Weekly Wrap 1 May

The following is a transcript of an interview with Will Riggall, CIO – Bell Financial Group, and Sophia Mavridis. You can watch the original interview here.

Sophia Mavridis: Thank you for joining us this Friday, the 1st of May. I’m Sophia Mavridis and I’m joined today by Bell Financial Group’s Chief Investment Officer, Will Riggall. Will, thanks for joining us this Friday.

Will Riggall: Hi Sophia, great to see you again. And yeah, we’ve rounded out the month. And I guess when we look back and aggregate that all together, there are some really interesting themes on a global perspective, but also domestically. What has been a kind of an environment of the tide that was lifting all boats, it’s very much changed and we’ve seen some real differences at the sector and stock level.

Sophia Mavridis: Yes. Well, it was a big month, so let’s jump into it. I guess not as strong locally, but in the US, Wall Street’s been on the rise off the back of corporate earnings. And there’s also been optimism about the resilience of the US economy, which is expanding. A strong first quarter in US earnings seasons. I guess there’s also been hopes of easing tensions in the Middle East that’s boosted US equities higher this year. The three major averages did drop when the US war with Iran commenced, but the three indexes are now trading above where they started this year. I’ll hand it over to you, Will; it’s been a big week with the Mega-cap reporting. What are you seeing in US markets?

Will Riggall: Yeah, so it is important for us to take a lead from the US and understand what the drivers are there. Again, we’ve talked about what we had at the start of the year. We had positive global growth, we had strong earnings and we had probably the expectation of rate cuts.

Sophia Mavridis: Yep.

Will Riggall: In Australia, we’ve certainly got increases. There’s a real question around where to from here in the US. But what we’ve had this month was the relief rally that came as tensions eased. What the hope was is that we’d have a resolution. By now, we haven’t, and markets are certainly getting a little bit more nervous. But then, of course, we have to think about what are the impacts and who is most impacted. I think that’s the key thing we need to look at to understand why global markets have been performing better than our Australian markets.

It’s more of a structural versus cyclical argument at this point in time. The backdrop of strong economic growth is certainly being proven in the US, but in Australia we’re starting to see some weakness flying through. That’s not surprising given the pressure on the consumer. The companies, as well as the banks that we flagged this month, continue to point out there are some stresses in the domestic economy. ANZ today has been the last bank to give us an update and tell us about that. But we’re also seeing some companies starting to flag impacts.

Net-net, our earnings are somewhat resilient. We’re getting a bit of weakness coming through, but we need to look under the hood. Again, it’s the energy that’s holding us up. So Woodside, Santos, Beach and those names that are getting the upgrades, but the rest of the market is reflecting what is an economy that is more exposed to global demand, but more so those cost impacts that are coming through from the higher oil price.

Sophia Mavridis: On that topic, what are we expecting on the oil front, considering the rally over the last month?

Will Riggall: Yeah, the hope was that we’d have a resolution. So we had oil drop significantly at the start of the month. We were all the way back down into the 90s from where we were peaking up around the 120. And look, we got there yesterday; we got all the way back to 120 and the market is almost climbing that wall of worry at the moment.

Sophia Mavridis: Mm.

Will Riggall: Hoping that what we’ll see next week—I guess we’re starting today or last night—is kicking off the US reporting season. Strong numbers, we can talk about that. But we do need this resolution this month. The tensions are there; there’s a will to get a deal done. But I guess as we exit the month, the concern is that we will not get that resolution any time soon, which does mean those economies such as ours will be more impacted. That’s where we’re seeing that dislocation between geographic and asset class returns.

Sophia Mavridis: Well, some key movements in those key asset classes that you just covered. What were the winners and losers in Aussie sectors?

Will Riggall: Yeah, so it’s stark. We need to give some reference to what we saw: the 10% plus return over the month for the S&P 500 off the back of a return to that AI trade. But actually, if you saw last night, Meta was off 10%, Alphabet—or Google as we know it—was up around 10.

Sophia Mavridis: Yeah.

Will Riggall: What they really liked, what’s boosted the market and had the Dow moving up higher than the broader S&P, was actually Caterpillar talking about strong inbound sales, demand, power generation, strong order books, and they upgraded as well.

To your question, what are we seeing in Australia? We’ve actually had a broad range of sectors talking down the markets. We’ve got real caution around the consumer. We have talked about names such as Cochlear that disappointed during the month and really got hit hard. But yesterday we had Woolworths down 7%. Woolworths was and is the leader in the supermarket industry in Australia. It is the largest; it should deserve a premium. It has actually come back from ceding that leadership to Coles over the last couple of years, trading back the premium. They disappointed yesterday and it was really interesting what they remarked.

