Final bells of new cycle are rung, S&P 500, ASX200 firework rebalance, HK ends flight ban
Australian Market Strategist
Summary: As the final bells of the new cycle are rung, before rates rise and petrol rises again; the S&P Dow Jones Indices rebalances the US benchmark’s S&P500 and S&P100, and the ASX’s ASX200, ASX300. The main theme is that commodity companies and banks are being bought, while companies hurt by higher energy prices and rates, are culled; meaning ETF providers and fund managers will copycat those moves too. Options expire seeing the highest trade volumes since 2019. Hong Kong ends flight bans from nine countries, boosting oil demand and oil prices. Volatility and gold fall. Bitcoin marches toward $41,000. And end of quarter rebalancing takes effect, seeing ugly swans bought up.
Co-written by Market Strategists Jessica Amir in Australia and Redmond Wong in Hong Kong
What’s happening in equites that you need to know?
- The Australian share market (ASX200) briefly hit a high of 7,350 points, and rose above its 200 day average, before ending lower (0.2% down). The market was weighted by the gold price pulling back, seeing De Gray Mining (DEG) fall 7%. But looking at the leader board we saw Block (SQ2) rally 9% after the price of Bitcoin jolted higher (Block earns most of its money from Bitcoin transactions). Meanwhile, other leaders today were quarterly downward facing tech stocks like pay-tech stocks EML Payments (EML), and Tyro (TYR) which rose 9% and 3% respectively, as fund managers are being somewhat forced to buy into as tech as it's been the worst performer this quarter, ahead of rates rising. Please note we expect portfolio rebalances to continue to occur before the end of the month/quarter, where fund managers buy underperforming stocks/sectors (i.e. tech) and meanwhile reduce exposure to stocks/sectors that have made strong gains (i.e. commodities). So if you are bullish long term commodities, you could buy low hanging fruit if you see commodity stocks pull back here.
- In Australia today, the S&P Dow Jones Indices quarterly rebalance came into effect, and it highlights that commodities are ruling this new cycle. For example, in the ASX50, BlueScope Steel (BSL) was added to the key index, while freight handler, Aurizon Holding’s (AZJ) was removed. In the benchmark index, the ASX200, African lithium miner AVZ Minerals (AVZ) was added, taking MedTech company Mesoblast (MSB)’s place. In the much broader ASX300, most of the companies added are in commodities; like lithium companies; Core Lithium (CXO), Lake Resources (LKE), Sayona Mining (SYA) and gold-lithium company Firefinch (FFX), reflecting that these companies have made sizeable gains. While several battery mineral stocks were added to the ASX300 including Jervois Global (JRV), and Syrah Resource (SYR). On the flip side, stocks removed from the ASX300 are those that are likely to be squeezed by interest rates rises, so we saw Sezzle (SZL), Opthea (OPT) and Paradigm Biopharma (PAR), and Electro Optic Systems (EOS) removed from the ASX300.
- In Asia on Monday, Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) Hang Seng Index opened higher following strong performance of ADR trading last Friday in the US session but quickly gave back the gains. Chinese banks kept their 1-year and 5-year Loan Prime Rates (LPR) unchanged this morning on their monthly fixing announcement. Semiconductors did well. SMIC (00981) and Hua Hong (01347) were up over 4%. Coal miners outperformed. China Coal (01898) rose more than 4%. Catering and brokerage stocks were hit. Haidilao (06862) fell 7%. CITIC Securities (06030), CICC (03808), Haitong (06837) were down 1% to 2%. In Singapore, the Straits Times Index (STI) was little changed.
- In the US, the S&P 500 (US500.I) and Nasdaq 100 (USNAS100.I), are tipped to open higher. A focus will be on oil stocks, given the oil price rocked back to $108.14, with no replacement in sight for Russian oil. Another focus in the US on Monday, will be on S&P100 rebalance. The Dow Jones Indices has added banking and financial services giant Charles Schwab (SCHW) to the biggest 100 US index, and removed Biogen (BIIG). The change will be effective from Monday March 21 in the US, meaning fund managers and ETF providers who use S&P100 benchmark, will be forced to buy Charles Schwab and sell Biogen.
What you need to consider
- Two largest pieces of US economic news will be watched like a hawk, New Home Sales (data due Thursday March 24) and Durable Goods Orders data out same day. US new home sales are tipped to rise slightly ahead of rates rising, with 813k new home sales expected in Feb. If the data is better than expected, you will probably see a rally in US banks and US mortgage houses, like Bank of America (BAC), JPMorgan (JPM) and US Bancorp (USB).
