Latest / ausbiz a.m / 07.10.26 James Gerrish, Market Matters
Transcript
- Andrew: Good morning. Welcome to your morning wrap from OSBs. It is Wednesday, October the 7th, and a flat opening is expected on the local market this morning. In a moment, we'll preview the day ahead with James Gerrish. First, though, to Wall Street climbed to historic heights on Tuesday, with the major indices up more than half percent. The SP 500 and Nasdaq both hitting fresh record highs. Investors shrugging off those recent bond market anxiety fueled by well, the AI rally. Also easing crude oil prices and a mild pullback in those treasury yields. Optimism ahead of third quarter corporate earnings reporting season sparking buying across tech and utility sectors, and AI's insatiable power demand gripping the market also. Constellation energy surging after locking in a massive long term deal to supply Google with electricity, a power giant GE Vanova also surging. So Brent crude, that's sitting around a hundred dollars a barrel, gold slightly higher at four thousand one hundred and seventy an ounce. Bitcoin remaining around eighty five and a half thousand, and the Aussie dollar slightly higher at sixty nine point eight US cents. Let's get across those market moves and what is ahead. James Gerrish joining us from Market Manners. James, good morning. James: Good morning to you, Andrew. Andrew: Wow, well those moves continuing in the US very bullish. so new record highs. But just how broad is that move at the moment? James: Yeah, it's dri it's being driven by a very small cohort of stocks. So you made mention of technology shares leading the charge, and that's been the case. If you look at you know, you look you need to look at the market more broadly, and there's yeah, only about one percent of S P five hundred companies that are actually testing, making new all time highs. So the rally is a very narrow one. That's largely in the the six of the large seven megacap technology shares. So If we look at the numbers more broadly, there's about eighty percent of the S P five hundred, which is more than ten percent below their high. there's about fifty percent of the S P five hundred, more than twenty percent below their high. So, you know, you the the the the there's a bear market territory for more than half the index. So it's a i it it is a rally that's very narrow in nature. It's it's being focused on the areas that are benefiting from this big AI capex spend that's that's going through. I think the other important point is that you know companies given where we've seen bond yields move, so we've got US bond yields at circa twenty year highs, it's those companies that are being able to drive earnings at a greater rate higher that that are absorbing some of this impact from higher yields. And that's what's really driving the market. So, you know, from our perspective, we want to see this rally start to broaden. it was interesting last night. You made mention of some of the energy stocks doing well on the back of a deal by constellation. So we want to be seeing more of that, Andrew, in the US market. So a broadening of the rally would give us more confidence that's sustainable. Andrew: Yeah, interesting. you mention the power to drive these these AI data centers. how are you playing that at the moment, obviously, as I mentioned there, so Alphabet signing that agreement with a couple of different companies, Constellation Energy obviously involved there. Are you in on that or what what's your view as to how to play that? James: It's a so the the the impact of that's pretty significant. So the deal is a twenty year agreement between Alphabet and Constellation. It's for eight hundred and ninety megawatts of new nuclear capacity. to give you some context around that, that's about that that would power about one point w one million homes over the course of a year. That's about the size of Adelaide. So it's a big deal, and we saw some of the uranium shares get a boost last night, Camiko up over six percent as a result of that. So we've been bullish on the uranium space for a while. It hasn't really worked in the last six months or so. Uranium stocks have underperformed what's been a pretty resilient uranium price. Uranium price is sitting around ninety bucks US a pound. so it's been you know, it's up about thirteen percent over the past year, but some of these uranium stocks have been under a fair amount of pressure. So good to see a bit of respite in the sector last night. I'd expect that to flow through on the Aussie market today. Next gen was up. circa seven percent overseas last night. So it's a it's an important catalyst, right? So you've obviously got this big AI CapEx build that we all know about. One of the key components of that is energy. and the US is showing that one of the key components of that supplying these data centers with energy is through uranium. So we think it's a really strong medium term thematic. So we've got uranium exposure pretty much across all the p the strategies that we manage. and we're bullish on it. it hasn't as I said, it's been a bit of a struggle in the last six months or so. but I think the medium term prospects in this area look look particularly strong. Andrew: So James, as you mentioned there, obviously very narrow that leadership on Wall Street driven by those AI related stocks and hence, given what we're seeing in the Australian market with the lack of those large AI names, we are continuing to lag. Is that likely to persist, do you think? James: Yeah, well it's if if you think broadly, so obviously the index composition is important, which is what you alluded to. but I think it's also the earnings trajectory. So earnings growth in the US is outpacing earnings growth here in Australia, driven by you know, AI and technology, etcetera. and that makes that market more ha it gives it a greater ability to withstand high yield. So when you've got the US ten year yield at circa five point three percent. We've got the Aussie ten year yield at five point four percent. That's creating a, you know, valuation