Earnings season on the ASX has come to a close with a historically low number of downgrades on the FY22 numbers, as tracked by Wilsons, but more downgrades than upgrades to EPS and dividend guidance for FY23, based on Evans & Partners' numbers.

The one year return on Bloomberg's benchmark for the bond market is down 19% over the past 12 months. While the Australian yield curve is sloping upwards, the US yield curve is currently inverted. An inverted yield curve has historically led to some type of "break" in the system, @Marlin_Capital warns. But the inflation data is potentially turning - Yardeni highlights plunging US gasoline prices.

Given the European situation, nuclear power and uranium are seeing a revival of sorts, at least with Japan revisiting its stance. Uranium equities have been advancing and the Washington Post ran a Blooomberg piece highlighting the unsavoury sources of current uranium supply.

Taking a look at equities, Bespoke's optimistic take on the June half-year's poor showing is that such a poor first six months is typically followed by 12 months of 20%+ returns for the S&P 500. We thought it was interesting how closely the Grayscale Ethereum Trust has traded in comparison with the ARK Innovation ETF - a speculative cryptocurrency vehicle alongside a high growth tech investment vehicle. And potentially adding some colour to that is Visual Capitalist's charting of the demise of long-term investing.

Aggregate ASX earnings downgrades announced over course of 12 month reporrting cycle

Source: Wilsons

Net guidance upgrades for FY23f for the S&P/ASX 200

Source: Evans & Partners

Bloomberg Global-Aggregate Total Return Index Value Unhedged USD

Source: RBA

Australian and US yield curves

Source: worldgovernmentbonds.com

An inverted yield curve has historically led to some type of "break" in the system

Source: @Marlin_Capital, Federal Reserve of St Louis

US gasoline priced have plummeted as consumption is reduced relative to a year earlier

Source: Yardeni Research

North American uranium ETFs on the rise (URA, URNM, U.U)

Source: TIKR, Equitable Investors

Authoritarian nations dominate the world's uranium production

Source: Washington Post / Bloomberg

S&P 500 has been up at least 22% in the year following prior 20%+ two-quarter drops

Source: Bespoke

Grayscale Ethereum Trust (orange) and ARK Innovation (green) moving together

Source: TIKR, Equitable Investors

The average holding period of shares on the NYSE has fallen to new lows

Source: Visual Capitalist

September Edition

Market sentiment on China has become especially fragile of late amid fears over near-term growth. However, we see reasons to be positive and urge investors to think longer term and ignore market noise.

Hot topics among our investment teams include zero-Covid policy, US-China tensions, monetary and fiscal easing, the weak economic backdrop, a beleaguered property sector and regulatory oversight.

China's economy contracted 2.6% in the second quarter this year on the back of Covid-19 lockdowns and a real estate sector under severe liquidity stress due to continued government deleveraging.

Of course, these headwinds will likely trigger further monetary and fiscal policy easing, which will support China's economy. Chiefly we expect infrastructure spending and modest interest rate cuts.

In the absence of strong stimuli, we're anticipating a gradual turnaround. Our Research Institute is forecasting year-on-year GDP growth of about 3% in 2022 - below market consensus of close to 4%.

We see authorities have levers to stabilise the property sector, and growing policy support reaffirms Beijing's commitment. Reportedly they're considering a rescue fund to deliver unfinished residential projects. While it may be insufficient to shore up buyers' confidence, it's a step in the right direction.

Further, we expect policymakers to dilute or discard their zero-Covid strategy over time, most likely after the Party's 20th National Congress this year. So we see lockdown effects on growth dissipating.

Similarly we see regulatory pressures easing. At a recent Politburo meeting we noted support for expanding China's universe of digital platforms and standardising supervision. Stable regulation will help to improve investor confidence and could drive multiple re-ratings for e-commerce companies.

Clearly, geopolitical risk is hard to predict and we expect heightened US-China tensions to last for some time. But we view such tensions as periodic and part of an evolving geopolitical landscape.

Our base case is that Beijing will not engage in direct military conflict with Taiwan in the near term. We think cooler heads will prevail in recognition of the heavy cost to economies and global stability.

We believe imposing sanctions on Taiwan would be contrary to Beijing's own economic interests, while more military drills around the Taiwan Strait risk disrupting global supply chains and logistics.