For supermarkets, they sell goods. We’re seeing inflation in those goods coming through, so that does lift the top line as long as the sales volumes stick around. And at the moment, they are. So they did see better than expected top-line growth. But what they did flag was there will be impacts at the EBITDA margin line. They’re going to start assuming or taking on some of those costs to protect the consumer. I think that’s a willingness or for the ability for the consumer to take on the same amount of goods at higher prices, but also I think it’s a little bit of political manoeuvring here—just to be seen not to be taking advantage of the environment and supporting the general population as there has been some regulatory things raised of late.

So they need to be good actors in the economy. They flagged that it’s not all cream for them. Woolworths was down about 7%, Coles was down in concert. We’ve got Coles’ three-quarter sales number out today, and it actually looks like they might be managing this somewhat better than Woolworths. So we will look at our positioning there. But I guess when I think about the market at the moment, in this level of uncertainty and with slightly weaker returns, it’s really hard to find a defensive. Healthcare is not there like it used to be. Staples are certainly stumbling somewhat, and those interest rate sensitive property and infrastructure stocks don’t usually do well in a higher interest rate environment. So it’s a challenging time for Australian investors.

Sophia Mavridis: Will, what about just any key highlights to mention that came out of Bell Potter’s research over the month?

Will Riggall: Yeah, I think what’s really worth remarking on is the strength of our understanding of the mid-to-small cap or the commodity exposure. So you had materials broadly flat across the board, but that includes gold. Gold gave back a little bit, but what we saw was continued strong performance from the major miners.

Sophia Mavridis: Yes.

Will Riggall: But I want to talk about the lithium sector. We’ve seen a material shift in the demand-supply dynamics within lithium. Our team, James Williamson and Stu Howe, have done a great job of releasing reports and keeping us informed. What we’ve seen is actually the crisis around energy is moving people back towards what we need to be more sustainable in the approach. There will be more capital investment in EVs, and that’s what they’re saying. Demand’s picked up for EVs, as we all know. Anecdotally, we’re not happy about paying those high diesel prices; that’s increasing demand.

The issues we had over the last 18 months with really low prices in lithium or spodumene saw some of those plants turned off. So the supply isn’t there at the moment to fill that gap. Inventories are low, we’ve got strengthening demand, and supply’s got to catch up. That’s really seen names—and our preference in the space, Liontown, covered by Stu Howe—was exceptional in the month, up over 40%. I think you could throw a blanket over the other names there: Mineral Resources, Pilbara.

It’s well worth touching on that research. It’s a sector view. Things may look like nothing’s much changing, but underneath, when we can understand the key drivers and look ahead, it can actually lead to great returns. There are always opportunities out there, and that’s what we’re here to do: to partner and help you navigate that and deliver those long-term sustainable returns.

Sophia Mavridis: And we’ll continue to bring those insights from Bell Potter’s research through in these videos on a weekly basis. To wrap up, we’re heading into a new trading month now. We’ve got some key economic data to watch out for from the RBA next week. What should the market be watching?

Will Riggall: Yeah, we had our RBA rate rise. We saw the Fed overnight. I talked about how everything was an 8 to 4, so a little bit of dissension whether or not they’re going to raise or leave it the same. Certainly, it’s very much a bias towards leaving it the same at this point in time, but we are getting a changing of the guard there with Kevin Walsh coming in.

Back to Australia, we do have a potential announcement on Tuesday around what the RBA will do. The expectation is that we are most likely to get a rate rise, which will be challenging for the domestic economy. We’re seeing global central banks starting to look through this inflation peak. But we’re not seeing the progress there; we’re not seeing those boats and tankers move through the Straits of Hormuz. We’re in a bit of a stalemate. So I expect the RBA will raise rates on Tuesday, and then we’re going to see if they back up with another one. That’s really important for the domestic economy, which is already showing signs of stress.

What we’ve also got is a very big week for news flow for the ASX companies. There’s a large industry conference where a significant portion of Australia’s companies come out to meet with investors. There’ll be a lot of news flow next week. They do call it the “downgrade conference,” and we’ll see if that’s what we come back with. Expectations are low—the expectation is that we will see more companies talking about a more cautious outlook. So there’s always the opportunity that it may be less cautious than expected. There is some resilience in components of the domestic economy. But yeah, it’s a really big week for markets on the macroeconomic front, but also on the stock-specific front.

Sophia Mavridis: Well, we’ll touch base next Friday, Will, and report back on how the market reacted to the RBA and to the conference. But for now, thank you for joining us, Will, and enjoy the weekend, everyone.

Will Riggall: Yeah, you too. Bye everyone. Thanks for joining.

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