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Active managers earn their keep; Elon and Ukraine: What we learned this week

Magellan announces buyback as Covid-19 roars back. 

US Federal Reserve lifts rates, stocks rally

The US Federal Reserve lifted interest rates for the first time in four years on Wednesday, helping the technology-heavy Nasdaq to its best 3-day gain since November 2020. Why are technology stocks rallying after declining for months amid fears of higher interest rates? Market participants point to greater certainty about the Federal Reserve’s intentions and bullish comments from Chairman Powell’s press conference, where he said recession risks were “not particularly elevated”, and that the US economy was “very strong”.

Don’t ditch your active manager yet

More than half of Australian large-cap managers beat their benchmarks in 2021 for the second year in a row, according to data published by S&P Global this week. Meanwhile, 80% of Australian international equity managers fell short of their benchmark return—an eyewatering 29.1%. Active management continues to lag longer term. Over a five-year period, roughly three-quarters of Australian domestic and international equity managers underperformed the index.

Chinese equities notch record gains and losses in a single week

Chinese equities swung wildly this week. Investors stampeded out of markets early in the week amid a new covid outbreak only to stream back in as the government pledged support. Hong Kong’s Hang Seng plummeted 10.6% over Monday and Tuesday as China quarantined tens of millions and shut key manufacturing hubs, raising fears of further inflationary supply chain disruptions. On Wednesday, shares had their best day since 2008 after officials pledged to support the market and hinted at an end to crackdowns on the pummelled technology and property sectors. The Hang Seng Tech index rose 32% on Wednesday and Thursday.

Risky business

Derivatives markets are pricing in as many as six rate hikes this year--bad news for the quarter of new mortgages that banking regulator APRA classifies as “risky”, according to data released this week. Debt-to-income ratios were six times or more for 24.4% of new mortgages in the December 2021 quarter, up from 17.3% a year ago. For example, anyone taking out an $800,000 mortgage with a gross income less than $133,000 falls into the category.

Magellan retraces losses with buyback

The week started with Magellan Financial Group (ASX: MFG) reporting another $5 billion in outflows since late February, prompting a sharp selloff. Shares rallied from Wednesday as the fund manager announced an on-market buyback of up to 10 million shares, or 5.4% of those on issue. The timing and exact quantity will depend on market conditions. Magellan is Morningstar’s top pick in the listed fund manager space, with analyst Shaun Ler bullish about the Global Strategy’s portfolio of undervalued moat-y stocks.

Covid is back

Case numbers are rising across Australia, with New South Wales reporting 20,050 new cases on Friday. Victoria reported 9,036 cases. The more-infectious BA.2 Omicron subvariant is spreading rapidly and health officials are bracing for another wave of cases that could peak next month. The ASX has taken the news in stride, rising 3.3% this week.

Elon Musk tries to broker peace in Ukraine

Tesla founder Elon Musk challenged Russian President Vladimir Putin to a duel on Monday. The stakes? Ukraine. Putin has yet to respond but his ally, Chechen-warlord Ramzan Kadyrov, fired back on Wednesday claiming “Elona” needed to “pump up those muscles” and offering Musk a trip to the Chechnya to train. Putin-loyalist Kadyrov runs Chechyna, a Russian republic in the Caucasus, as a personal fief amid widespread reports of abductions, torture and extrajudicial killings. Musk declined the offer.


Ramzan Kadyrov prepares to welcome Elon Musk to Chechnya (Source: FT, copyright Yelena Afonina/TASS/Reuters)

Don’t sell your dollars

When US sanctions froze the bulk of Russia’s foreign currency reserves, commentators speculated that countries like China might diversify away from US dollars to reduce exposure to financial sanctions. News broke on Wednesday that Saudi Arabia and China were discussing paying for oil in Yuan (as opposed to dollars). However, the end of dollar dominance looks distant. Chinese Yuan was used for just 4.4% of all foreign exchange transactions in 2019, compared to 6.8% for the Australian dollar and 88% for the US dollar.

ASX within sight of a year to date gain: Market wrap

Australian shares are on track to recoup losses stretching back to January after this week’s rally took the ASX to within 2% percentage points of breaking even year-to-date.

The benchmark S&P/ASX 200 closed up 0.6% on Friday for a full week gain of 3.3%, the best showing since February 2021. Year-to-date losses have shrunk to 2%, versus 4.7% a month ago.

Markets rallied in line with a drip-feed of positive news on two fronts: US inflation and China’s economy. Big selloffs in Australian energy and commodity early in the week eased by Friday as Chinese officials announced support for markets and the country’s covid lockdowns looked less severe than initially thought.

“The classic covid lockdown trade came back mid-week,” says Aaron Binsted, a portfolio manager at Lazard. “In the subsequent days, people looked at the situation and said maybe this isn’t so big, and then the government came out and said it would support the economy.”

Shares jumped again on Thursday following the US Federal Reserve’s decision to raise rates for the first time since 2018 and as Chairman Jerome Powell talked up the strength of the US economy. Rallies could give way to more volatility as the Fed works to curb inflation without triggering a recession, says Binsted.

“Historically, we don’t see the damage from Fed hikes this early in the cycle,” says Binsted. “The Fed’s own view is extremely fluid and divergent right now. It could move either way and markets will have to recalibrate.”

All sectors bar Materials finished in the green for the week. The heavyweight sector pared losses on Friday to end the week down 1.2%. Iron ore miners Rio Tinto and BHP fell 2.1% and 3.2%, respectively. Fortescue Metals rose 0.6%.

Major moves

  • Brent Crude oil down 3.3% this week at US$109 as of 6pm AEST.
  • Iron ore down 4.7% this week at US$149.65 as of 6pm AEST.

What we’re watching next week

  • Monday: The Blockchain Week conference starts. Federal Senators and senior bankers will rub shoulders with fund managers and crypto luminaries. Watch for signs of mainstream acceptance.
  • Tuesday: Reserve Bank Governor is giving an evening address. Watch for any sign of hawkishness.

What we’re reading/listening to this weekend

Understanding crypto; The rise of direct indexing; Drama and intrigue in the world’s nickel market; The mixed impact of sanctioning elites; Has ESG investing been ‘twisted to insanity’; ARK loses out to its evil twin; Economics has a confidence problem; First time home buyers should be able to use super

And finally, the wild tale of how cinema operator and meme-stock-extraordinaire AMC bought a gold mine.

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