims from natural disasters. But the company said its underlying business is strong, putting it in a good position in the 2nd half of this financial year.

Commonwealth Bank has reported a 30% growth in cash profits for the 1st half of the financial year increasing their interim dividend by 17%. The bank reported a 12.2% increase in household deposits and an 8.5% jump in home lending. Capital position remained strong. The company plans to buy-back up to $2 billion of its shares on-market, following the $6 billion off-market buy-back in the 1st half.

Computershare upgraded its full-year earnings forecast after 1st half figures beat expectations, with higher sales and profits from its register maintenance business.

As the oil price remains high, the number of US oil rigs rose very modestly to 497, its highest since April 2020. Even though the rig count has climbed for a record 17 months in a row, the weekly increases have been very modest, and production remains far from pre-pandemic highs.

ECONOMIC

Australian consumer sentiment fell again in February, only just remaining in positive territory. Rising inflationary pressures and increasing expectations of higher mortgage rates are negatively impacting sentiment. Changes in business conditions and confidence were mixed in January.

The annual inflation rate in the US accelerated to 7.5% in January, the highest since February 1982, and above market forecasts of 7.3%, as soring emerging costs, labour shortages, and supply disruptions couple with strong demand weighed. Excluding volatile energy and food categories, inflation rose 6%, the most since August 1982.

Private businesses in the US unexpectedly cut 301,000 workers in January, the first job loss since December of 2020 and the biggest since April 2020. Investors were expecting a job gain of 207,000.

The US economy unexpectedly added 476,000 payrolls in January, much better than market forecasts of 150,000, and in stark contrast to the job losses reported in the private sector ADP.

Two key US labour market metrics may take multiple years to recover to their pre-pandemic growth trend, with the labour-force participation rate and the employment-to-population ratio languishing due to high level of retirements and others leaving the workforce altogether.

A noted European central bank hawk said he expects an interest rate increase as early as in the 4th quarter of this year, as he expects Euro-area inflation to stay above 4% for much of 2022. A noted US central bank hawk tried to one-up his Euro-counterpart, suggesting a US cash rate of 1% by July.

POLITICAL

The Australian federal government announced a relaxing of border rules which will see us welcome visa holders into the country from February 21. Tourism operators are still haemorrhaging some $4 billion a month compared to pre-pandemic levels. The federal government has maintained they will not seek to boost immigration rates to “make up” for the last 2 years. Smart move leading into an election, but a poor move from an economic perspective.

Federal Treasurer Josh Frydenberg has indicated that its time to close the federal money tap and hand responsibility for the economy back to industry.

Russia reached new long-term supply deals with China as the Kremlin aims to strengthen ties with the Asian nation at a time of souring relations with the West.

US president Biden said the Nord Stream 2 natural gas pipeline between Russia and Germany would be stopped if President Putin orders an invasion of Ukraine. An invasion is highly unlikely.

Europe and the US are accelerating steps to roll back virus restrictions as politicians across both regions are deeming many public-health measures increasingly unnecessary as they come under pressure from a pandemic-weary public.

The US is apparently losing patience with China after the nation failed to meet its purchase commitments under the trade agreement reached during the Trump administration. China had pledged to buy an extra US$200 billion in US agriculture, energy, and manufactured products in the 2 years through the end of 2021. The Biden administration is under increasing pressure to show it’s willing to punish China for not holding up its end of the deal.

33 Chinese entities including electronics, optics, and healthcare/biotech companies, were added to a US “unverified list” that subjects them to tighter export controls.

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

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Equity markets mixed as relief rally soured by US tech sell-off

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

MARKETS

Equity markets were mixed this week as a strong rally earlier in the week was soured by US tech sell-off and more hawkish comments and action from both the European central bank and the Bank of England.

Reported 4th quarter US corporate earnings have continued to come through stronger than expected, with 78% of companies beating analyst estimates and more than 80% having met or beat expectations. Analysts are expecting that profits from companies in the S&P 500 rose 24% in the quarter from a year earlier.

Money markets are now expecting almost 5 interest rate increases from US Fed this year and 4 from the Bank of England. There’s also speculation that the US Fed might front-load hikes by increasing rates in larger increments, which Fed officials have poured cold water on. All will largely depend on inflation dynamics from here but will also be a function of what interest rate level the economy and markets can absorb and withstand.