So what might investors expect? Here we outline our investment teams' China views.

Equity team

It's early for China's economy to show strong signs of recovery on the back of easing measures. So we expect equity markets to remain rangebound in the near term. But we're constructive on the outlook as stimulus measures start to work their way through the system in the second half of 2022.

"We're constructive on the outlook as stimulus measures start to work their way through the system in the second half."

Companies have started reporting their first-half results, with investors now more focused on analysing fundamentals to understand their underlying strengths and weaknesses. Given our focus on high-quality stocks, we're optimistic about the earnings resilience of our holdings.

Valuations also look attractive. The MSCI China A Onshore Index's 12-month forward price-earnings ratio is 11.6x - comfortably below 15.4x for MSCI World and against a five-year average of 12.6x.¹

China aims to reduce real estate's contribution to GDP growth due to the sector's high leverage. We have positioned our equity portfolios around the following five themes that we think will enjoy state support and are deemed critical to give China a competitive edge in its economic rivalry with the US:

Aspiration: rising affluence leading to fast growth in premium consumption;
Digital: we see a bright future for cybersecurity, cloud, software-as-a-service and smart homes.
Green: we're positive on renewable energy, batteries, EVs and related infrastructure.
Health: fast-growing disposable incomes driving demand for healthcare products and services.
Wealth: rising prosperity points to growth for consumer finance, investment services and insurance.

Fixed income team

With inflation not an issue, we expect stronger fiscal policy-easing this year and further rate cuts over the next 12 months. However, we suspect growth in infrastructure investment might disappoint after a strong first half.

Momentum in the property sector is too weak for it to recover this year. Property sales have fallen sharply and will likely stay low amid impaired consumer confidence. However, we think state-owned enterprises (SOEs) in the sector with continued access to funding are well-placed to outperform.

Additionally, with the rollout of more co-ordinated government support, we see potential for stabilisation among large, well-established privately owned enterprise (POE) developers.

More generally, Chinese SOEs have enjoyed healthy demand in recent months and we expect them to retain strong government support, although we remain cautious about valuations. We think onshore SOE spreads will remain tight in coming months.

We have been trimming core SOE positions over rich valuations relative to Asian and global peers. For the same reason we underweight Chinese financials in the offshore market, especially big banks.

We also see supportive liquidity conditions for Local Government Financing Vehicles (LGFVs) in the near term, albeit amid growing concerns about the ability of local governments to support them.

Offshore China portfolio positioning:

• Domestic champions with limited geopolitical risk and continued ability to refinance;
• LGFVs with clear strategic roles within their province/region/city;
• Real estate bonds with a low cash price in anticipation of restructuring or normalisation of the operating environment.

Onshore China bond positioning:

• We're long duration v benchmark - serves as a good diversifier versus other global assets;
• Mostly hold stronger local SOE/LGFVs in onshore RMB credit after trimming POE developers;
• We hold a neutral position on RMB currency. Strong balance of payments should support RMB over long term, but short-term we think volatility will be dominated by USD direction.

Multi-Asset team

The world is a highly unusual place today, with this economic cycle different for three reasons: policymakers are seeking to avoid stimulating the economy via the property sector; strict Covid containment measures continue to dampen consumption; and major central banks are tightening policy aggressively to fight inflation, leading to slower global growth.

Whereas in China, where inflation is not an issue, economic growth is in the early stages of recovery after authorities started easing policy this year. Government bond yields are near historic lows, so not outright cheap. But equity risk premia and offshore credit spreads remain attractive.

As a result, although Chinese growth is likely to see sequential improvement in the second half of this year, the strength of the recovery will be weaker than in previous cycles. Monetary policy is likely to remain loose, with credit growth driven more by government than the property sector.

As policymakers seek to balance short-term growth with long-term structural reform goals, we remain long China onshore equity and China duration; cautious on China credit; and we recommend hedging currency risk when investing in China.

In a normal cycle, an early recovery phase is the time to invest in Chinese equity. However, in this cycle we think the recovery will be highly uneven and asset allocators need to pay close attention to potential tail-risk from Covid lockdowns and the property sector. Active stock selection is key.

In a normal cycle, as growth recovery takes hold, the bulk of government bond outperformance should be behind us. However, in this cycle the weak recovery suggests China's central bank is likely to keep liquidity conditions loose, meaning bond yields will remain lower for longer.

