Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Australian equities set to outperform: Ausbil
The March quarter is well and truly over. Unfortunately, the war in Ukraine is not.
Chart 1: World equity market returns – March Quarter 2022
Looking at the world chart above, equity markets tumbled across the board in the quarter, except for some small pockets in Singapore and Australia. According to Ausbil, much of it was due to rising energy and commodity prices due to the war.
In stark contrast, the Australian market posted a monthly gain of +6.9% (S&P/ASX 300 Accumulation Index), +2.1% for the quarter, with the 1-year return at +15.2%. The Ukraine conflict appears to be locked within national borders and the market is giving this a low probability of changing anytime soon. Ausbil says, it “is closely monitoring the elevated risks and the potential for surprises, though the risk is somewhat mitigated by the strength of Australia’s economy, and the positive impact of the current resources super-cycle on our balance of trade.”
Most major markets were down in the quarter with China (Shanghai A-Shares : -10.6%) the worst performer, closely followed by Hong Kong (Hang Seng: -9.1%), Nasdaq (-9.1%), and Europe (EuroSTOXX: -6.5%), as illustrated in Chart 1. Developed markets (MSCI World: -5.2%) outperformed emerging markets (MSCI EM: -7.0%). However, positive highlights came from Singapore (Straits Times: +9.1%), the UK (FTSE 100: +1.8%) and India (Nifty 50: +0.6%).
Australia, however, managed to outperform with the S&P/ASX 300 closing +2.1%, with the Canadian TSX: +3.8% also outperforming: it should be noted that both countries are commodity-driven economies. So the increase in energy and commodity prices as a direct consequence of the war in Ukraine has helped prop up the materials sector.
Chart 2: Domestic returns by segment – March Qtr 2022
According to Ausbil, “The March quarter saw more rotation towards sectors that benefit in rising inflation environments, and are beneficiaries of rising rates, including Energy (+28.3%), Materials (+15.2%) and Financials (+4.4%). Utilities (+14.1%) also delivered solid returns. In contrast to these, Information Technology (-13.7%), Consumer Discretionary (-10.4%) and Health Care (-10.1%) all underperformed, as illustrated in Chart 3.”
Chart 3: Sector returns – March Qtr 2022
“The war in Ukraine has highlighted an urgent need for alternative energy solutions with the upside shock to Energy prices given Russia’s major exports of oil and gas (Brent: +37% and WTI: +30% and US Natural Gas: +51%), with a knock-on impact on Thermal Coal (+53%) as a chief source of electricity generation. The action also seen in Nickel (+54%) has been exacerbated as Russia is a major producer (7% of world market share) of this critical metal for stainless steel and batteries,” says Ausbil.
Ausbil concludes by saying “the market follows earnings, in the medium to long term, though in the short term, markets can deviate from fundamentals. Australia’s earnings outlook remains strong, and though rates are rising steadily, companies are still benefitting from low rates and cheap balance sheet funding.”
Ausbil believes consensus is still underestimating earnings growth. “Australia’s position as a key commodity market globally, and one whose provenance is increasingly valued on ethical sourcing, quality of materials, and reliability, is set to benefit both the economy and the equity market. We expect Australia to outperform in the near term as demand for resources escalates in the current geopolitical environment and with the underlying shortfall in supply for key commodities.”
Chart 4: Commodity markets – March Qtr 2022
