Why rate cuts are a long way away

1. Rate cuts are a long way away

2. Battle of the tech titans

3. Higher wages for younger people is a good idea

4. Greeniums are here to stay

THIS WEEK'S BIG STORY

Is the sharemarket set for a big fall?

The big four bank stocks are flying, notwithstanding most professional investors don't think they offer much value and haven't for a while. Commonwealth Bank, NAB, Westpac and ANZ are somewhere between 25 and 35 per cent higher over the past year. The gold miners have also done well alongside the price of the precious metal. Then there are the tech stocks - anything around data centres and AI have done well.

What happened on the ASX

From late October to late March, the S&P/ASX200 surged more than 15 per cent to ultimately hit a new record level. Since then, the market has been able to maintain its elevated position, though generally has traded 'sideways'. That means it has gone up and down around the 7700 point level. There have been some big moves in different sectors though, sometimes due to macro-economic factors, and other times due to industry issues.   

The good on the ASX

Banks and tech have outperformed, while miners have underperformed. They are trends. Outside those sectors, it has become a stock-picker's market. An investor needs to truly understand specific stocks. In a low interest rate environment, a rising tide lifts all boats. In a high interest rate environment, it is much harder. Plenty of market watchers think there could be some tough times ahead for the ASX200. (And as we always say at F&G, we're not qualified to provide financial advice so go and see a planner for some help.)      

The ugly on the ASX 

There have been some shockers over the past year, with the resources index lower than where it was 12 months ago. A plummet in nickel and lithium prices hurt. So too the fall in iron ore prices. Both BHP and Fortescue's share prices are lower than they were a year ago. But the sell-off has been broader. Telstra, Woodside, Woolworths and Transurban have had a shocker over the past 12 months. You can also throw in Fletcher Building, IDP Education, Sonic Healthcare, Nine Entertainment and Domino's Pizza.

What next?

BEST OF THE WEEK

IF YOU MISSED THIS GUEST, CATCH-UP NOW

With the Australian economy barely growing over the last six months, Gareth Aird - Head of Australian Economics at the Commonwealth Bank - shares his view on what lies ahead.

CALL IT FOR WHAT IT IS

BEST SOCIAL CALLOUT 

 

@Emma:

"I left school at 14. By the time I was 18 I was a supervisor at a restaurant getting paid less than the 22 year old I was training."

 

@John:

"There is a difference in maturity and life experience, if you have to pay both the same, then I'm only hiring the older as I am getting more for my dollar."

 

 

GOT A HOT TOPIC?

Thanks for reading my opinions on the week's biggest stories.

- Sean Aylmer

The media discusses high interest rates as a bad thing. It isn't. It's just a thing. People with term deposits and no home loan like higher interest rates. So too many pensioners. Of course those of us with a mortgage dislike higher interest rates, and are hoping for a rate cut sometime soon. The news this week was mixed, at best. The good news is that some overseas economies have started cutting rates. The Bank of Canada and European Central Bank both dropped their benchmark rates. It's a global economy so what happens overseas does impact Australia. The bad news is that in the US, figures showing a strong labour market diminished the chances of a rate cut in the world's biggest economy. And locally, the National Australia Bank Business Confidence monthly survey shows inflation pressures haven't dissipated yet. Markets are now pricing in a one-in-three chance of a rate cut this year. It's more likely that rates won't start falling until next year. 

Between them, the three big tech titans (Microsoft, Apple and chipmaker Nvidia) are worth more than $US9 trillion. That's around $14 trillion in local currency. It's about the equivalent of the Australian residential property market - all of it - plus all the money invested in superannuation. Last week Nvidia had become the second largest tech company, over Apple. But this week Apple's release of its version of artificial intelligence for smart phones sent the company's stock soaring seven per cent. In the battle of big tech, Microsoft now has a market capitalisation of $US3.22 trillion, Apple sits at $US3.18 trillion and Nvidia is at $US2.97 trillion. They comprise more than 20 per cent of the S&P500, which as the name suggests, has 500 stocks. The end of the era of big tech has been forecast for a couple of years. It hasn't happened yet.

Full credit to Donald Trump for posting on TikTok for the first time, and within four days amassing 5.6 million followers. Joe Biden's campaign fired up his TikTok account back in February and it has just 361,000 followers. In the US, almost 50 per cent of TikTok users are under the age of 30. In the UK the figures appear to be higher and in Australia it is 18 to 34-year-olds that dominate. Like newspapers for my parents and websites for me, social media sites like TikTok are the communication tool for the under-30s. And Donald Trump does social media better than any other politician. Getting information to a demographic that has always been hard to reach is a revolution enabled by social media. But the revolution has no leader. And it has no rules or regulations. It just has people who shout loud. It isn't really about Donald Trump or Joe Biden. It's about the need for some form of control to deal with racism and sexism and homophobia and persecution for religious beliefs. The tech companies are too big for any single government to regulate (including the US). It is a very real prospect that the tech companies ultimately set the boundaries for what is right and wrong. 

What's a Greenium? While it sounds like it belongs to the same family as the Snuffleupagus or the Gruffalo, it's nowhere near as exotic. It is all about government bonds, and the greenium is the extra amount investors are willing pay for buying a bond that does some good. Over the past week, over 100 investors across five continents bought Australia's first-ever 'green bond'. This green bond will be used in programs to finance specific projects that support Australia's transition to net zero carbon. Investors in the government's guaranteed 'IOU' were prepared to pay two basis points more. It might not sound like much, but it is worth about $1.4 million a year. Why would investors pay more? Because they want the money they're lending to do some good. Many superannuation members want their savings in their super funds to not just earn a return, but to help society as well. The success of the first-ever government green bond, and the greenium paid, augurs well for the future.  

The test case by the Shop Distributive and Allied Employees Association to abolish junior rates for more than half-a-million workers has the potential to change how business operates. If successful, the days of employing 18 and 19 year olds, because they are cheaper, could be over.  The case will be hotly contested by employers who argue that increasing junior rates will deter hiring. Also junior workers don't have the experience of older workers, either in terms of the job or life. Under the retail, fast food and pharmacy rates, an 18-year-old is paid 70 per cent of the adult wage and a 19-year-old is paid 80 per cent. (The SDA also wants to raise rates for 16 and 17-year-olds, who are on lower rates.) Is it a good idea? South Korea, Belgium and most of Canada have done away with junior wages. Others, including New Zealand, have experimented with other options such as 'time in job'. Certainly it would add to the wages bills in areas such as retail and hospitality. But it should also add to the pool of available labour for those sectors. And higher wages would add to economic growth, though in the short term it would be inflationary. The idea has merit, but only if it is implemented sensibly, over a long time period where the impact of inflation can be dissipated. 

5. The good and bad of social media, thanks to Donald Trump

Plenty of people joining the debate on Fear & Greed's TikTok about whether junior rates for 18 & 19-year-old workers should be abolished.