In a normal cycle, credit should rally with equities. However, in this cycle we are not confident that policymakers will backstop troubled property developers, which means high-yield credit will remain distressed. Of course, that does not preclude interesting opportunities in investment grade credit.

For currencies, we think CNY can stay resilient on a trade-weighted basis, but weakening external demand and a hawkish US Federal Reserve will put downward pressure on CNY against USD. For global investors, hedging CNY risk is not a bad idea as hedging costs are at their lowest for five years.

Author: Nicholas Yeo, Head Of China Equities;
Edmund Goh, Head Of China Fixed Income; And
Louis Luo, Investment Director, Multi-Asset Investment Solutions

In August, equity markets were weaker, driven by expectations around the number of future interest rate rises needed to reduce inflation. In the key US indices, the S&P 500 was down -4.2%, the Nasdaq fell -4.6%, whilst in the UK the FTSE 100 performed better, declining -1.9%. 

Australia outperformed, where the All Ordinaries Accumulation Index rose +1.3%, driven by its heavy weighting to resources and oil and gas stocks, which outperformed strongly. Property, consumer staples and utilities sectors lagged. 

The key driver of declines in global indices were comments made by Jerome Powell (chair of US Federal Reserve) in late August which indicated the US Federal Reserve monetary policy will be aimed very strongly at bringing down inflation closer to its long range target of ~2%, which in turn indicates the interest rate hiking phase will be larger and go for longer than some equity investors had hoped for. On this issue, our base expectation is that central banks will need to raise rates aggressively for another 6-12 months in order to reduce inflation to more acceptable levels. Whilst this will lead to a challenging and volatile period for equity markets, the positive is that this volatility is likely to provide excellent buying opportunities in stocks across a range of sectors on the ASX. 

In fixed interest markets, the US 10 year bond yield rose sharply, climbing 42 basis points to close at 3.13%, whilst the yield on the Australian 10 year bond also rose sharply, by 54bp to close at 3.55%. The A$/US$ fell -2.0% to close at US$68.5. 

Commodities were broadly lower in August, iron ore fell - 16.0%, crude oil -12.3%, copper fell -2.1%, whilst thermal coal continued to outperform, rising +4.2%. 

Overall, the August reporting season was better than many investors had feared, with most results coming in close to consensus expectations. With that said, we are still quite early of the interest rate hiking cycle, with company results for the December 2022 half likely to be more impacted by rising interest rates, higher cost of living, and general caution on household spending. 

Within the tech sector, the delineation in terms of performance between the winners and the losers in the current environment is becoming clear. What are the key elements that depict the winners and losers?

Trent discusses the fundamental themes from his two recent trips to the US which were structured around two technology conferences - the Morgan Stanley conference and the JP Morgan Conference.

Speakers:
Trent Masters, Portfolio Manager & Elfreda Jonker, Client Portfolio Manager

This information is for adviser & wholesale investors only.

Australia was a relative outperformer posting moderate gains compared to the retreats staged by major global equity markets in August. 

The month began on a positive note with equities surging upward after the eagerly anticipated US Consumer Price Index (CPI) print announcement came in below expectations. The "risk on" exuberance was short lived after several U.S. Federal Reserve (Fed) voting members made headlines that a Fed pivot was unlikely and that further rate rises were needed to dampen inflation. Toward the end of August, the month's steadily accrued gains took a blow with the Fed Chairman's hawkish rhetoric at Jackson Hole confirming the Fed would continue its tightening policy until confident inflation is returned to target.

Small Resources (+5.6%) outperformed in the month, driven by strength in Lithium/Battery Materials names. Sentiment towards Mining Services names turned more positive after better-than-expected FY22 results. 
Consumer Discretionary results were largely better than feared. 
Information Technology (-4.6%) names remained volatile with weakness over the month. 

Overall, the domestic corporate reporting season scorecard shows result 'beats' trumped 'misses' verses expectations. Better than feared was bought, whereas downgrades were punished by the market. The season highlighted the deterioration effect higher than normal buffer inventories had on cash flow. Higher operational expenditure a consistent feature with both labour and material cost inflation. Finally, management outlook statements suggested that the consumer is still spending with no sign of slowdown yet.