Latest / ausbiz a.m / 18.09.26 with Michael Carmody, Centennial A.M
Transcript
- Andrew: Good morning and welcome to your morning wrap from OSBs. It is Friday, September the eighteenth, and we are expecting a strong start to the session. ASX Futures up around six tenths of a percent. In a moment, we'll preview the day ahead with Michael Carmody. First, though, quick look at global markets. And after an initial negative reaction, investors well, they've warmed the Fed's rate hike with the view that the central bank's hawkage stance ought to keep long yields contained, obviously as they fight inflation. Bearing in mind also the Fed share painted an optimistic outlook for the U.S. economy. So on Wall Street, it rallied SP up 1.1%, NASDAQ 1.7% higher, the Dow up around six tenths, gains led by the likes of Intel, Micron, AMD all up between five and seven percent, and falling oil prices added to that bullish sentiment. Brent crude down to around $104 a barrel. Gold's up some 2% to 4,380, and Bitcoin is at currently around seventy six and a half thousand and the Aussie dollar at seventy one point seven US cents. Well, let's get across those market moves. And what's ahead for the local market? Michael Carmody joining us from Centennial Asset Management. Michael, good morning. Michael Carmody: Thanks, Andrew. Good morning to you. Andrew: So, ⁓ well that that negative sentiment didn't last very long, did it? ⁓ we were talking about this yesterday when ⁓ you appeared on ⁓ Osbers just talking about perhaps, you know, needs from caution and so on. But what did you make of the market reaction today? Michael Carmody: Well, in in some respects the the the increase was so well flagged. I mean we've got a a a a relief rally. I mean, one day doesn't make you know a a trend, but certainly it it I think there's some relief in equ in equity markets that the Fed are taking some action to address inflation. We've seen a sort of very very small response as far as you know, those investors pricing bonds as as as far as ten years particularly are concerned, and that sort of slip below five. And so You know, I think the commentary around the increase yesterday from Walsh that that that that that we're really ta taking a gentle approach, I suppose, to trying to address this problem that that that persists as far as inflation is concerned. And that really he he's a dove. He'd like to see lower interest rates. ⁓ there's some inevitability about having to deal with some short term inflation issues that, you know, have been lingering for a while. And, you know, markets have decided they've looked at the great reporting season we've we've just had, ⁓ particularly in the US, ⁓ the the strength of the US labour market and y you know, the the the sort of softness that has been in equity markets, particularly in the US, you know, leading into this rate increase and decided that ⁓ it's manageable, I suppose. Andrew: So well let's then focus what we're seeing locally, of course, ahead of ⁓ our own central bank decision week after next and ⁓ clearly expectations of one perhaps two rate hikes to come. ⁓ how how is the local market position at the moment, you Michael Carmody: Well, I I think, you know, as you say, the the potential for one or two additional increases locally is is well flagged. You know, and I think, you know, the local market has, you know, responded to that with respect to the the recent performance, which has been which has been poor. We are in a seasonally weak period, but I think it's fair to say that, you know, if if you look at the rolling twelve months and look at resources versus industrials in a in i in a headline sense Industrials are down sort of just over seven and a half percent and resources are up more than sort of thirty four. So it tells you that ⁓ the market here has been preparing for, you know, softer GDP, softer growth, a softer consumer for some time. Andrew: So how do you see that playing out then as we head towards the end of the year and into the new year, given I guess that disparity you're seeing particularly between industrials and resources? Michael Carmody: Yeah, look, I think it's fair to say that obviously rate increases are negative for equity valuations. It's not really hard to do that arithmetic. But I think as far as investing in in in in in the equity market, there are certainly areas in the Australian market particularly associated with the CapEx infrastructure cycle that's underway. And the examples I'll give you is that mining services as a result of the resources sector's strength. Is certainly, in our view, looking pretty robust as far as growth and demand is concerned. We look at this data center build that's taking place here. I guess from my perspective, we've all seen estimates of of of what that's worth as far as CapEx is concerned. And I'll say to you, I suspect we're all underestimating the expenditure that needs to take place to take advantage ⁓ of that opportunity. And then if we look at the defense spend, that's clearly lifting relative to history. And then we've got the Olympics in South East Queensland ⁓ to come and really contractual arrangements associated with that construction spend really haven't been awarded yet and it's gonna happen soon. We w we've got those Olympics coming in that near term horizon. Andrew: Let's just pick apart ⁓ some of what you just said there, particularly I guess the focus there on so called picks and shovels, both in the resources sector, but but also ⁓ data centres. So you're talking about those doing the building, the services company, which ones are you liking at the moment? Michael Carmody: So from our perspective, look if we l think about mining services, you know, w w we think names like Monodelphus and SRG and NWH are are are all exposed to the sort of demand that we think ⁓ is underway as far as resource expansion is concerned, but also the maintenance activities that that needs to be deployed in order for production levels to be sustained. And so I know