- After the dramatic rally triggered by China’s Vice Premier Liu He’s remarks, short interests have been substantially reduced and outflows have reversed. Market sentiments have stabilized. Indiscriminative selling just to unload holdings disregarding earnings beats and low valuation has stopped. Whether Chinese equities can hold on to their new found stability largely depends on if the roll-out of accommodative fiscal and monetary polies and easing in regulatory measures on e-commerce as well as supportive policies to the property sector are substantial enough to remove the fear of deceleration in growth. The bar is now higher after expectations have been lifted last week. A more hawkish U.S. Fed, happening in a time when the Chinese current accounts may be hit by slower exports and worsening terms of trade, will be a constraint on China’s monetary policy through depreciation pressure on renminbi. Fed Chair Powell referred to the need to “restore price stability” 10 times in the press conference, while he used the phrase “maintained price stability” in the past. The Fed is behind the curve and Powell knows that he has to move fast and big.
- Another tech wreck ahead? Earnings drive share price growth, and share price growth also stems from policy shifts. Meaning, money will favour commodity, not tech in this new cycle. Don’t be fooled by tech gains, as the tech rally is likely to continue for now, before tech stocks head south once again as rates rise. As mentioned on Friday, tech stocks are rallying ahead of end of quarter and month (as fund managers are being forced to buy underperformers to bring asset allocations back into alignment). So for you, it means you could consider selling or reducing tech stock holdings, to take advantage of the higher tech stock valuations for now. The rally is likely to be short and sweet. So you could sell some of your tech positions at higher highs, and instead, buy stocks that have tailwinds or stimulus from either rates rising or Federal incentives (green energy). So consider looking at banking stocks, insurance companies, and commodity stocks.
- The Hong Kong and the China A share markets may pull back from the current level. With over 60% of the Chinese and Hong Kong stocks in the MSCI Asia-ex-Japan Index that have reported results beat market estimates and many quality companies are trading at historical low valuation, long-term investors may look for opportunities to selectively accumulate when the market pulls back on bad news. Given potential disappointment on the magnitudes of accommodative policies mentioned above and the delicate Sino-American relationship magnified by the Russian-Ukraine fiasco, it is advisable to focus on companies that can provide a good level of margin of safety through sustainable profit margins and cash flows.
Earnings to watch
Mar 24: Premier Investments (PMV) Brickworks (BKW), Gold Road Resources (GOR)
In Hong Kong & mainland China
Mar 21: Brilliance China (01114), Pinduoduo (PDD)
Mar 22: Anta Sports (02020), Chow Sang Sang (00116), CSPC (01093), Minth (00425), Shimao Services (00873), Wuxi Bio (02269), Xiaomi (01810)
Mar 23: AAC (02018), China Mobile (00941), CIMC Enric (03899), Fosun (00656), Geely (00175), Haidilao (06862), Kingsoft (03888), Tencent (00700), Trip.com (TCOM)
Mar 24: BAIC Motor (01958), China Life (02628), China Overseas Property (02669), China Resources Beer (00291), NIO (09866)
Mar 25: Greentown Service (02869), Longfor (00960), Meituan (03690)
Quarterly Outlook Q2 2022
Quarterly Outlook Q2 2022: The End Game has arrived
- Shocks from covid and the war in Ukraine have forced the global financial and political world to change, but what will the end game be?
Productivity and innovation have never been more importantAs the world economy hits physical limits and central banks tighten their belts, could equities be facing a 10-15% downside?
The great EUR recovery and the difficulty of trading itIf the terrible fog of war hopefully lifts soon, the conditions are promising for the euro to reprice significantly higher.
Tight commodity markets – turbocharged by war and sanctionsWith supply already tight, commodities keep powering on. But will it last for yet another quarter?
Between a rock and a hard placeGeopolitical concerns will add upward price pressures and fears of slower growth, while volatility will remain elevated.
The Great ErosionInflation is everywhere and central banks try to combat it. But will they get it under control in time?
Australian investing: Six considerations amid triple Rs: rising rates, record inflation and likely recessionWhile global financial markets are struggling in an uncertain world, the commodity-heavy Australian ASX index is poised to keep a positive momentum.
Cybersecurity – the rush to catch up with realityWith the invasion of Ukraine, governments and private companies are rushing to reinforce their cyber defenses.