Rudi’s View: Winners Are Winning For Longer

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Jun 05 2024

In this week's Weekly Insights:

-Winners Are Winning For Longer
-Rudi Interviewed

By Rudi Filapek-Vandyck, Editor

Winners Are Winning For Longer

The share market being an open forum where humans combine and clash with robots and other humans, it should be no surprise Monday's announcement by the Fair Work Commision to increase by 3.75% the National Minimum Wage and all modern award minimum wages from July 1st onward has already been interpreted in opposing ways.

Forget about any prospect for RBA rate cuts anytime soon, says one share market commentator, an increase of this magnitude means the official cash rate will remain untouched until mid-2025, at the earliest.

Economists at ANZ Bank and Westpac beg to differ, however, and believe nothing fundamentally has changed (ANZ) or that the announcement is actually positive for inflation and for the RBA. Westpac had expected this year's wage increase could have been as high as 4.50%.

Clearly, the Fair Work Commission has also taken into consideration there will be tax cuts for virtually everyone from July 1 onward, and it's not like there aren't any other forms of financial support in the pipeline from both state and federal governments. This might well explain why the Commission stayed well clear from Westpac's 4.50% scenario.

Both ANZ and Westpac economists believe the RBA would be comforted by Monday's announcement. Judging from the price actions on the day, it looks like that assessment is carried by the majority of investors and forecasters.

ANZ Bank has reminded us all the RBA's latest forecasts see the local Wage Price index growing at 3.7% from the year earlier in the final quarter of 2024, and by 3.6% by the second quarter of 2025. The Fair Work Commission's statement considers the forecast return of the inflation rate to below 3% in 2025 remains intact.

Those who prefer a more negative interpretation can point to the fact this is the first time in three years when the increase exceeds recorded price inflation, so there's a surplus coming for wage earners in Australia (while Monday's decision doesn't affect all wages, there usually is a follow-through impact on wages that are not directly impacted).

A more constructive view is the freshly announced 3.75% increase remains well below the 5.75% rise in FY23, as well as the 4.6% rise in the year earlier. While this year implies a small rise in inflation adjusted incomes, real wages will still be below the level before inflation spiked higher.

All of this melts into the economic debate that weighs on general sentiment among Australian investors, also illustrated by the fact some media reports still have the RBA hiking rates while most other central banks around the globe are preparing for rate cuts. I see a lot of biased hyperbole, and a not so subtle political agenda.

I sympathise with the view that many Australian households are feeling the squeeze, while small businesses are closing their doors, and thus many among us won't go on a spending spree if we find a little bit of extra money in our purse post June 30th.

The counter-argument is today's economic impact from inflation and rate hikes is not being felt by a large proportion of the population that owns its property and welcomes additional wealth through the share market, or otherwise.

It's a polarised world, for sure, and this also polarises experts views and predictions, as well as ASX-listed companies.

Before we zoom in on what has been happening inside corporate Australia, let's first take note of what has been happening in the USA recently, as that might surprise a few readers.

Insights From US Quarterly Updates

Big Tech has been driving the American share market indices through the peak in bond yields and their economic impact to fresh all-time record highs in 2024. In the slipstream of Big Tech, market momentum has stuck with 'Growth', and 'Quality', and with 'Technology', more than it has with the lagging 'Value' stocks.

Led by 'elevated' valuations, as well as by historical analyses of Fed rate cuts, many investment portfolios are positioned for a reversal in momentum, i.e. smaller cap companies instead of large and Mega caps, but also 'value' (both 'cheap' and 'cyclicals') rather than Big and smaller Tech, or 'expensive' Quality.

Thus far, the predicted switch in market leadership has failed to materialise. There have been a number of attempts, but the dial keeps reverting back to Growth and Technology. There is one obvious explanation for this: the direct correlation with market expectations for Fed rate cuts.

As US Treasuries have delayed the timing and reduced the number of expected rate cuts this year, this has placed market momentum back in favour of those expensive-looking, large cap Growth stocks.

Underneath the surface, however, there's a second driver that equally should be taken notice of: the recent quarterly results season has yet again worked in favour of the (almost universally) maligned Mag7, as well as other Growth companies.

In simple terms: now that analysts have updated their forecasts post the latest financial results and company presentations, the pendulum for positive earnings momentum has swung back in favour of those who already were leading the share market higher in the first place.

A third explanation comes through accumulating signals the US economy continues to lose momentum, which might equally be reflected in more subdued performances and forecasts for companies whose operations align more directly with economic momentum.

As pointed out by analysts at RBC Capital recently, Value and Small Caps tend to outperform when GDP readings are above average. The opposite is currently happening, and economic data and indicators are feeding into reductions in forecasts. The March quarterly reporting season in the US has also shown many companies are still struggling with inflation, or their key customers are.

The good news, as far as inflation forecasts and the Fed's intention to start cutting rates are concerned, is companies are starting to talk about lowering prices. Another stand-out observation highlighted by RBC Capital is companies are delaying decisions about purchases and investments.

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