I've used stock codes there, but let let's talk about ⁓ you know, mo mon Monodelphus, NWH and and and and I will say to you that SRG are are are all engineering groups that we think are well positioned. Andrew: All right, and well similarly there, ⁓ with ⁓ with the Dana set of build then ⁓ y I mean you're seeing that that continuing obviously given with that that massive build out we're seeing ⁓ and that's very much focused here in Australia at the moment. Michael Carmody: Yeah. I mean we you know, the examples we'll give you, and these are all small caps, ⁓ and we think there's direct contractoral wins and earnings revisions that we think are constructive for the likes of Southern Cross Electrical, ⁓ and also the the likes of ⁓ SKS, who are electrical contractors that are, you know, intrinsic to the the the the services that are required in order to build out the proposed data centre footprint that's planned for this country. Andrew: So, Michael, where do you not want to be, particularly with the prospect of ⁓ further rate hikes to come? Michael Carmody: Yeah, I think with with with with rate heikes to come, there's some obvious pressure as far as consumption is concerned, household wealth. And I think it's very ⁓ unlikely that we're going to see outperformance from the bac the banks. I mean, I think we've already got a bit of a taste that credit growth is slowing, demand for mortgages for the big four ⁓ is is slowing, and management have been very transparent about that. And so I I I think it's hard to see how the banks outperform in this environment. But also history tells us ⁓ property trusts, REITs, for example, also, you know, because they're priced on that long-end bond, generally speaking, do struggle in this environment. And we have recently seen ⁓ poor performance relatively speaking from from that sector. ⁓ consumer discretionary is also probably the third area where people just pause. and that retail space ⁓ or sector is an area that we think is probably sensible to avoid. Andrew: Now, ⁓ we're also I mean obviously come out of ⁓ earnings season, looking for that guidance. ⁓ we're likely potentially get it more too as we head into AGM season. How is how important is that? Michael Carmody: ⁓ look, I think it's very important and you're you're exactly right. look, I think ⁓ companies are in the habit of giving us updates whenever they're forced to speak to the market and the ADM season is is is is the next opportunity for that to take place. We saw in the most recent reporting season that, you know, like ⁓ guidance is very difficult for management at the moment ⁓ to provide you with. And a few companies ⁓ decided not to give you guidance in August, preferring to wait to see. How the year had had traded to to to to the AGM season. And look, I think it's it's going to be difficult for management to be able to give guidance that surprises the market on the upside, particularly in those sectors where ⁓ we've identified there's likely to be some pressure. ⁓ but guidance is very important. Investors are always comforted by a confidence statement from management regarding the outlook. And look, one of the reasons that we've seen the softness or the underperformance of the industrial sector on a rolling twelve month basis is that ⁓ that sector relative to resources hasn't been able to provide you with guidance that ⁓ is i i i is robust enough for people to want to own those sectors and that's why we've seen that relative underperformance. Andrew: Can I ask how you how you view the local tech sector at the moment? Obviously ⁓ it's small relative to what we've seen ⁓ more globally and and ⁓ sort of different too, given ⁓ the dominance of the hyperscalers and chipmakers, obviously, on Wall Street. You seeing I mean, how are you look viewing that ⁓ particular sector at the moment? Michael Carmody: Well, I I think you have to take it stock by stock and be very specific about that because there are quite fundamentally different issues with different names. But I I will say to you, I think there are there are a number of names that potentially benefit in that in in that se in that tech sector from the AI phenomenon. And Prometicus, for example, would be one example of a smaller cap stock that I I I would give you as As I think one that's likely to be advantage advantaged by the technology that they can incorporate as far as AI is concerned. ⁓ I think the interesting thing is that you know the growth profile of the of that sector and and and the way that sector's valued is probably somewhat divorced from the traditional bond rate discount approach that investors take. And so for those names within that sector. that are gonna deliver you as an investor growth that's sort of divorced from the economic cycle, if you like, are probably gonna do quite well. Andrew: And Michael, y you said at the beginning obviously we're in that seasonality where September, October tend to be quite weak. Are you seeing that play out and and beyond that would you then expect potentially we get into that you know so called Santa Claus clause rally? Michael Carmody: Well, I I I'm not sure I'm prepared to call you know call that yet, but like September's it's been a tough month. I mean, we're in negative territory for both small caps and large caps for the month. ⁓ you know, I think the playbook's pretty well established. ⁓ I think we've got messaging from the the Fed and our own reserve bank that ⁓ you know rates are going up but but in a in a modest way. and ⁓ you know I wouldn't be surprised to see local markets rally ⁓ post this soft period that traditionally comes through, you know, s that September, October period into the end of the year. Andrew: Well Michael, great to get your view of the markets at the moment. Hope you enjoy your day. Thanks for joining us from Centennial Asset Management. Michael Carmody: Pleasure, Andrew. Thanks again. Andrew: And that is your husband's morning wrap. Hope you have a great day. I'm Andrew Gagan. Thanks for listening.