Telstra job cuts are just the beginning

1. The fall and fall of Telstra

2. Why Stage 3 tax cuts might help push interest rates lower

3. When the Hard Rock is not really the Hard Rock

4. Nuclear power should be considered

THIS WEEK'S BIG STORY

The ASX is within reach of an all-time record, even though interest rates are at 12-year highs

It comes down to interest rate expectations. The consensus view for months has been that rates in the US and Australia will fall this year. The timing has been pushed out as inflation figures come in higher than expected, but still the view is that the next move in rates is down. Lower rates spark economic activity, and that helps earnings. Also, lower rates means the risk-free return via government bonds is reduced. Investors look for better yielding options, like equities.

What happened this week?

The S&P/ASX200 this week came within half a per cent of its all-time high. Up until recent trading sessions, it has been the large banks, along with the technology stocks like Wisetech Global, and to a lesser extent the property companies, leading the way. But this week the miners gave the bourse a kick-along. This came after commodities including gold and copper hit new highs on the back of a Beijing-backed rescue plan for the Chinese property market. 

Why's the ASX so strong?

There are many professional investors expecting a fall in the market, and many that expect a rise. Get some professional advice, and keep in mind that buying a stock today is about future earnings, not what has already happened. Maybe a good place to start is Warren Buffett's rules. He has many, but boiling them down to three: invest within your circle of competence, think like a business owner, and buy at inexpensive prices to provide a margin of safety.

Winners and losers

While the shift in interest rate expectations has helped certain sectors - notably technology, property, consumer discretionary stocks and the banks - there are always stock-specific issues that overwhelm macro issues. A case in point is James Hardie this week. It said earnings would be lower across its businesses and its share price tumbled 15 per cent. There are also sectors which don't do well when rates are expected to fall. Telcos are an example, as are health care stocks and consumer staples companies.  

What next for the market?

BEST OF THE WEEK

IF YOU MISSED THIS GUEST, CATCH-UP NOW

Have you tried our other podcast How Do They Afford That? It's all about personal finance and investing. This week, investment guru Roger Montgomery gives a step-by-step guide to picking shares, including what to look for in a quality company.

CALL IT FOR WHAT IT IS

BEST SOCIAL CALLOUT 

 

N.J. Allan:

"There's $75 (per quarter) that would have left your pocket to pay the bill, which is now not leaving your pocket. That's as good as $75 of new money coming into your pocket. It's all inflationary."

 

Steve:

"It is an insult to us all. Fix the tax system. Tax resources. Tax multinationals. Increase the tax free threshold. Phase out negative gearing and the CGT discount on investment houses."

GOT A HOT TOPIC?

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

- Sean Aylmer

Telstra is in a world of pain. Its share price is off ten per cent this year. It is a very large legacy company competing in a brand new world of global software giants. Just think of how often you use WhatsApp, rather than texts. Gone are Telstra's natural advantages of owning the landline into every household across the country, and the monopoly status it held for decades. This week it said it will cut 2,800 of its 31,000 employees. I guarantee you there will be more to come. Telstra’s enterprise division, which provides fixed infrastructure for businesses, is fighting the ubiquitous shift to the cloud. The consumer business has been impacted by the roll-out of the NBN. And the shift to remote working has totally changed the needs of business clients. Even CEO Vicki Brady doesn't have a landline on her desk in the office. Telstra is still a major brand and has done very well in mobiles, in part thanks to its enormous reach. But it really is fighting the tide.

Tax cuts are inflationary, unless there's an increase in productivity to offset the fact that people have more money in their pocket. So the Stage 3 tax cuts, which we all receive from 1 July, will put pressure on prices. The Reserve Bank and Treasury have worked that into their forecasts for inflation and economic growth. This week, the Westpac Consumer Sentiment Index shows that 80 per cent of people will use at least half the extra money to save or pay down debt. Around 30 per cent will save all the extra money. They are very high numbers. If they eventuate, it is quite possible that the bureaucrats have over-estimated the inflationary effects of the Stage 3 tax cuts. Add in the disinflationary effects of the $300 energy rebates contained in last week's budget and the trajectory for inflation might be better than forecast. And that could mean rate cuts sooner than anticipated.  

In the 1970s, my mother used to get incredibly frustrated when she was threatened with being penalised for arriving at work more than six minutes late, even though she would often work many, many extra minutes in the afternoon. The eventual demise of the time clock was welcomed in our household. But they're back. Well at least time sheets are. And apparently it is a good thing. Westpac wants employees who earn between $90,000 and $140,000 to fill in time sheets, not to check if they are doing work, but to ensure they are paid for any extra overtime. Across sectors, including financial services, unpaid overtime has meant hourly rates of pay have dipped, in some cases below minimum hourly rates. Credit to Westpac for addressing the issue, but I don't buy the need for time sheets. Bureaucratic, unnecessary, Big Brother-like - it's a shift back to the 1970s.

The debate about nuclear energy is political, emotive and often irrational. This has been amply demonstrated this week by the response to Opposition Leader Peter Dutton's push to consider the technology as we transition to cleaner energy. The CSIRO's report that a large scale nuclear power plant would cost as much as $17 billion in today's dollars, and take 15 years to build, is being used by politicians as justification for no-nuclear. But those pollies are missing the point. The nuclear future, if there is one, is about small modular reactors, which are simpler, safer and cheaper than conventional reactors and produce less waste. Major developed economies including Japan, which has an awful track record in the technology, are considering nuclear because it is the only way to meet carbon emissions targets. Why can't we have a sensible debate, rather than political slandering, over one of this generation's greatest challenges - clean energy?

This week saw a major "red face" moment for many - and a real wealth creator or destroyer for investors. Hard Rock International, the Florida-based hospitality giant, distanced itself from media reports that it was in talks to buy the beleaguered Star Entertainment, owners of casinos in NSW and Queensland. Hard Rock International never entertained the idea. Turns out the interested party, according to the AFR, was a Brisbane developer with links to the now defunct Hard Rock Cafe in Surfers Paradise. The stuff-up (once again) doesn't reflect well on Star. In its announcement to the ASX, Star said it had received an approach from a consortium including Hard Rock Hotels & Resorts (Pacific), which it "understands is a local partner of Hard Rock." A little bit of due diligence on that fact would have been worthwhile, particularly for the investors who bought in to the stock.

5. Time sheets are back ... and apparently it's good news

Big debate on Fear & Greed's TikTok and Instagram over whether the $300 energy bill rebates announced in the federal budget would be inflationary.