Weekly Wrap 17 April

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: Good morning everyone, welcome back to the weekly wrap. I am joined this week not by Sophia, who’s off on a well-deserved couple of days break, but I’ve got our head of investment strategy, Rob Crookston, to join us. Rob, great to have you on board. Perhaps we could make this a weekly thing as well. Who knows?

Rob Crookston: It’s a big hit. That’s good.

Will Riggall: Yeah, so look, it’d be great to just—we’ve been, you know, pretty much in the trenches this week trying to work out how sustainable this rally is. You know, looking back, it’s just moved so fast. But I guess what we’ve been—it’d be great to go through what we’ve been talking to clients about, how we’ve been talking to them over the last two to three weeks. Looking at the milestones and how we saw this rally come into fruition. And I guess in the end, the big question, is it really sustainable? So Rob, look, yeah, if you can just lead off and then we’ll come back to me and a few things, I guess.

Rob Crookston: Yeah, I guess we’ll go from the start and when the conflict started and we spoke to clients sort of in the first week and just spoke about the history of conflicts over the last 30 years and what you’ve tended to see is pretty short and sharp corrections, which is sort of what we got to.

Will Riggall: Mm.

Rob Crookston: And then short and sharp recoveries. And the recoveries can typically happen before, you know, a ceasefire occurs or actually the end of the conflict. And it’s sort of unsurprisingly, we’ve got to a point today where there isn’t really the end of the conflict. The Strait of Hormuz isn’t open yet, yet we’ve got the S&P 500 at all-time highs again. So yeah, we sort of spoke about over the last sort of couple of weeks to clients to add risks to their portfolios, adding quality because there’s still a lot of uncertainty in the world. And that call has been pretty good. And obviously we’ve seen, as I said, the S&P 500 now get back to all-time highs.

Will Riggall: Of a slowing economy. And what actually has been provided over the last three to six months has been a significant sell-off in the tech sector. So not just in Australia, but globally, we’ve seen the market move back towards the tech sector, those higher growth, those quality stocks where the SaaS apocalypse… the concerns around that seem to be discounted to a point, but I guess it’s as well at that lowering of risk around interest rates, which is a discount round of these longer-term type, longer-term cash flow type businesses. So yes, what’s led the market has been that higher growth component.

We’ve seen resources jump a little bit as well. Very much we are probably seeing some more stability around earnings within the US. But again, to your question, looking at Australia, we talk about the confession season more so than an earnings reporting season. We had ours in February, it was positive. We are moving to a quarterly cycle within the US. It will be really interesting to see and important for markets how that goes.

But this confession season is around the updates that are given prior to the June financial year end. So there are a few major conferences that we’ll have in May. And actually this week we’ve already seen some stocks come to market and give us indications of the impact. It’s very much been first order today; it’s around cost increases from oil. So the obvious ones are Qantas [QAN] got clean away with their transport network. But what’s interesting is that second derivative may be starting to come through.

Westpac [WBC] this week came out and talked about impacts on cost inflation and the stresses on businesses. It’s been a long period of decreases in the bad and doubtful debt cycle. So those loan provisions that they put aside, there’s just been no real evidence of loans that they’ve made over the last three, four or five years turning bad, but banks do provision for these and we’re starting to see those provisions come up. That’s not cash EPS change, but it is expectation of future cash EPS.

And I guess where we stand, we’re very much recommending that clients continue to move towards those components of the ASX that are more offensive. But also, if you’re looking for better, you’d be going for the higher growth, higher return on capital, less capital, less cyclical components, which are the tech sector. We’re looking at diversified financials as well, where we’re seeing some higher growth names and then traditional classified names, REA [REA], Seek [SEK]. Car Group [CAR] has certainly had a very strong performance this week.

So in a relative sense, we are concerned and a bit cautious around whether the momentum seen in February may actually be tempered somewhat over the next few months as we have some level of downgrades in the ASX for today. We’re not seeing it yet. So I guess that’s something we’ll certainly be talking about over the next few weeks with you. So just to round it off, Rob, what have we learned this week, I guess? What lessons can we take away that we can remember for next time this happens?

Rob Crookston: Yeah, I think it’s at the moment, the key lesson for me is the resilience of markets, especially. And I think we forget the composition now of, you know, US equities is a lot more resilient than it was 10, 20 years ago in terms of that bigger weight into the tech sector, which as you’re saying, is less sensitive to the oil price and the global economy than banks and energy used to be, a big part of the market for the US.

I think it’s interesting, just we’ve seen with some of the performance this week, we’ve seen the banks underperform and some of the tech start to outperform, which is good to see in terms of portfolio positioning. It may be interesting that the large caps have been seen as insulated from the risks of the Middle East and it’s been a flow of investors to the really big large caps like the banks over the last six weeks. And maybe now that’s time to assume that rotation away from the ASX 20 to the mid-caps and into the smalls as we get more news and more positive news on the conflict. So I expect to see more of the same over the next few months as well, that rotation away from the large caps into the mids and the smalls and the tech sector, which obviously has been hit hard over the last couple of quarters.

Will Riggall: Yeah. All right. Okay, well, thank you for joining me today, Rob, and thank you everyone for listening in. We look forward to Sophia being back next week because she’s extremely good at this. But have a great weekend, everyone, and thank you very much for your time.

Rob Crookston: Yes. Thanks, Will.

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