In local stock news, Telstra has announced it will spend up to $1.6 billion on two projects over the next 5 years. The spending is projected to provide a $200 million earnings contribution by 2026.

Westpac has reported a net profit of $1.82 billion in the December quarter, up 80% on the quarterly average for the 2nd half of 2021. Cash earnings were up 1%, but the net interest margin declined 8 basis points to 1.91%. Total loans increased 0.7%.

Sydney Airport shareholders have voted for a $23.6 billion takeover bid from a consortium of investors, with shareholders to receive $8.75 per share.

Oil prices moved higher this week after OPEC+ stuck to planned moderate output increases (400,000 barrels per day) despite pressure from customers and consumers to raise output more quickly. The group has blamed rising prices on the failure of consuming nations to ensure adequate investment in fossil fuels, whilst Russia/US tensions also haven’t helped.

The Aussie dollar rose as the US dollar took a tumble after both the European and England central banks turned more hawkish in their rhetoric and actions.

ECONOMIC

The Reserve Bank of Australia left rates unchanged at 0.10% but announced an early finish to their quantitative easing (money printing) program, giving the bank the green light to begin raising rates. The bank made it abundantly clear in their statement that they’re in no rush to raise rates, but markets are currently predicting a rate lift-off in either June or August. Inflation, particularly wage growth, will be key.

Australian private sector credit rose by 0.8% in December to take the annual rate to 7.2%, the strongest rate since November 2008. Both housing and business credit were strong, whilst personal credit fell in December and remains well below levels a year ago.

Australian retail trade fell by 4.4% in December affected by virus issues, falling more than consensus estimates, but remains at near record levels. Food retailing was the only positive, with large falls coming from department stores, clothing & footwear, and household goods.

Australia’s trade surplus narrowed in December as imports rose strongly in the month relative to exports. Exports were mixed, with iron ore rising strongly and reasonable growth from wool and meat, whilst coal fell sharply as did other rural exports. Imports were boosted by strong gains across all the goods categories.

Australian building approvals rose strongly in December, boosted by a surprising lift in multi-unit approvals. In contrast, private detached house approvals fell as momentum continues to slow. Over the past year, the number of approvals is lower by 7.5%, however, alterations & additions approvals remain elevated.

US data showed that the central bank’s preferred measure of inflation rose at 4.9% in December over the prior year, pushing well above the bank’s target.

A separate measure showed US employers spent 4% more on wages and benefits over the past year, an increase not seen since 2001, as a tight labour market encouraged workers to demand higher pay. However, employment costs didn’t rise as much as expected in the 4th quarter easing concerns that wages are advancing too quickly.

US consumer spending fell in December as rising prices and virus fears took their toll.

US manufacturing activity slowed in January, from December, but remained in expansionary territory. Supply chain impediments caused by virus health policies were among the issues that weighed on activity.

The Bank of England voted by a majority 5-4 to increase the cash rate by 0.25% to 0.50%. Members also voted unanimously for the bank to begin to reduce the stock of UK government bond purchases by ceasing to reinvest maturing assets – i.e., reduce the size of their balance sheet by taking the liquidity away they previously provided via money printing. They will also begin to unwind the stock of corporate bond purchases.

The European central bank maintained key interest rates at record low levels in February and pledged to steadily reduce its bond purchases (money printing) this year. Rate rises are unlikely in 2022.

China’s economy continued to slow at the start of the year with manufacturing output slipping and Covid-zero policies curbing consumer spending.

POLICTICS

Russia/US tensions continued to rise this week with Russia maintaining they have no plans to invade and Ukraine trying to calm tensions on all sides. US lawmakers are apparently close to finalising the language for a sanctions bill that could include some penalties even if Putin doesn’t invade. The US has also given the green light to move troops from the US to Europe and to move troops within Europe closer to the Russia/Ukraine border.

Some 300,000 Australian fossil fuel jobs could be wiped out through declining international demand for fossil fuels, new modelling predicts. There’s a widely held belief that those job losses will be easily absorbed, but that doesn’t appear to be apparent with renewable sources of energy largely developed using automation. The job losses will disproportionately impact regional centres. Job transitions and retraining are never easy.

Need advice? Contact Macarthur Wealth Management for expert financial advice in Parramatta and Sydney wide on (02) 9683 2869. www.macarthurwealth.com.au

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