Sector rotation on the ASX & is the cost of living crisis over?

Hello everyone, it is Thursday, the 3rd of July. Welcome to the SBS on the Money podcast where you can get consumer finance and markets news you can use without the fluff. The Australian share market holding steady today, the S&P ASX 200 down 0.02%. So that's basically steady, 8,595, but it does follow a record close yesterday.

RICARDO GONÇALVES

And while the index implies that there wasn't much action around, indeed there was in the form of what appears to be a sector rotation out of the banks.

RICARDO GONÇALVES

Into the miners. So to discuss all of that, including the manager's recent note, which asks the question whether the cost of living crisis is over, I spoke with Matt Wacher, the chief investment officer at Morningstar. So Matt, the ASX has really underperformed the US, which hit a record overnight again, the S&P 500 and NASDAQ. Why do you think we saw this underperformance?

MATT WACHER

Well, I have to say today maybe it was just one of those days that our market needed a break. At one stage, the Aussie market was down about 1% just before lunchtime there. It's recovered a bit from that, but it doesn't seem like there's anything specific driving or was driving those losses — potentially some profit taking

MATT WACHER

in the banks, which obviously have been at kind of record highs, CBA in particular. That might have pushed the, or has pushed the market a bit lower at times. And maybe in the middle of the day there when China opened, some renewed kind of tariff jitters. We've got the mini Liberation Day coming up on 9th of July for us.

RICARDO GONÇALVES

OK, you mentioned the

RICARDO GONÇALVES

banks. We know that CommBank has been hitting record highs over the past few weeks. A lot of analysts over the past few months saying that that's happening despite it being overvalued. Today though, it's down. BHP up quite significantly, up more than 4%. Are we starting to see a rotation from financials into resource stocks? And what's prompting this particular move today?

MATT WACHER

Yeah, we're certainly seeing that rotation today. I'd say that there's many Australian equity managers, investment managers out there, that are hoping that this is a longer term rotation after being caught underweight CBA for probably a number of years now. It's been a big pain trade for lots of investors out there.

MATT WACHER

But I guess what's been driving it today, we saw the iron ore price hit about a three-week high overnight — 95, 65 it got up to. That's really lit a fire under, as you said, some of the bigger mining names — BHP up over 4% today, Rio up nearly 2%.

MATT WACHER

And that's really been on the back of China's steel industry and some of the caps that the Chinese government is trying to put there. The steel industry it's been in overcapacity for quite some time. That's been really driven by record exports in 2024. You would have seen that.

MATT WACHER

And the government's really trying to reduce that capacity and make their steel mills much more profitable, which was getting a bit out of hand over the last couple of years. This should really be good for the iron ore price. It's also driven up coal prices, and we saw some of the coal miners jump today as well. But in general, what China's trying to do is fix its deflationary problems by cracking down on overcapacity, not just in steel, but across the board.

MATT WACHER

And if this ironically results in higher inflation, that's actually viewed as a bullish signal for the Chinese economy and subsequently commodity demand. And so our miners have done really well, and that's really been funded in a mini rotation today. It's been funded by CBA and

MATT WACHER

the other banks, which have come off pretty significantly in the face of the mining stocks. They're still not too far away from their all-time highs, and we'd say the sell-off today in CBA and some of the banks, it's not unwarranted. They've been trading at very high multiples. But really, the question will be how much longevity this rotation actually has in the markets.

RICARDO GONÇALVES

Can we spend a bit of time on one of the notes out from Morningstar earlier in the week, which caught my attention? Morningstar said that the cost-of-living crisis is a thing of the past. Can you elaborate on that, especially in the light of weaker than expected retail sales numbers that we got yesterday from the ABS? And is it just a function of the fact that we're going to see lower interest rates in the near future again?

MATT WACHER

Well, that's certainly part of it. My colleagues have certainly come up with a catchy headline there, caught some attention. But I guess the key things are, yes, interest rates we believe will come down. I think that's a general consensus in the market now. We think probably next week we'll get an interest rate cut.