compression across the market. So even though the US market is at all time highs, we've actually s actually seen valuations come down because earnings growth at the index level is outpacing the valuation contraction that's derived from higher bond yields. but we don't have the same level of earnings growth here in Australia. So at the index level we're getting yeah, we're getting a greater impact from that valuation compression because we don't have the offset of set of higher earnings. will that continue? So that's a that that that's a really important question. So if you think the market, you know, the the rally is going to broaden, so the earnings base is going to broaden over in US market, then that would be a really positive thing for Australia. I think one of the keys for Australia is we need to s at least see a stabilisation in the bond market. I think the you know the cost of capital is more important for the for the the type of index we've got here. So they're more, you know, economically exposed companies here in Australia rather than these you know less economically exposed technology companies that are sort of running their own race. So to me I think it really comes down to the bond markets. If yields can stabilize here, then I think there's got a good chance of a of a strong rebound here in Australia. So and then you're likely to see some performance catch up to the US, some rotation into those more economically exposed areas of the market. And that would be beneficial for our index. So I think the market continues, you know, I think the market's got a good chance of of moving higher into Christmas if we see stabilization in the bond market. I don't think we need to see yields come back materially, but we certainly need to see stabilization for the Aussie market to try and recoup some of this underperformance, recent underperformance relative to the US. Andrew: Do you have some concerns nonetheless though in terms of earnings growth locally, particularly given the state of the economy? I mean look at the latest reads on consumer sentiment at all time lows off the back of further rate hikes, of course. So I guess in particular those interest rate sensitive stocks, you take a look at the banks where they're going at the moment, I guess the one bright spot remains commodities. James: Yeah, exactly. So that's where the earnings growth in Australia is going to come come from. So you know, the using the deal last night with constellation as the example in the uranium space. I think the you know the outlook for the commodity side remains particularly strong. We saw in FY twenty six earnings, where you know at the index level earnings are up about twelve percent year on year. It was primarily driven by commodities. So I think that thematic is going to continue. That's a strong medium term trend for Australia. So we shouldn't, you know, s you know shy away from that. I think the mark we all we get negative on, you know, the market's earnings growth being derived from commodities because they're cyclical. But in that sort of in you know, in the current environment, this you know the the the trend towards commodities I think is more of a medium term thematic. If you look elsewhere, obviously consumer under pressure, no doubt about that, but consumer stocks have been absolutely whacked. That so they're all starting to find a base here. Markets price the future. So we're we're getting data. you may mention of you know the the the consumer data that we got this week. That's backward looking data. so we're looking forward. If we can see some sort of, you know, the RBA isn't pressured to move on rates further. It was interesting when Michelle Bullock raise interest rates at the last meeting, it's it seemed to me like the commentary had shifted a little bit. so the potential is that they won't raise rates again the market's position for further rate hikes. so that's obviously filtering into the pricing of consumer facing stocks. Banks are a little bit, you know, fifty fifty here in in my view. I think they're pulled back pretty sharply, but I think you know, they're they're they are a broader barometer of the Aussie economy. The Aussie economy is struggling a little bit. So I'm not outright bullish on the banking space. I think in the consumer space has been hit really hard and I think it's looking for a low. The same in the property space. but obviously the earnings growth is going to come from the commodity side. So yeah that there's enough to be optimistic in the market at the moment. I will you know it seems to me like everyone's bearish in the market, particularly on some of these consumer facing stocks, but I think that's more of a backward looking view. Andrew: Yeah, well opportunity but a contrarian I guess. But if you're talking about perhaps some of those consumer related stocks finding a base, are you tempted then to weigh in now or you just want to wait a bit longer? James: Yeah, so we don't i in in growth strategies we don't have any consumer facing stocks at the moment. but we are looking at them right now. We've got some property exposure. Last week we added to our holdings in Murvac. I think that looks an interesting story. Charter hall looks interesting at the moment. That's been you know, in the property space as well, that's pulled back, you know, near nearly thirty percent from its recent highs. So, yeah, I think you need to I think you need to be targeting some of these stocks that have really been kicked to the curb. in the last six six months or so and and probably longer. and that's where the value is in the Aussie market, to me. But yeah, yeah, our overarching view is probably Aussie market for for yield and there's still some really strong yield opportunities in the Aussie market and focusing on the US for the growth side. Andrew: James, always great to get your perspective from Market Matters. Thanks so much for joining us and enjoy your day. James: Have a good one, mate. Andrew: And that is your Osby's morning wrap. Hope you have a great day. I'm Andrew Gagan. Thanks for listening.