On The Desk Talking Market Risks and Opportunities
Market Risks and Opportunities
With market volatility back in the spotlight, the guys take a look at the biggest risks and biggest opportunities present in the market. Plus, Chris and Ben go head-to-head in a round of On The Desk trivia.
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Chris Conway 00:00
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Tom Wegner 00:09
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Ben O'Leary 00:22
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Chris Conway 00:38
Ladies and gentlemen, before we get to the podcast please note that the presentation is general in nature only before acting you should take into account your personal financial circumstances. If you would like to read Marcus Today's full disclaimer, you can find it on the Marcus Today website. Now over to the boys.
Tom Wegner 00:52
Hi guys. Welcome back to a nother episode of On the desk. My name is Tom Wagner and I'm joined here as always by colleagues and friends, Ben O'Leary and Chris Conway. How are you guys?
Ben O'Leary 01:04
Good. Thank you, Tom.
Chris Conway 01:06
Very well. Thank you for asking Thomas.
Tom Wegner 01:08
Glad to hear it. A quick update on the market. The ASX 200 is up 2.7%. This week reverse much of last week's 3% for the s&p 500 is flat, and that follows a 0.1% rise. Russia and Ukraine remain the main focus point for markets. inflation in the energy space one of the outcomes influencing as firms and traders blacklist oil, gas and other commodities from Russia. limited supply from elsewhere causing the issues and Stagflation is one of the bearish headlines splashed around some of the news wires this week. high inflation and low growth are the characteristics of that environment. And central banks may have been listening or watching the headlines. As we have had some dovish tilts from the RBA and the Fed this week back to a sector front the ASX 200 has seen mining and energy stocks outperform not surprising banks and consumer discretionary underperforming the market. We did see February reporting season draw to a close 70% of the companies that reported reported a lift in profits. And while cost pressures were scrutinised. And there's a lot of people talking about margin pressure. They didn't appear to weigh on profitability as much as expected. cash holdings lifted 60% And that was one of the big takeaways from the results season. And dividends paid are actually lower than the long term average only 81% of companies reported a dividend down from 85% with the long term average. You could read into that a number of ways but as Henry always says, cash is king.
Chris Conway 02:54
Thomas very nice summary, there I just wanted to circle back to a comment you made and it was really just a highlight the RBA is my waiting has been a little bit off the mark but you said there's been some dovish tilt. The question was going to be the RBA get any more dovish. They are pricing in no rate hikes this year and maybe not out to 2024. They have sort of let go that to be fair, whilst the market is pricing in five so if they get any more dovish, they're going to be given money to people on the street. Anyway, just a cute little observation though.
Tom Wegner 03:22
And that's what everyone's all the all the banks, all of our banks are saying they see rate hikes in this year. So I think we did also see the language change from the RBA. Maybe it was at last last statement they said they see scope for it now after saying that it's not going to happen.
Ben O'Leary 03:40
Even the RBA don't believe the RBA Yeah, at this point,
Chris Conway 03:44
Which is a shame because they had done a written about this had done it previously a fantastic job, like the Fed of managing the message and communicating appropriately. seems they've sort of departed though in the Third Estate onpoint. And even through this latest crisis with Ukraine and Russia, the Fed has even pal overnight saying, yeah, the chances of a 50 year pretty much off the table. We're dialling it back because there's a situation there that's going on, that is impacting the way we see the world and how we're going to navigate interest rate rises, so but if I'd be just sticking to their guns, God bless them.
Tom Wegner 04:16
Thank you, Chris. One quick question without notice. Ben, Chris, are you bullish or bearish on the market this week? This week? Yep. Joe quickly, a real real quick traffic light system.
Chris Conway 04:32
We've only got Friday to go so...
Ben O'Leary 04:34
Yes, I'm bullish on the market this week. We've got commodities going higher due to some unfortunate circumstances but that does help our market and how being a little bit more dovish, overnight just paves way for a little bit of relief a little bit of a rally people knowing that they're not going to have the option of treasuries or bonds to get a real return on their money anytime soon. Still. So bit of relief rally in the market this week.
