Weekly Wrap 15 May

The following is a transcript of an interview with Will Riggall, CIO – Bell Financial Group, and Rob Crookston, Lead Strategist – Bell Potter. You can watch the original interview here.

Will Riggall: Welcome to this week’s weekly wrap. I’m here with our Chief Investment Strategist, Rob Crookston, and we’re here to talk all things markets. And it certainly—we were busy this week, weren’t we, Rob? There was plenty to go through on the macro front or global front, but also on the domestic front.

But as we always do, we try and give a bit of framing of how markets performed this week. So again, a bit of Back to the Future. We talked about how the ASX was performing marginally better than global markets last week. We had a return to trend where offshore markets were the leaders; we had the US S&P and the NASDAQ leading the way, and we will go towards talking about the US results.

Domestically, it was a somewhat more anaemic response to the federal budget this week. Also some stock-specific impacts—a couple of key stocks, CSL and CBA—that certainly did impact returns, but also, you know, we certainly find them in a lot of portfolios, so we’re very happy to cover that. And then I guess we’ll kind of go towards how we’re looking for things forward. But Rob, over to you, if you could give us a sense of the big news this week and perhaps we’ll start off with the federal budget. To be honest, that was a big one early on Tuesday night.

Rob Crookston: Yeah, just on the federal budget, I think the key things that came out of it was restricting negative gearing now to new builds only—that comes into effect in July 2027—and changing the CGT discount, so removing that 50% and eradicating that from gains, again from July 2027. So, they’re the two big ones for me.

I think the best implications for that: one, on the CGT discount, it probably changes the incentives for investors. It moves incentives away from growth investing. So, if you can get charged a higher CGT now, it’s going to change your return profile over the next few years. And it tilts it towards income. So, if it’s turning for retirees now, the tax incentives there around generating more returns from income than from growth and capital growth in terms of price. So, that’s probably a good thing for listed property, infrastructure, and some of those consumer defensives as well—you know, supermarkets, Wesfarmers, Telstra, etc. And we have seen something in some of that happen over the last few days as well, in terms of those shifts towards those names. You know, something like Transurban was up over the last few days.

I think on negative gearing, what it does is—if you were going to be a property investor, the incentives were there versus equities because of the negative gearing. Well, when you’re buying a property, there are obviously some costs involved: stamp duty, then the maintenance costs as well—that could be strata, obviously maintaining the property. They’re going to add cost year-on-year. Negative gearing netted off some of those impacts, but now you haven’t got that. Certainly, I think the incentives now again are shifting towards equities over investment properties. Obviously, a bit different for new builds, but that’s a smaller part of the market. So, I think again, incentives are shifting overall to equities over the medium term. That could actually be a good thing, a small tailwind over the medium term for our market.

Will Riggall: Okay, yeah. If we look across the sector performance, we had real strength in that materials sector. So, as we’ve seen this de-escalation, or at least people moving away from the concern so much about the Middle East—and certainly we do need a resolution to come through there—but what we’re seeing is strong US GDP, global growth reinvestment, and largely real strength in the commodity prices.

So, names such as BHP to have a positive 6% move plus over the week—really strong. I think copper’s leading the way there. And we’ve talked about BHP as our key exposure in that space. Copper fundamentals look really strong. It’s not just the lack of investment in new mines and such, but we’ve got those secular drivers around AI and renewable generation that’s really driving that too.

If we go down, the ones that were hit off the back of the budget were the banks, really. And look, the banks have been a bit weaker over the last couple of weeks as we’ve had some more concerns rolling in around the economic environment in Australia and how that may come through in what has been a very anaemic environment for challenges with their loan books. So, we did see the main thing was credit growth has held up so far, net interest margins are resilient, but the problem is the expectation that the bad and doubtful debt charges, or the provisions that they’re putting aside, need to increase.

CBA kind of had the double-whammy terrible data report on Wednesday post the federal budget because, really, if we’re thinking about a sector that is impacted—and where we’ve seen the biggest negative move in the market—it is that property-related sector. Certainly, given the focus on that, most of the loans there in their books are mortgage-related and very much investor-related, and the big changes there. The banks have taken a hit and where it comes through is the, I guess, not so much the net interest margin expectations, because a positive interest rate environment is usually good for sustainable net interest margins. The problem is just the credit growth and how investors are going to react to that.

So, we saw REA relatively weak, just turnover, some malaise there as well. Perhaps we’ll get back to stocks a little bit later, but I did want to touch on a note that you put together recently on just the US market and the underlying strength within that. I think it’s really important to frame our positive view on where investors should be looking towards. You could just say it’s a blanket “AI is great” and the positives are way off in the future and it’s a bubble, but you’re actually seeing some real fundamental positives in the reported numbers there. If you could just take us through that, Rob.

Rob Crookston: Yeah, so we sort of got through towards the end of US reporting season by the end of last week—about 90% of companies reported. We’ve got Nvidia next week, which will be important. But what we’ve seen is around about 85% of companies beat earnings expectations. That’s above average.

The key for me is when you actually look at the Q1 actuals, the year-on-year growth was 27%. And what we’ve seen over the last six quarters is double-digit growth, which is very impressive. And that 27% number is the highest number since Q4 2021, when earnings were extremely strong because we were coming out the back of COVID. Now, sort of a recovery in earnings from that—this isn’t a recovery. This is just purely on the basis of strong AI demand, which was a big part of it.

