Markets react to war and Magellan downgraded: What we learned this week
Russia and the Federal Reserve, commodity prices see-saw and AGL energy.
Markets have swung wildly in the hours since Russia invaded Ukraine. Here’s what we’ve learned so far about how investors are responding:
Interest rates and war in Europe
Equity markets in the US, Asia and Australia recovered ground on Thursday as dip buyers emerged, and investors mulled the possibility that the uncertainty created by war in Ukraine could force the Federal Reserve to step back from aggressive interest rate hikes.
The S&P 500 rose 1.5%, the Dow Jones advanced 0.3% and the Nasdaq Composite added 3.3%. All reversed sharp selloffs at market open.
Ed Yardeni, chief investment strategist for Yardeni Research expects the Fed to slow down the pace of rate hikes because of economic uncertainty. The expected likelihood of the Fed hiking rates by 0.5% at its March meeting fell to 17% from 34% the day before, according to pricing data from CME Group.
Geopolitics fades quickly
Investors may also be taking cues from the tendency of markets to bounce back during previous wars and crises. In a survey of the Cuban missile crisis, the Soviet invasion of Afghanistan and the 2014 Ukraine conflict, investment bank UBS told clients geo-political events “tend to quickly fade”.
“...drawdowns driven by geopolitical stress events are typically short-lived for well-diversified portfolios. Historically, the greatest risk for investors from geopolitical crises has come from overreacting and under-diversifying,” said Mark Haefele, chief investment officer at UBS Wealth Management, in a note on Thursday.
Russian commodities sidestep sanctions
Fears sanctions could lead to higher inflation in the West by cutting off crucial commodity supplies eased overnight after the initial wave of Western sanctions exempted Russian energy and agriculture exports.
US sanctions hit major Russian banks on Thursday but left exemptions for transactions related to energy and agricultural commodities. Markets have been concerned sanctions could lead to higher prices for oil and food, adding to inflationary pressures and accelerating interest rate hikes. Russia is the world’s top wheat exporter and second largest producer of natural gas.
Oil prices eased slightly after hitting the US$105-mark overnight on Thursday. They traded at $101.14 as of 5pm Sydney time on Friday.
AGL and the case of the vanishing utility dividend
Income investors will confront a shrinking set of defensive utility dividends should the takeover of AGL Energy by tech billionaire Mike Cannon-Brookes and Canadian asset manager Brookfield succeed. The S&P/ASX 200 Utilities Index is down to two companies, APA Group and AGL Energy, following the sale of Spark Infrastructure and Ausnet Services to private bidders in the last two months.
The $5 billion bid for AGL Energy was rejected by the board on Monday on the grounds it materially undervalued the company. Brookes and Brookfield have hinted at further offers.
Investors exit Magellan as fund downgraded
Morningstar analysts have downgraded Magellan’s flagship Global Equity fund from Gold to Bronze following the exit of star fund manager Hamish Douglass on medical leave. Analyst Chris Tate cited “heightened uncertainty” as a key reason, adding that “a period of stability and improved execution” was needed for a re-rating.
The downgrade comes as Magellan reported investors withdrew billions from the fund manager in February. Net outflows hit $3.2 billion between 11 February and 23 February. A fifth, or $0.6 billion, was retail money. A further $2.1 billion is set to be withdrawn in the coming days.
Breathing room for interest rate doves
For months, Reserve Bank Governor Philip Lowe has fended off market speculation of early rate hikes by insisting he would wait for signs of wage growth. Wednesday’s wage growth numbers lent support to his cautious approach. Wages rose 0.7% for the December quarter for an annual increase of 2.4%, coming in slightly below market expectations. The bank has said previously it believes wages need to be growing at 3% or more for inflation to sustainably hit its target.
Rio Tinto splashes cash
Shareholders are looking forward to Australia’s biggest ever payout after Rio Tinto declared a US$16.8 billion dividend on Wednesday. It comes on the back of the miner’s highest ever profit of US$21.4 billion thanks to elevated prices for iron ore, copper and aluminium. Morningstar maintained its fair value of $91 and expects commodity prices to cool as Chinese stimulus fades.
ASX: Market recap
A muted week of trading on the ASX gave way to sharp losses in the aftermath of Russia’s invasion of Ukraine as investors tried to price the economic and inflationary impact of war between two commodity heavyweights.
The ASX 200 plummeted in mid-afternoon trading on Thursday as Russian troops poured across the Ukrainian border amid missile strikes across the country’s major cities. Shares pared losses Friday after an overnight rally on Wall Street and closed the week down 3.1%.
“Markets were positioning for a very tight sanctions response and so far, the response has been less than what some were anticipating,” says Aaron Binsted, a portfolio manager at Lazard.
“Sanctions would have strong flow-on effects in some commodity markets. Right now, it looks like those are not on the table.”
Tough sanctions that disrupted Russian exports of oil, gas and wheat could lead to higher prices in the West.
Consumer staples, utilities and energy were the sole weekly gainers amid a sea of red as investors moved into defensive stocks.
Woolworths and Coles closed 5.9% and 5.6%, respectively for the week, after reporting higher sales and lower profits in line with expectations.
The fourth week of reporting season was strong, with the median company beating profit estimated by just under 1%, says Binsted.
Media Group Nine Entertainment shares rose as high as 8.7% on Thursday after reporting a first-half jump in profit.
Block shares jumped 32% on Friday after the US company reported a stronger-than-expected profit in Q4.