"I'm still nervous": Peter Warnes on the outlook for equities |
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10/06/2022
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<p><strong>Lewis Jackson</strong>: U.S. equity markets have had the worst start to the year in decades. For bonds, the losses are some of the worst on record. Australian equities have avoided much of the downturn to-date, but still declined about 4% this year. I'm joined today by Morningstar's Peter Warnes to talk through what's going on in markets.</p>
<p>Peter, let's jump straight into it. You've seen markets rise and fall in your time. How are you feeling about this year's downturn?</p>
<p><strong>Peter Warnes</strong>: Well, this year's downturn was predictable, and I'm still nervous. And so, taking those two issues together, I think there is still a bit more downside. It could get ugly, but we haven't seen the bottom of the bear market yet. And so, I think this caution is certainly front and center.</p>
<p><strong>Jackson</strong>: Yeah. All those issues you've sketched out, it takes us from China all the way to the US. For Australian investors, for people who perhaps have the majority of their portfolio in local equities, which of those risks is sort of the most concerning, the most relevant, or is it all of them?</p>
<p><strong>Warnes</strong>: Well, we haven't got – I don't think we've got the risk profile as high as the U.S. or the ECB or Eurozone. They have got issues because of just the sheer size of what's happened in terms of their central bank balance sheets, and of course, Ukraine is right on the border of Europe and what have you. So, we have – our market is totally different in composition. Our biggest company is a resource company. You know what they are in the U.S. Totally, totally different makeup. Our banks with BHP and with energy and then with Telstra and Wesfarmers and what have you, you've nearly got 45% to 50% of the market there, whereas their market is totally a different composition, mega growth stocks and you all know what they are.</p>
<p><strong>Jackson</strong>: And does that make you more optimistic about Australian equities, given just how wildly different the local market is to the U.S.?</p>
<p><strong>Warnes</strong>: Well, to some extent, because we're kind of almost not comparable to the – because the issues of – issues of inflation are all consuming. The issues of sucking out liquidity out of the markets and out of the financial system are much, much more focused and a bigger fallout, if you like, from the two biggest economies in the world ex of China – the U.S. and the Eurozone. And they've got stocks that are so sensitive to liquidity and to bond yields. We have got – I'm quite comfortable and very – we're not very bullish – I'm bullish on energy, and Australia is a major exporter of energy whether it'd be thermal coal, whether it'd be LNG, and I still think that there's going to be – the world is not going to fall off a cliff. And so, total demand is still going to be there. There's going to be expansion. And so, metallurgical coal is still going to be wanted given the high quality we've got. So, we have got some kind of protection to the winds of change and the winds of change in the U.S. and the ECB could get to gale-force at some stage.</p>
<p><strong>Jackson</strong>: Okay. I want to return to some of those sectors that you're sort of more optimistic about. Before we go there, I think for lots of people watching on right now, it can just seem, like you said, there's just so much going on, it's incredibly difficult to sort of put your head around. What are some indicators that you're watching closely, signals – I don't know – there could be economic data, financial data – for a sign about whether we've reached the bottom, whether things are going to get worse. So, what are you watching closely as sort of a bellwether?</p>
<p><strong>Warnes</strong>: Well, Lewis, I still think that inflation is going to be an issue for a little while. Forget the transitory, and everyone has decided now it's not transitory, and we know why that's the case. The supply chain disruption could have been classified as transitory. Then we had issues there that the Ukraine and Russia just brought in over the top that forced another look at these things from a rising price point of view. And those issues aren't gone. I suspect that energy prices are going north rather than south for a little while to come. And what we've had initially, the two phases of inflation, we had the demand pull, which was one – you had supply chain issues, number one; but then number two over the top of that came this fiscal stimulus that pushed all the money into the consumers' pockets and that drove – demand goes up, supply issue is here, up go prices and that's your initial surge.</p>
<p>Now, the second coming is that these guys who have less buying power have said I want more, and Albanese, the new Prime Minister, he is saying, well, I want wages to rise, and (indiscernible) for a 5%, or that it goes from demand pull to cost push because the cost push is coming from increased wages and now, increased energy prices. They're not demand issues. They're cost issues. That's the worst cocktail you can get. You put demand pull and cost push together, you have cost pressures, inflationary pressures that are going to be around for quite a while.</p>
<p><strong>Jackson</strong>: So, then, just to recap there for people watching. So, you're watching what's going to happen with inflation, is it going to roll off how quickly, and you're also watching consumer spending, so are consumers going to continue spending at the rate we've seen or is that falling off?</p>
<p><strong>Warnes</strong>: Well, I doubt whether they can because their spending power has been cut and until they get – can refill the bank, don't forget we have got a savings ratio or rate that's relatively high. It's double digit, about 11% or 12%. Any increase in retail sales are sucking out savings. You just saw what the U.S. did. Savings rate in the U.S. is 4.4%. That's lowest it's been in over 50 years. The firepower of the consumer that the central banks are relying on from this savings, $250 billion of savings here from the pandemic, I'll bet you the 80-20 rule is in force. 80% of the savings with 20% of the households, and that 20% will be high income households whose marginal propensity to consume is the lowest.</p>
<p><strong>Jackson</strong>: Okay.</p>
<p><strong>Warnes</strong>: That means that the rate of growth in household consumption is going to slow, and that means so will GDP growth.</p>
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