ASX Today — Live ASX News | XJO Falls; Lowe Flags Pause in Rate Hikes; Powell Sends Rate Warning

Wednesday ended with the ASX 200 down 0.77%.

Philip Lowe’s comments at the AFR Business Summit that the Reserve Bank is considering a rate pause didn’t buoy the markets, especially after the very hawkish comments from counterpart Jerome Powell.

For Powell, the US central bank will have to continue hiking rates after inflation continues to baffle the Fed’s expectations. Powell noted before the US Congress that the ‘ultimate level of interest rates is likely to be higher than previously anticipated.’

Even our own Philip Lowe said elevated interest rates will be with us ‘for some time’ as the RBA chases its inflation target.

All that is likely bad news for equities.

Cash is no longer trash and the rising yield on ultra-safe government bonds will pressure valuations of riskier assets.

The market sometimes presents opportunities to purchase companies valued less than their net cash position. For a Benjamin Graham type, these companies might look like undervalued bargains.

But do these firms always turn out to be good investments?

Investment firm Jenga Partners sought to answer that question in a research briefing by studying the returns of stocks trading below their net cash value.

Jenga found:

“Among the 91 current publicly listed companies that traded below their net cash value five years ago (15th February 2018), 45 companies (or 49.5%) returned less than 0% in the following five years, while 12 companies (or 13.2%) returned less than -50%. The MSCI ACWI Index, on the other hand, returned 40.3% during the five years. Simply buying “cheap” companies without some form of analysis doesn’t guarantee great returns.”

However, Jenga’s research also identified an asymmetry.

Among the 91 companies, 25 (27.5%) doubled in share price. Compared to the broader market, only 12.6% of publicly listed companies doubled in share price over the same period.

For Jenga’s researchers, this shows ‘some potential in these below net cash companies.’

Interestingly, the investment firm found that when more than 1% of all globally listed companies are valued below their net cash, ‘there’s likely excessive fear and potentially attractive investment cases.’

Today, Jenga calculated the percentage is at 1.12%, which indicates ‘favourable conditions for searching for bargains.’

Are #stocks trading below their net cash value good investments?

Research from Jenga Investment Partners found:

"Among the 91 current publicly listed companies that traded below their net cash value five years ago (15th February 2018), 45 companies (or https://t.co/lIbljoDrRT…

— Fat Tail Daily (@FatTailDaily) March 8, 2023

Europe’s biggest asset manager Amundi released a research note on the state of cryptocurrencies and what crypto investors can expect next.

Amundi argued that the asset class is still nascent — still in the price discovery phase, as they say — and therefore remains highly volatile.

Yet the asset manager thinks the volatility hasn’t detracted from cryptocurrency’s ‘key value propositions: decentralisation and the immutability of transactions.’

Amundi also thinks that while crypto is still a fledgling asset, the ‘underlying blockchain technologies will soon need to cease being mere promising and start delivering large-scale key services to the real economy.’

An interesting thing from Amundi’s research was the growing correlation between Bitcoin’s price and US stocks.

In 2017, the correlation between BTC and the S&P 500 was negligible, but has grown considerably since, at ~0.60 in 2022.

You can read the full note here.

Australia’s consumer sentiment continues to crater.

The latest data compiled by the Reserve Bank shows consumer sentiment has fallen to a multi-decade low, surpassing nadirs hit during the pandemic and the global financial crisis.

Lithium developer Sayona Mining (ASX:SYA) — who this week raised over $50 million via a flow-through-shares raising — today followed up by announcing that first spodumene concentrate was produced at its North American Lithium operation.

Sayona said about 70 tonnes of lithium concentrate was produced with the first ‘saleable concentrate to be produced shortly’.

The lithium miner expects the first shipment of spodumene concentrate from NAL in July 2023, with four shipments targeted for the first half of FY24. Sayona is aiming for total production between 85,000 to 115,000 tonnes during this period.

SYA shares were down 2.5% in afternoon trade on Wednesday.

‘Cheap and forgotten.’ That’s what I wrote about commodities in January 2018.

At the time, there wasn’t much interest in them. We had just gone through a massive crypto boom in 2017 and stocks were rallying. So, it’s not surprising investors set commodities aside.