Tom Wegner 04:58
The Powell put is still in As Henry said in his Henry's take so they're looking to support markets he can do no wrong is the poster boy for every finance Pro.
Chris Conway 05:08
For everyone all monies trade a meme stock, I struggled to disagree with Ben, he made some very good points. The only thing I would say I'll repeat something that I heard this morning on CNBC from one of my favourite content has been and I sit in the office every morning, I listen to CNBC, and there's a trader on there. In New Jersey, I think on New York trader, he often has a very, very funny things to say about the market. And he was saying this morning that you actually don't know from one day to the next don't know is Up 600 Down 600. Now market is obviously very much follows what's happening on Wall Street. And we've seen a lot of that. And that's evidenced this week, and in the last four or five months on the ASX 200, which is something we've all talked about. It's really been going sideways. So being updated a commodities, but even then we were up at something points today. Last time I checked, now we're up 40, we might end up up 20. And then the Dow goes down tonight tomorrow we're down 50. So I don't know, I actually don't know.
Ben O'Leary 06:01
Henry said earlier in the week, that a day or two days is a long time and more. And obviously the market is responding to the conflict. And we know a lot of months in two weeks ago, if you'd said the situation that has happened was going to happen, you would have not believed that. So yeah, things happen. And things change very quickly.
Tom Wegner 06:20
Well, we thought and we discussed as well. We're back to discussing normal market events, interest rates Fed meeting, we didn't think a geopolitical event like what we've seen, which is devastating is would have would have happened. But here we are talking about it. And you know that's that's the world we live in. Correct. So volatility is around. First question. And this is directed at Chris Conway, oh, what are the two biggest risks for the market. And I would love a stock tip for each for our listeners.
Chris Conway 06:57
So this is this is quite simple. And I don't mean to minimalize any of what I'm about to say but the Fed and the geopolitical conflict, one and two, so fed the Fed is still most important. With respect to the humanitarian side, obviously, we're here to talk about markets, I'll just focus on the facts. The Fed is still a very, very big deal pal overnight, taking the 50 basis points off the table, there was some resistance from Bullard, I think he was the perhaps the Atlanta or the St. Louis Fed President has always been very aggressive in terms of saying that they should go 50 basis points. He's a voting member in the FOMC as well. So he will vote for more aggressive he came out literally after Powell and said, basically, I disagree. 50 should still be on the table, we should be going hard because he sees it as a big risk not just to markets, but also the US and the global economies as well. So what the Fed does on the 15th and the 16th. The 16th is actually we're now delivered, the decision will undoubtedly shape markets in a more profound and longer term way, then the conflict in Russia and Ukraine. So that's the number one risk for markets is what the Fed is going to do if they do raise rates, which is pretty much priced in absolutely both for the cows. He goes, he's basically said we're going 25 and 50. So you would expect that that's the likely to be the likely outcome. As we know, you know, high inflation risk off environment, high P E growth names will typically get sold off first and most aggressively. And that means tech stocks. So I'll give you a specific tech stock. But you know, we've talked about this ad nauseum in the past. The other problem, particularly with tech stocks in Australia is because we have such a small tech sector, and everyone loves tech, they pile into those tech names and it becomes a crowded trade. So becomes a crowded trade on the way up.
And we see even more overextended and ridiculous valuations and then the wind changes and they get smashed twice as hard on the way down. And I think it will still be a significant event, the Fed going from talking about raising rates to actually pulling the trigger. It's not let's not pretend there's not a significant event it still is, even though the change is minimal, and it's off such a low base. So tech stocks will be the losers. So yeah, there you go. There's the there's the idea, I guess, on that risk. And then with regard to the Russia Ukraine situation again, I never mean to make light of he must choose our words very carefully. But it does have an impact on markets. And we shouldn't ignore that. It is a risk. I'd certainly hope it gets resolved soon. But in terms of a stock idea, or something that might be impacted, have an outsized impact is building companies and I was talking to Ben about this the other day, a very good friend of mine works for I won't say the name of the company, but a major building company here in Australia, one of the top two. So there you go, you can narrow it down. And he was explaining to me that Russia supplies 20 to 25% of the world's software. lumber. Now houses are made out of softwood lumber. And he was impressing upon me that at a very senior level over at this particular company, there were some people started to worry about what what actually happens if Russia turns off that supply.
