The Month in Review - Jan 2023
Monthly Review
Farrow Hughes Mulcahy Investment Research 07 February 2023
The year has gotten off to an exuberant start with the ASX 200 up 6% in January and the MSCI World Index up 7% US$.
The Fed of course is key given its influence globally. It hiked again but is sounding a lot less hawkish and open to a cut this year. As widely expected, the Fed downshifted to a 0.25% hike which took its Fed Funds rate to 4.5%-4.75%. The Fed is still hawkish in that it still anticipates “ongoing increases” in interest rates, still sees the labour market as tight and with Chair Powell wary of easing too soon. But against this Powell noted that the “disinflation process has started”, he didn’t push back against the easing in financial conditions, and he indicated a willingness to ease rates if inflation falls faster than the Fed anticipates (which is what we and the markets are expecting). So, it was less hawkish than feared. We expect another 0.25% hike in March. The stronger than expected January payroll report in the US adds a bit of upside risk to this, but we expect US jobs data to slow going forward.
In Australia, it’s a slightly different story but only because the inflation cycle here is lagging the US by about six months – partly due to a delayed rise in electricity prices, floods and a later reopening. After the strong December quarter CPI we expect that the RBA will raise the cash rate again on Tuesday. With RBA rate hikes already getting traction - indicated by recessionary levels for consumer confidence, the collapse in housing indicators, signs that retail sales and the jobs market are starting to slow - and signs that global and local inflationary pressures are peaking our view remains that we are near the top in rates. It’s interesting to see that the money market now sees the cash rate peaking at around 3.6%, after expecting 4% or more over the past six months, and now sees the possibility of falling rates by year end. It’s clearly sniffing out a likely turn in the inflation cycle in Australia.
China’s economy bouncing back. Chinese business conditions PMIs – notably for services - rebounded in January reflecting the boost from reopening. Chinese high frequency weekly data for, e.g., traffic and subway usage, flights and property transactions, suggests economic conditions are running around normal going into February after running well below normal late last year with Covid disruptions. The reopening bounce back is consistent with our view that Chinese growth this year will rise to 6% after 3% last year.
Just over half the S&P 500 by number (and roughly two-thirds by weight) have now reported December-quarter earnings. The proportion of companies beating EPS estimates remains at 69% this is below the long-term average. Aggregate consensus earnings estimates for FY23 have bounced from their lows on February 1, but are still down 2.3% since the start of major earnings releases this season.
The Australian December half earnings reporting season will start to ramp up with around 10 major companies reporting including Nick Scali, Transurban, Macquarie, Amcor, Suncorp, AGL and Mirvac. Following recent upgrades, consensus earnings expectations for 2022-23 are for growth of 7.3%, but this is concentrated in energy, industrials, IT and utility stocks. Expect companies to generally confirm that cost and supply chain pressures have eased somewhat from last year.
2023 is likely to see easing inflation pressures, central banks moving to get off the brakes and economic growth weakening but proving stronger than feared. So far, so good. This along with improved valuations should make for better returns in 2023. But there are likely to be bumps on the way, particularly regarding recession risks, geopolitical risks and raising the US debt ceiling around mid-year.
Bonds are likely to provide returns a bit above running yields, as inflation slows and central banks become less hawkish.
Australian home prices are likely to fall another 8% or so as rate hikes continue to impact, resulting in a top to bottom fall of 15-20%, but with prices expected to bottom around the September quarter, ahead of gains late in the year as the RBA moves toward rate cuts.
Cash and bank deposits are expected to provide returns of around 3.25%, reflecting the back up in interest rates through 2022.
Important note: While every care has been taken in the preparation of this document, Farrow Hughes Mulcahy make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.
Source: AMP Capital, Pendal Group, AZ Sestante