But change is the only constant in life…and in investing.

There’s been a clear shift in investing since the pandemic. Rising interest rates are driving investors out of growth and tech stocks and into real assets.

Cash isn’t looking all that bad anymore…and one of the big winners has been commodities.

Commodities performed well in 2021 and 2022, with rising energy prices from the Ukraine war and the drive for the energy transition, as you can see below:

https://www.moneymorning.com.au/20230308/a-must-have-investment-for-2023.html

Following the less than dovish comments from US Fed chair Jerome Powell, the yield on US 2-year Treasury notes hit 5% for the first time since July 2007.

That also had a deepening effect on the 2s/10s yield curve inversion.

The yield curve is now inverted by more than 100 basis points, the first time since 1981.

Yield inversion occurs when shorter dated lending rates are higher than longer dated ones, often a harbinger of a looming recession.

US 2-year yield hits 5.00% for the first time since July, 2007.

This follows the 2s/10s yield curve inversion reaching 100 bps for the first time since 1981.

Implied Fed terminal rate hits 5.65%, and traders betting that 50 bps rate hike this month 2x more likely than 25 bps. pic.twitter.com/5m6QaZ7xjz

— Jamie McGeever (@ReutersJamie) March 7, 2023

Jerome Powell delivered a sterner message on inflation than his Australian counterpart.

US inflation has proved stickier than Powell and his colleagues expected. As a result, the Fed’s job is not likely to be finished any time soon.

Testifying before a Congress committee, Powell said the stronger than expected recent economic data suggests that the ‘ultimate level of interest rates is likely to be higher than previously anticipated.’

In fact, if the ‘totality of data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.’

Terrific testimony from Jay Powell today exemplifying what it means to be data dependent. The default is now 50bp.

But data dependence is a two way street and 25bp at the March meeting is and should still be on the table.

What should it take to go back to 25bp? A very short 🧵. pic.twitter.com/migIPmL001

— Jason Furman (@jasonfurman) March 7, 2023

Philip Lowe and his colleagues think inflation will trend lower in 2023 and 2024 but uncertainty remains about the exact path.

In fact, it will be ‘some time yet before we are back within the 2-3 per cent target range’.

Lowe did single out one variable he will be monitoring to assess the future path of inflation — household spending. In Lowe’s eyes, household spending is moderating already.

In the December quarter, household consumption rose 0.3%. On per capita terms, that represents a small decline. Lowe summarised that the ‘bounce-back in spending following the pandemic has now largely run its course.’

Household saving rate is now below its pre-pandemic average and the RBA expects the saving rate to fall further as mortgage repayment costs rise.

Philip Lowe said the Reserve Bank must act delicately to balance the priorities of lowering inflation and maximising employment.

If the RBA prioritises taming inflation above all else, that will come at a drastic cost to jobs.

Lowe said such an outcome is not worth it. The central bank will work to curb inflation, but with temperance to lessen the blow to employment.

However, curb inflation it must.

Lowe cited evidence to illustrate the point. Both in the United States and Australia, when ‘high inflation became entrenched in the 1970s and the 1980s, the unemployment rate ultimately ended up rising by at least 5 percentage points to get inflation back down.’

Even as the US Fed’s Jerome Powell was warning that economic activity was not coming down as much as the Fed expected and that more interest rate hikes are needed, his RBA counterpart was talking about pausing hikes.

Why?

Philip Lowe identified two reasons.

One, wages growth in Australia is more subdued than in the US. That mitigates the wage spiral inflation risk.

Two, Australia has a much higher level of variable interest rate debt. The impact of rising interest rates on Australian households is more immediate.

The biggest event today has already happened.

The Reserve Bank of Australia’s Philip Lowe addressed the AFR Business Summit early this morning. He spoke on inflation and recent economic data.

The biggest takeaway came at the end of Lowe’s address. The central banker said he and his colleagues think ‘we are closer to the point where it will be appropriate to pause interest rate increases to allow more time to assess the state of the economy.’

You can watch a replay of his address — and the following Q&A — here.

Or you can read his prepared remarks — accompanied with charts — here.