Tom Wegner 10:15
Or people are forced, and firms are forced to blacklist those supplies.
Chris Conway 10:21
Yeah, exactly what is happening. Yeah, they know that a source from there for whatever the reason why they are they can't that the supplies turned off yet. So what does that mean? Well, all of a sudden lumber prices, which have already gone up dramatically in the last 12 to 24 months, accelerate again, what does that do to building projects?
Tom Wegner 10:41
Well I guess you have to find an alternative done?
Chris Conway 10:43
Well, what if there is no alternative, so you can just have to pay the price. But then all of a sudden, if your raw input costs go up, 20%? Well, is that project going ahead? So the knock on effects of that. So I will say any of those building companies. And you know, again, don't get me wrong, this is if it's still a big if some of the stuff that I've been reading suggests that Russia would be incredibly foolish to turn off either the gas or the oil that they supply, they make something like $700 million a day selling gas and oil.
Tom Wegner 11:12
And one thing to point out that whilst there have been a lot of sweeping sanctions, reading this morning, that the US actually hasn't sanctioned the energy industry yet, because of the the stagflation and concerns that it could have.
Chris Conway 11:28
Well just use the impact globally. So again, reading this morning, that there is still gas running through a pipeline from Russia, that runs through Ukraine, into Europe, here, there are things that won't be messed with, theoretically, and the lumber is probably one of those. But like I said, that this company was being passed on to me that there was some concern that Russia might turn those tabs off, or the point you may have the tabs turned off for them, and then all of a sudden, it has huge knock on effect.
Tom Wegner 12:01
There's two sides of the coin with Russia, they turn the tap off on the wood, and they're not getting an income. They're already losing income from all sorts of places. So you know, a lot of different elements to that puzzle.
Chris Conway 12:13
Tom Wegner 12:13
Great analysis, Chris, for you.
Ben O'Leary 12:15
After we were talking about that yesterday? I think it was, I did a little bit of research. So I've got another potential tip for you. If you were worried about that, or you want to invest in that possibility, there is a ETF. An iShares global timber and forestry ETF title Wood, W O O D.
Tom Wegner 12:36
They make it simple for you.
Chris Conway 12:37
Ben O'Leary 12:37
So it would give you exposure to companies selling lumber, which would be.
Chris Conway 12:42
a lot to see the chart on that actually, and see how it's going in the last 1224 months, probably roofing it. Yeah.
Tom Wegner 12:48
There's a lot of pans in those days. I didn't even think you were done. Thank you, Chris. So it's a great analysis there. Was there a stock tip? Or did I miss it?
Chris Conway 12:57
Well, I, I hesitate to mention the name of the company that my friends were my friend works for none of it was inside information. But I would just say building coding building companies that rely a lot on software timber to build their projects.
Tom Wegner 13:11
And if you ever wonder this, the Civic companies, you can always find them in our market map. That's the end of day and midday emails. And it's all it's all there for you the main companies in that sector, Ben, two biggest opportunities in the market and a stock tip for each.
Ben O'Leary 13:31
Thank you, Tom, I will actually give you a couple of stock tips unlike Chris. And as is quite often the case, the biggest opportunities are fairly closely aligned to the biggest risks because they are the action points in the market. They're the key drivers in the market. So the first one is to do with the Fed. And that is the slowing fed timeline. So as mentioned at the start, it's a bit of a relief rally from the slowing of the Feds timeline been dovish, we were expecting at the start of the month, that would be 50 basis points this month, I think it was priced up to about 93% probability of happening now it's almost off the table, there's a 3% probability that there's no rate hike at all. So that has slowed. And that has produced a bit of a relief rally in some of the stuff that does get hurt by raising rates, like technology, and some selling in the things that benefit from higher rates. So bit of opportunity. So the fact that we are going to see higher rates in the future has not changed. It's only the timeline, there is an opportunity to get yourself set for an environment of inflation and interest rate rises. If you missed doing that the first time around if you were like Damn, I missed the boat. Everything I've got getting hammered. I'm not set up for this environment you can now you get a kind of second opportunity to do that which is fairly rare. And so during things like lightening up on tech consumer discretionary HYPEEEE names, making sure that you've got enough financials materials energy being a bit conscious of high debt levels, companies that have hype cash deposits, they're going to do well those sort of things. So for a stock, they're talking about it before, it's pretty obvious one in a rising rate environment, Computershare, they pop 16%, on results that come 8% Off the top since just as a function of that kind of modelling rally to the other stuff, it's one of the ones that goes up with interest rate rises. So let's come off a little bit with the idea that interest rates are not going to rise as quickly but they're still going to benefit in the long run, they're 8% off the top, so you're going a little bit discount there, their results showed that they are performing strongly, they're gonna perform strongly, they take something like 90% of the benefit of interest rate rises, so they're going to keep making more and more money over the next few years, as rates inevitably do rise.
