Latest / ausbiz a.m / 16.09.26 with Greg Canavan, Canavan Capital
Transcript
- Andrew: Good morning. Welcome to your morning wrap from OSB. Setting you up for the day on the Aussie share market. It is Wednesday, September sixteenth. We are expecting a solid start to the session. ASX futures up point four percent. In a moment, we'll preview the day ahead with Greg Canavan. First, though, a look at global markets. US equities did come under further selling pressure as oil prices and treasury yields moved higher. And as investors prepare for the Fed decision on interest rates, which will be revealed tomorrow morning our time. The US ten year yield remaining above five percent. ⁓ Wall Street S P down around half percent, Nasdaq point eight lower, and the Dow also falling. The hyperscale is among those leading the losses, ⁓ including Alphabet, Amazon, and Microsoft. Brent crude surging again up another three percent to close to one hundred and nine US dollars a barrel. Gold around four thousand three hundred and thirty, Bitcoin falling to seventy six thousand after the US Senate blocked a digital assets bill, and the Aussie dollar is weaker at seventy one. Well let's get across those market moves. Joining us Greg Canavan from Canavan Capital. Greg, good morning. Greg Canavan: Good morning, Andrew. Andrew: So of course, ⁓ so many risks, I guess, for investors to consider at the moment. ⁓ clearly the Fed remaining a large one. Bit hard to know, I guess, what's gonna happen because we've got no guidance from Kevin Walsh, the new Fed chair. Markets pricing in well, it's over eighty percent chance they're gonna hike tomorrow. D d how cautious do you think investors are at this point? Greg Canavan: Well, I think ⁓ a hike tomorrow is is virtually guaranteed. ⁓ interestingly, although Walsh doesn't give forward guidance, if you look at the markets, they're suggesting there's gonna be more rises rate rises to come. So the ⁓ the two year yield in the US is often a good indicator of where the Fed funds rate is gonna be heading, and that's trading at around four point six six percent at the moment. ⁓ so that indicates if we get a rate rise ⁓ tomorrow, then the market is pricing in another two by the Fed. And when you think about what that means going forward, the equity market, in my view, isn't just isn't priced for this this higher cost of money. So you look at long everyone's talking about long-term bond yields, they're rising around the world. And that's obviously driven in the very short term by what's happening in Iran. And as you just mentioned, oil prices up again overnight. That's feeding through to higher in the US gas prices. ⁓ diesel prices, that also has a big implications for the Aussie sector. The mining sector obviously runs on on diesel, and in the last couple of weeks we've seen broad weakness ⁓ across the the big majors like BHP and Rio. They've corrected quite a lot. The gold miners, obviously, with the gold price falling as well, they've corrected quite heavily. but then when you look at other parts of the Aussie market. ⁓ and you know and and I've mentioned this before, but Commonwealth Bank being the standout, it's still trading at 23 times earnings, which is equivalent to an earnings yield of 4.3%. Now when you compare that to a government bond yield, 10-year bond yield trading at 5.4%, it's just reflective of for me, the ⁓ the fact that the equity market is just not really taking these rising bond yields seriously. ⁓ the bond yields reflect a risk-free rate. ⁓ and equity should trade at a pre ⁓ at a discount to that ⁓ risk free rate. So there should be a ⁓ a a price adjustment given these rising bond prices and you're just not really seeing that across the board. Yes, we've seen some weakness in September, ⁓ but I think there's probably more to come. Andrew: Well, I mean, with the Treasury Market flashing red then, wh why do you think it is the case that equities aren't really paying attention? Greg Canavan: There's probably a lot of reasons. ⁓ you know, the one thing that gets talked about a lot is the the the passive ⁓ in inflows. And if money's coming into the market, then it's got to be put to work somewhere. ⁓ most fund managers and the big pension funds, they have to be fully invested or near fully invested. So they're going to go into those larger stocks to try to, in some ways, just just protect themselves against any earnings ⁓ issues. So you're seeing a lot of those flows move into those big stocks. But at the end of the day, I think they're they're mispriced. Everything should be based on a risk reward outcome. ⁓ and I think the market is still risky, ⁓ risky ⁓ given the rewards on offer. So that's where I'm cautious. Andrew: All right, so you're obviously ⁓ remaining concerned about particular those valuations of the banks and where they're at at the moment. Just in terms of perhaps the flip side and ⁓ what's playing out in the Middle East and with those oil prices, have you been surprised perhaps we haven't seen some of those energy stocks move more? Greg Canavan: Yeah, absolutely. And I think that is a reflection of the market saying, look, we're not going to price Woodside, for example, on these hundred dollar plus oil prices because we think it is short lived. ⁓ now, short lived I'm talking about it could be another one or two months or maybe a little bit more, but it's certainly not something that analysts are going to put into their models and and ⁓ assume that Woodside is gonna ⁓ earn that those types of ⁓ oil prices over the longer term. It is very, very difficult when you're investing around geopolitical risks because things can change very quickly. We saw that just a few months ago. Oil prices rallied to 120, come all the way back down to near seventy dollars and then have rebounded back up. So there's a huge amount of volatility. And I would point out that the Brent crude market is not necessarily a physical market. It's just the the market that the traders play in to trade on the oil price. The biggest issue I think for markets is the price of refined products coming down the down the pipe and that feeds through into agricultural products, that threat feeds through into fertilizers. And I think if the war continues for much longer and it and it we can't see ⁓ any resolution as yet, ⁓ we're gonna see some real pressures come through in those areas. Andrew: