Inflation climbs - but it's not all bad news for rate cuts

1. Inflation - the never-ending conundrum

2. Profit downgrades flow from the retailers

3. The ongoing demise of Qantas

4. Nuclear power out in the cold

THIS WEEK'S BIG STORY

ASX and super funds set for bumper financial year ... again

It has been a year of surprises. Technology stocks, thanks to the rise of AI and data centres, have been the best performers on the ASX over the past year, with the tech index up 30 per cent. Financials - mostly the big four banks - are up 26 per cent. The consumer discretionary index, which includes many retailers, is up 24 per cent while the previously maligned real estate index has risen 23 per cent. The three sectors which could end the financial year lower than where they started are materials (big miners), staples (big supermarkets) and energy stocks.

The ASX in FY2024

In short, it's been a cracker year with the benchmark S&P/ASX200 up around ten per cent for the 2024 financial year, which ends on Sunday. If you have a median growth superannuation fund - which has about 70 per cent of assets in growth investments - then your return for the year will be around nine per cent, according to Chant West. That will be the 13th positive super return in 15 years. Since the introduction of compulsory super, the median growth fund has returned 7.9 per cent per annum. That's more than five per cent above inflation and a very good outcome.

Best and worst sectors

The next 12 months on the ASX, and other sharemarkets, will depend on interest rates, according to most professional investors. If there is a rate cut in Australia later this year, that should benefit earnings and the overall market. Mind you, over the past week there has been a run of profit downgrades. The ASX has mostly traded sideways since March and there are always concerns around geopolitics, recessions, frothy technology stocks, the cost of living crisis and plenty more. My advice is speak to a financial planner, or if not, read this by AMP's Shane Oliver. Shane has been in the market for 40 years, and it's his nine lessons for investing. 

Best and worst stocks

It is an eclectic bunch of top performers on the ASX200 this year. If you discount those that received a takeover bid, some of the top performers include digital tracking group Life360, healthcare software group Pro Medicus, fund manager GQG Partners and retailer Lovisa Holdings. Among the mega caps, industrial property leader Goodman Group was best, on track for an 80 per cent rise. At the other end of the rankings, the battery metals stocks - Liontown Resources, IGO and Arcadium Lithium - had a shocker as did Fletcher Building and Tabcorp. Woodside was the worst of the large caps, heading for an annual fall of 18 per cent.

Outlook for 2025

BEST OF THE WEEK

IF YOU MISSED THIS GUEST, CATCH-UP NOW

After a lacklustre couple of years for smaller companies on the ASX, many investors thought 2024 was going to be the year of the small cap. Oscar Oberg from Wilson Asset Management explains why it still hasn't happened - and picks out a bunch of stocks he's keeping an eye on. 

CALL IT FOR WHAT IT IS

BEST SOCIAL CALLOUT 

@Selmafudd:

"They'll never get me back into the office. I have 2 kids home with me 2 days a week, if I get 20mins free I can walk across the road to the park with them or hang the washing out, vacuum or just sit on the lounge and read for 15mins.. and I'm still finished work 2 hours early."

 

@Lani:

"Hell no. And the fact I am ostensibly saving them money by not being there just makes me angrier with the whole argument."

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

- Sean Aylmer

During the 12 months to the end of May, inflation rose by four per cent, up from 3.6 per cent. At face value it isn't a great number for those hoping for an interest rate cut. But in truth, it isn't too bad a print. The jump reflects, in large part, housing, food, transport and alcohol and tobacco. That covers fruit and veg and petrol, which are volatile numbers. In fact higher prices for grapes, strawberries, blueberries, tomatoes and capsicums drove fruit and vegetable prices to their largest rise in more than a year. If you remove some of these volatile items, underlying inflation fell from 4.1 per cent to 4.0 per cent. Underlying inflation fell. That's the good news. Financial markets saw the Bureau of Statistics data as bad news, at least within the first few minutes of trading. The Aussie dollar jumped to 66.7 US cents and the sharemarket fell. The bottom line is that the monthly figure wasn't as bad as it first appears, though clearly inflation isn't back in control yet. Today's inflation figures won't sway the Reserve Bank one way or the other.   