Second one is related again, and that's inflation. We've talked about it to death about materials and energy on this podcast on the other podcasts in the newsletter, I don't need to go over that too much again. So I've just given a stock tip. But we know that inflation, materials and energy are the two really big ones that do benefit from inflationary times. And so my stock tip is for skew. They are 22% off the high of the start of the month. So it's a fair move on the back of results that were fairly poorly received, obviously, from that move, but didn't read too bad. They had a few little hiccups on costs and labour shortages. But essentially, those results were solid. And ultimately, they're going to pretty much be tied to the iron ore price, which we expect, which we expect, is going to continue to perform in this environment coming out of COVID economies are trying to build their way back government spending, making sure GDP is going to be strong. All the ingredients are there for commodities to keep going. As we said things can change quickly. But at the moment, that's the way the waves are going. And so they are tied to that as an added bonus, in the long term, the very long term, you get exposure to another big opportunity that is not going to maybe affect your returns this year. But over the next 10 almost guaranteed will. And that is renewable energy. Because they of course have started the forest view future industries, as a subsidiary is a global green energy and product company committed to producing zero emission, green hydrogen from 100%, renewable sources. Force, you have a really good track record of adapting, evolving and growing with opportunities. Twiggy, as we know, very, very wealthy man. And he's fairly committed to this renewable energy pipeline, which is quite an interesting little tangent away from mining strategy and renewables. But we love to say it. And it's a long payoff, but they've shown their ability to make money and to capitalise on cycles. So I think there's a good opportunity extra there.
Tom Wegner 17:47
Thank you, Ben. And just on that point with Twiggy, when you hear him speak, he's extremely passionate about the environment, the economy, and pivoting as well, like similar to what bhp have done as well. Pivoting to future facing commodities and energy and sources of clean energy. And it's fantastic to see a massive business identity speak so glowingly about that.
Chris Conway 18:15
Easy to be green, when you've made $11 billion out of ripping stuff out of the ground.
Ben O'Leary 18:20
It is very good point. But as being an early adopter to moving green and having green processes is going to mean they are really well positioned for when inevitably, investment company mandates, cuts are changing. And government mandates come in where companies won't be invested into by big investment groups, or they won't get contracts or they won't get supply deals unless they are hitting certain green targets or renewable targets. We know there's coal is going to be out of the country. And by 2050, the whole world basically agree to that, that we're moving that way point, it's just a fact we are moving that way. And to be set up for it early means that they're going to be an easy one for people to put their money behind when the time comes.
Tom Wegner 19:01
And big for big investment managers and firms that also making a strong pivot to ESG credentials. And if a company doesn't stack up, they're not in getting involved with it. So that's another point to make there. Thank you very much for those tips, Ben. So guys, we're doing a bit of trivia now, I'm going to ask each of you the same question and the closest answer wins.
Chris Conway 19:24
Just as an aside, Ben, we're betting a lunch.
Ben O'Leary 19:27
We can have lunch.
Chris Conway 19:27
Oh, we've got a million silly bits outside of these four walls. So we'll just add this to the table.
Tom Wegner 19:33
Succulent lunch on the line. Here we go. Question one. Christopher, cash holdings lifted 60% in February for ASX 200 companies. How much cash did the 164 companies from the ASX 200 debt reported? Have at the end of the year in December, how much cash did all those companies have?