So Greg, of course, the Fed not the only central bank under pressure to lift rates. So we've seen the ECB just do it. Of course, we look ahead to our own RBA week after next. ⁓ with ⁓ look, I mean you brave to bet against ⁓ a a a hike in rates there, one even maybe two by the end of the year. Given that, how are you positioned? ⁓ just in perhaps in what you're holding and what you're not? Greg Canavan: Well, I'm positioned in in a high cash weighting at the moment. the RBA more than likely is going to r raise rates at the end of the month. Now anything can happen in the next two weeks to to change that outlook, but it looks increasingly likely that they're gonna rate. And this is all about credibility for central banks. So I I feel like this could be a policy error in that a lot of the issue is around a rising oil price at the moment, which is geopolitical. If you go to the petrol pump Br prices are rising there, that's taking money out of the out of the system. ⁓ so the consumers already getting squeezed by oil prices and another rate rise is gonna make that even worse. But I think central banks will have to do that from a credibility perspective because if they don't, the market will then just say, Well, look, you know, inflation expectations are gonna get out of control. And that comes back to what we just talked about is that, you know, I don't think the stock market is really pricing in aggressive hikes. ⁓ and and the implications for that. So if you the the Aussie economy's already had a few rate rises this year. We've had a pretty ⁓ tough budget on the housing market. Another couple of rate rises is going to inflict some real pain ⁓ on the economy because it's the RBA's trying to squeeze out the demand in an in an economy that just doesn't have the the the productivity to handle it. So I think there's some real risk building. Andrew: Mm. Yeah, so potentially with the prospect then of ⁓ the economy getting weaker, you've had the hit to house prices and the wealth effect that that brings up. ⁓ obviously the household is already feeling pain. How does that translate then into earnings growth going forward? Greg Canavan: Well, I think you'll see ⁓ in the course of the next few months, you'll see some and we're coming up to ⁓ I guess annual general meeting season where companies do provide updates on on how they're going towards the back end of the year. So in certain sectors I think you'll see ⁓ a tempering of ⁓ earnings growth expectations. And if you look at a lot of the consensus estimates, they're still pricing in reasonably decent decent growth. ⁓ But I I think they're at risk of of ⁓ of being brought back a little bit as well. So that's where I'm sort of looking at. And it's when you get those adjustments and those deratings that that's where I think you can start getting interested in the market again. But right now I think it's just a little too optimistic given what the what the outlook is. Andrew: You you mentioned resources before. Obviously they have done well. Bit of a pullback more recently. Are you can are you still in the resources sector, ⁓ particularly the larger miners, given how well they've done? Greg Canavan: Look, I think that was, you know, quite clearly a good opportunity to take some profits. ⁓ back when certainly when BHP was getting up towards the seventy dollar mark, it was very much a ⁓ AI copper related trade. And now there's a little bit little bit of concern around the I guess longevity of that AI trade and and we're we're seeing the ⁓ the the the open AIs in the anthropic starting to talk about let's pull back on the spend. Now I think They're talking about a moral issue there. And I think that's more around are they ready for IPOs yet? ⁓ they they're trying to get huge valuations. And I'm just a little bit skeptical about their business models being able to justify the huge ⁓ IPO prices that they're trying to get. And I think that's feeding through into the the whole ⁓ commodity spend as well. And and copper's come off a little bit. That's related to what's going on with US tariffs and and those sorts of things. So very, very sort of murky picture. I still think ⁓ commodities look ⁓ look solid ⁓ at this point and it's more a bit of a profit taking and positioning more than anything. ⁓ but certainly need to keep a close eye on that AI expenditure ⁓ projection. Andrew: And given all that talk about that existential threat that AR supposedly poses at the moment, we d I mean we did see some ⁓ investors, I guess, take pause, ⁓ and that was reflected in in tech stocks. ⁓ do you think that's we're gonna they're gonna move on quickly from this? this is simply talk, or will there be action? Does it have consequences for the broader share market, do you think? Greg Canavan: Well, I f I feel like it's more around their business models. And, you know, their their business models are very, very expensive. They're very capital intensive. And you're seeing a lot of these models come out of China where the tokens, which is the underlying, I guess, economics of these business, the tokens are very, very cheap compared to the the ⁓ prices that the anthropics and the open AIs charge. So the business models in my mind are coming under pressure and and the the owners are saying, Well, look, let's just try to pull back a little bit. And this pretense of doing it on a, you know, this is good for humanity, I think is a little bit I'm a bit cynical about this. And I think that they're a little bit more concerned about do they actually have a moat? You know, d d are their business models as strong as what ⁓ th they previously thought, given all the competition coming ⁓ a around that. So ⁓ you know, and if you look at ⁓ the the semiconductor stocks fell quite sharply when that news first came out. And it's interesting that Jensen Huang ⁓ the CEO of NVIDIA, he was against it. ⁓ so this is all about self interest. This is all about, you know, trying to protect their valuations, ⁓ trying to get some regulatory moat around their business models. so I think this has got more to play out. Andrew: Greg, ⁓ fascinating to get your view of ⁓ what is ahead for investors. I hope you have a good week. Thanks so much for joining us from Canavan Cap. Greg Canavan: Thanks, Andrew. Andrew: And that is your Osby's morning wrap. Hope you have a great day. I'm Andrew Gagan. Thanks for listening.