FNArena’s Weekly Insights – October 25 2021
In this week’s Weekly Insights:
-We Are All Worried
-Australia’s Share Market Sweet Spot
-Conviction Calls
-What Works In Australia?
By Rudi Filapek-Vandyck, Editor FNArena
We Are All Worried
Confused? Well, you should be.
Investors, central bankers, business leaders, economists, politicians, and consumers, not to forget the many experts and market commentators on Twitter and elsewhere across social media; all are struggling to see what is really going on in a world full of contrasts and contradictions.
At its core lives a global economy that is far from ‘normal’ given the extraordinary context of a global pandemic and the re-opening of societies and country borders but still supported by extraordinary central bank largesse. Yet, central bankers are once again looking at winding down their accommodative policies at a time when global economic momentum is deflating.
Add share markets near all-time peak valuations and this process by definition will be a tricky one to pull off without triggering market anxiety, or worse; the threat of a good old fashioned asset market meltdown.
We’ve had a few of such moments in the recent past. September-December 2018 is most comparable to today’s situation. In case anyone needs reminding: US indices tanked by -20% over those four months and only stopped falling once the Federal Reserve declared it understood the market’s message, and stopped tightening through higher interest rates.
Today’s central bankers’ dilemma looks slightly different, because the focus is on ‘inflation’ -sticky or transitory- but other factors are eerily similar; asset valuations are high, economic growth is decelerating and central banks want to migrate to a less accommodative policy-setting.
The valuation gap inside equity markets is similar too. Growth and Quality are trading at a sizeable premium to cyclicals/Value, even as banks and energy stocks have performed strongly. Back in 2018, as the likes of Altium ((ALU)), CSL ((CSL)) and Afterpay ((APT)) started to sell off, the schadenfreude among your typical value-investors didn’t last long with banks, miners and other laggards soon following suit.
The set-up three years later is equally as confusing: historically, when global growth slows noticeably markets are usually quick in pricing in the commensurate decline in demand for energy and commodities. This time around, however, inflation and higher bond yields are in focus and thus the general expectation is that energy producers and banks should take the lead in guiding indices higher.
At least widespread concerns about disappointing market updates from listed businesses, both domestically and in the USA, have thus far proved unfounded, or at the very least premature.
But earnings estimates are still falling, both in Australia and on Wall Street, providing an additional headwind for markets looking for answers and direction. Providing offset is the true avalanche in M&A deals that has descended upon the ASX (though, equally, this also involves a large number of failed attempts and aborted agreements).