One of the more remarkable aspects of the local economy is that despite interest rates at 12-year highs, retailers have been making money. Retailers have been among the best performers on the sharemarket over the past year with the likes of JB Hi-Fi, Harvey Norman and online players like Temple & Webster soaring. Cost and inventory control have improved while sales, notwithstanding a weak consumer sector, have held up well. But over the past week, things seem to be changing. The big savings buffer built up during the pandemic has been spent. Cost-of-living pressures have kicked in. Over the past seven days, Mosaic Brands (Millers, Rockmans, Noni B, Katies, Autograph), KMD (Kathmandu, Rip Curl), Metcash's hardware business (Mitre 10), online luxury retailer Cettire, and Collins Foods (KFC, Taco Bell) have provided weak earnings forecasts. It doesn't augur well for the next few months. Retailers are big employers. If times are tough for retailers, it will hit the jobs market as well as the sharemarket.   

I want to celebrate the release of Julian Assange, but it makes me uncomfortable. The greatest media publication of the past century, The New York Times, created the slogan "All the News That's Fit to Print", and that's why the Assange case troubles me. Was all the news he printed, fit to print? If you strip away everything, Assange's WikiLeaks published documents leaked by an army intelligence analyst, Chelsea Manning. The documents included a video of a US helicopter gunning down people in Baghdad, one of whom was a Reuters photographer, military incident logs from the Afghanistan and Iraq wars, diplomatic cables from US embassies around the world and dossiers about Guantanamo detainees. Some of the content, the Baghdad video for example, exposed wrongdoing by the US military and was absolutely "fit to print". But what about commentary about individuals who had no right of reply. Or content that put individuals in danger, or damaged national security. Was that content "fit to print"? While it is easy to argue that the concept of "fit to print" is no longer relevant in an online world, I disagree. It is why the case makes me feel uncomfortable. 

Good on Opposition Leader Peter Dutton for having the courage to push nuclear as an energy option. But it's a shame what he's talking about is bunkum. Australia probably can not, and definitely will not, build seven nuclear power stations by 2050, no matter who wins the next election or the one after that. I'm undecided on nuclear - I wouldn't want a power station in my suburb, but we desperately need a long term fix for energy supplies. This week we got a new federal energy czar, Matt Kean, who said nuclear was unviable in his home state of NSW. We got the Smart Energy Council saying the coalition's plan for nuclear could cost up to $600 billion. And we had the Australian Energy Market Operator dismissing nuclear as the best replacement for coal fired power stations. At the same time, we had what the Germans call dunkelflaute, or dark doldrums. A prolonged period, typically in winter, when both solar and wind power generation is subdued. That led to fears that east coast gas supplies would run down. And we also had warnings of the need for power surging (pardon the pun) along with AI and data centre usage. Even with nuclear part of the discussion, we are nowhere nearer to solving the energy crisis.

BHP, Telstra, Commonwealth Bank and Qantas are all national icons of Australian business, and of these, Qantas is arguably the one that's truly part of our national identity. But 2023 was annus horribilis for Qantas and 2024 hasn't been much better, despite new CEO Vanessa Hudson promising to spend $230 million to fix things up. This week the company slipped out of the top 50 stocks on the ASX - this morning it is the 51st largest company - and it got whacked in the Skytrax Awards, the industry benchmark for airlines. Qantas dropped from 17th best airline to 24th, beaten by Fiji Airways (14) and Air New Zealand (22). REX came in at 50, Virgin Australia at 54 and Jetstar at 75. (In case you're wondering, the top three, in order, was Qatar, Singapore Airlines and Etihad.) The fall from grace for the national carrier continues.

5. Assange - hero or villain?

Companies are getting over hotdesking, and some think an allocated desk could be an incentive to return to the office. On F&G's TikTok we asked - would it be enough to lure you back?