And the mega-caps led the way. Mega-cap tech especially, they grew their earnings 61% year-on-year, which is just exceptional. But even when you take a step back and look at the S&P—the Mag 7 was 61%, but if you look at the S&P 493 (the rest), they’re still earning 16% year-on-year. So, it’s pretty strong. Nine of the 11 sectors were growing their earnings.

And then we look forward into calendar year 2026, all 11 sectors are expected to grow their earnings over that period. Also, 11 sectors were seeing upgrades over the course of the earnings season as well. So yes, the Mag 7 are leading the way and they’re doing some of the heavy lifting, but actually, the breadth is pretty impressive as well and healthy. And that’s a good thing for markets. We haven’t probably seen that in the returns so far—there has been a certain narrowness in terms of it being tech—but I think when you’re seeing earnings broaden and you see the breadth of earnings being pretty healthy, that’s a good thing for the index in totality.

When I look at the mega-cap names—Amazon, Google, Meta, and Microsoft as well—that AI infrastructure spend is starting to pay off. We saw cloud revenue growth accelerating, which is pretty impressive when all of them are doing 25–30% growth in the first place. That’s now starting to grow faster. And I think what’s interesting with Meta is you’re now really starting to see AI being monetised by Meta. You’re seeing better algorithms, better ad targeting, and that’s flowing through for them for revenue growth accelerating. The revenue is 200 billion accelerating from 30% growth. It’s very, very impressive and margins are holding up very well. And they were starting to get actually pretty reasonably well priced, because they hadn’t moved for six months, but their earnings are going to continue to tick over.

Will Riggall: Yeah, I think it’s important to note that this opportunity set is actually coming through. If you think about GDP in the US, 1% is the CapEx being spent and that is flowing through the broader economy. So, we talk about for investors, it’s not just about picking the names, it’s having exposure to that. The value that’s being created is flowing through to the broader economy.

So, as you look to gain exposure, it is far easier than it has been historically, not having to take that stock-specific risk. But if you look across even just a broad S&P 500 Quality index—you don’t have to go just to the specific NASDAQ-type ETFs. As you look forward, there are ways to get exposure. Diversification is really important. We would encourage investors to think broadly, global, and look at those opportunities there.

Perhaps we’re probably a bit short of time, but we can’t get away from what was a tough week for a lot of people in Australia on a stock-specific basis. We talked about real strength in names like BHP, but for long-suffering CSL shareholders, there was no respite. On Monday, the company came out—Gordon Naylor, the ex-CFO who actually took the Segirus business and has delivered on the returns there, has returned in an interim capacity and has delivered what investors wanted. Understanding of the misallocation of capital and a return to the core.

The challenging part was that this is happening in an environment where CSL and its competitors are facing a more competitive market. We’re seeing increased supply, which is cyclical in its sense, but increased supply means challenges in the pricing. So, CSL is going through this period where it needs to refocus on its core at a time when its competitors have gotten stronger by reinvesting in their core business. Look, we’re not here to make a call, but CSL under $100 does offer support. And I think that’s the first indication of hope. But we do need more evidence and more milestones from this company for us to gain confidence around who the next CEO will be. What’s the strategy? Is there any further restructuring that needs to happen? So, a big hit for CSL shareholders, but at least the first positive move.

As we look across, yes, CBA was down about 10% post-budget on the loans there, but also they did miss and they did raise their doubtful debt provisions as well. It is a more challenging outlook for banks at the moment. We had Westpac in this morning and they certainly reiterated that somewhat.

And I guess we talk about as well, Rob, as we try and find where the opportunities are—what’s driving the market and where people are investing, it’s in those commodity-exposed areas, those that are exposed to hard assets or the ones that are probably needing more investment opposed to Middle East challenges and security of supply, and then as well as those defensive businesses.

We talked about it this morning, but Worley had its investor day yesterday. It itself has been impacted by the challenges in the Middle East, but we actually were pleasantly surprised and actually see that they’ve confirmed what should be an improving outlook. And so we’ll do some more work on Worley and we’ll come back to you next week and perhaps chat about the backdrop there, the transition underway, and some self-help that’s coming through on that name. And it’s certainly trading well below long-term valuation. So, that’s a nice makeup for strong investor returns. Rob, any final words from you? If we look into next week, what we need to focus on?

Rob Crookston: I think just on the macro, we’ve got Australian unemployment, which would be very interesting to see. The economy is probably going under more pressure just from higher oil prices. So, it’s just important to see any indicators of where the labour market is going at the moment. Obviously, we get the unemployment results for April. The market is expecting that to stay flat for now. Anything that can go higher from here probably is seen positively by the RBA in terms of not having to hike rates further, because they’ll see a weaker labour market as a potential for lower inflation over the course of the next 12 months. So, interesting—unemployment is going to be very important for what the RBA do over the next six months.

Will Riggall: Yeah. Okay, all right. And we always keep an eye on what the Fed could be up to over there. Kevin Warsh confirmed as the next Fed chair this week as well. And we’ll probably keep an eye out for global CPI to give us some indication of whether the positive liquidity and positive growth environment can be maintained in the US.

All right, well, thank you very much, Rob. It’s always great to get your insights. And thank you everyone for joining us, and we look forward to seeing you next week. Have a great weekend.

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