Chris Conway 19:58
So CBI had something like 5 billion. So I'm assuming it's
Tom Wegner 20:04
it's good to be on their balance sheet 250 across
Chris Conway 20:08
250 billion across the total.
Tom Wegner 20:11
Ben your response.
Ben O'Leary 20:15
We're playing nearest opinion yeah?
Tom Wegner 20:16
Ben O'Leary 20:16
So I'm going to say, 249
Tom Wegner 20:21
246, extremely impressive. GDP was released on Wednesday. Was it better than expected? And what was the growth way analysed?
Ben O'Leary 20:35
Was better than expected and I think the annualised growth rate was 4%.
Tom Wegner 20:41
Chris Conway 20:41
I agree with Ben, it was better than expected from memory was 3.4%.
Tom Wegner 20:46
We have 1.8. Question three in the year to date, how much is the S&P 500? Up or down? percentage wise?
Chris Conway 20:54
It's down, and it's down? 18.9%?
Ben O'Leary 20:58
I think that's too much. I'm going to say 13%
Ben O'Leary 21:03
8.55% Ben wins. The core logic home value Index rose 0.6%. In the month of February, over that this is a national increase. How much have national property prices risen in the year to February, the 12 months to February? Ben?
Ben O'Leary 21:21
I'm going to say 15%?
Chris Conway 21:24
I think it might be a little bit higher that I think they were applied 20 and then down two or three in the last couple of months. So I'll go 17.
Tom Wegner 21:31
Chris, you're correct. So whats the score check?
Chris Conway 21:34
Two all I believe.
Tom Wegner 21:36
Katmandu decide to change...
Chris Conway 21:39
Tom Wegner 21:41
Chris Conway 21:42
Ben O'Leary 21:43
I think it was just KD industries or group.
Tom Wegner 21:47
Is that your final answer?
Ben O'Leary 21:48
Tom Wegner 21:49
KMD Brands as a final answer.
Chris Conway 21:52
Tom Wegner 21:53
Sorry. It's incorrect. KMD group incorrect. The attack on Pearl Harbour triggered a 19.8% sell off in the S&P 500. How many days did the index take to recover?
Ben O'Leary 22:06
I'm going to say it took a while. Because we know that the COVID recovery was historically
Tom Wegner 22:14
I like that speed thought process.
Ben O'Leary 22:16
Speed of light. So I'm going to say it took 18 months to recover.
Chris Conway 22:23
I've been thinking I'm just trying to think when the attack on Pearl Harbour was it was definitely in the back end of the war because it's what prompted America to drop the big bomb. You were what five? was five or six? Yep. So I'm thinking it was towards the end. But then there was the end of the war to deal with and then post the end of the war. I would have thought markets would rally quite hard. But again, I'm just trying to figure out the distance between when Pearl Harbour was I think it was 43, 42. The end of the war was 45.
Ben O'Leary 22:55
Do we have a timer on here?
Chris Conway 22:56
I'm going to go 19 months just to really stick it to Ben.
Tom Wegner 23:00
It was 307 days. So Ben wins. And what's what's the score check?
Chris Conway 23:07
It is at three, two.
Tom Wegner 23:08
Final question and this is a buzz in question. Here we go. Mike cannon Brooks and Brookfield...
Ben O'Leary 23:16
Ben, Ben. Takeover offer on AGL Energy.
Tom Wegner 23:19
That is correct. Ben wins. Thank you guys. I thought that was a great discussion. Some really good insight there some stock tips. So a lot to take home for our listeners.
Chris Conway 23:29
Yeah, and just to remind everyone that we do have an email address set up if you want to send us some topics. If you want us to talk about anything. If you want us to review something, if there's something that we've talked about that you don't quite understand and need some more insight in, then you can email us you can shout shower us with praise you can tell us that you think that the podcast is boring and we need to improve things. You can do all of those things. Just be polite. Send us through your thoughts, opinions and ideas to...
Ben O'Leary 23:54
Chris Conway 23:57
Thanks Ben for bailing me out there have a good one guys.
OTD Guy 24:00
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