MATT WACHER

Seems to be a foregone conclusion for the market. ANZ joining that bandwagon yesterday. But actually, the markets are predicting about four cuts over the next 12 months or 1% of interest rate cuts, and that should really drive or free up consumers to be able to spend.

MATT WACHER

At the same time, with inflation having fallen so much, household incomes are really growing again in real terms now. So incomes are growing faster than inflation. There was obviously a period there where that wasn't the case — 2022 and even 2023 — and the savings rate has normalised. So it got down to about 2%, and it's back up to about 5%, and that's a really positive sign. When people have money in the bank,

MATT WACHER

they actually feel more confident to go out there and spend. So all of this points to, in the future, a better environment for consumers. And while the retail sales numbers, especially this week, have been pretty underwhelming, we'd say this is a backward-looking piece of data, and we think there's room for

MATT WACHER

improvement into the future, which should flow through to the retail sector. And because retail sales and the consumer have been quite weak lately, there's actually some reasonably attractive valuations on offer as well. So we think some tailwinds for that sector to come.

RICARDO GONÇALVES

OK, can we talk about IPOs? We've had a few hit the market over the past few days, past few weeks. Virgin Australia, the big one recently, which is still above its $2.90 IPO price. Also a successful debut today of a luxury housing developer called Gem Life. What does the performance of these say about the appetite for new listings from investors?

MATT WACHER

Yeah, I think that investors are craving IPOs. It's kind of become over the years a staple for retail investors and investors in general, and they've really been starved of opportunities in the last few years. Many Australian businesses have done the reverse and have left the ASX boards.

MATT WACHER

They've gone private — either to private equity or to super funds. And these have been really high-quality businesses that are now in private hands. What we saw recently, we saw Bain taking Virgin to IPO. We thought that Bain was asking a little bit too much, but it was very borderline. It was a really close call for us. And if you believe that the good times are still ahead

MATT WACHER

for the airlines — they've done very well, everyone's trying to get out and travel — then we think that you can generate some reasonable returns based on that IPO price. For Gem Life, it started today well. At one stage they thought it was going to open up 20%, I think it opened about 5%. So we'll see what happens there. But in general,

MATT WACHER

having more public companies, as opposed to private without the transparency, we think that's a better outcome for all investors, individual investors in particular. And if they're getting shut out of those opportunities, then they're probably missing out on the chance to meet their long-term investment needs. So we think it's a good thing IPOs are coming into the market.

RICARDO GONÇALVES

And so finally, given the economic environment that we're in, there's still a lot of uncertainty out there and the situation's always changing almost day by day, right? How are you feeling as an investor? What are you telling your clients and what are the opportunities out there at the moment?

MATT WACHER

Yeah, we're pretty boring. We always tell our investors, you’ve got to look through this short-term noise and focus on the longer term. But in the short term, all this volatility can also create some opportunities. So in Aussie equities, we're generally preferring the retailers and miners where we think there's more upside. As we've spoken about, we think the banks are a little bit stretched in their valuations, so we're trying to avoid

MATT WACHER

those and look under the hood for some of those better opportunities. Globally, back in April, we went looking for some bargains in the face of all that volatility we experienced in April. And we were looking for names that have really been beaten up on the back of the tariffs and also that long-lasting China slowdown. So we bought a few luxury names — Burberry, Louis Vuitton, and even retailers like Nike.

MATT WACHER

What we've seen even over the last few days is that even a small bit of good news can really push those names that have been beaten up much higher. So we think there's still opportunities under the hood. But at the aggregate level, we'd say that the US is probably now getting back to levels where it requires some caution to be investing. Generally speaking, we wouldn't be surprised to see some

MATT WACHER

more volatility on the horizon. Emerging markets — they're offering some attractive opportunities as well. But what we'd be doing is trying to look through that noise, and if there was more volatility, we'd be looking to buy some of the less expensive parts of the market if that sell-off does come again. That is Matt

RICARDO GONÇALVES

Wacher there from Morningstar, the market now looking to US jobs figures, which will be out later tonight.

RICARDO GONÇALVES

That ends the SBS on the Money podcast for this Thursday. Don't forget to give it a rating or a review if you enjoy the podcast on Apple Podcasts and Spotify and to click subscribe.

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