Evening Wrap: ASX 200 higher, Macquarie hits 10-month high, inflation 'may have' peaked in late 2022

The local sharemarket breaks a two-day losing streak thanks to banks and miners, Ai Group data suggests "inflationary pressures may have peaked in late 2022", UBS says the RBA could opt for another two 25 bp hikes in March and May and five large cap broker notes.

Let's dive in.

ASX 200 Session Chart

Source: TradingView

Markets

The ASX 200 snaps a two-day losing streak and remains within 1.5% of all-time highs. Powell set the tone for a rebound after he said "we expect 2023 to be a year of significant declines in inflation".

• Financials led to the upside but mostly thanks to a continuation rally from Macquarie (+2.7%) and Suncorp's 1H results (+3.6%)

• Materials higher thanks to broad-based gains from Fortescue (+1.4%), South 32 (+2.1%), Newcrest (+2.3%) and Pilbara Minerals (+3.3%)

• Defensive sectors underperformed, notably Health Care, Staples and Real Estate

Economy

The Ai Group Australian Industry Index fell -11.6 points in January from a -10.5 point drop in December, which indicates an acceleration of contraction in industries covered by the index. Key findings include:

• “Activity, input volumes and new orders contracted in the face of declining demand.”

• “Supply chain and labour pressures eased slightly, but remain elevated on long-term trends.”

• “Pricing indicators (wages, inputs and sales) all fell from record levels, but remain elevated. This suggests inflationary pressures may have peaked in late 2022.”

• “Capacity utilisation remains high at 84%, with industry continuing to struggle with supply-side constraints.”

Latest news

Macro: A Hawkish RBA

The RBA hiked interest rates by 25 bps on Tuesday but the outlook commentary was more hawkish than expected. Here are a few observations from UBS:

• A hawkish surprise: "This is especially surprising to us given a a range of softer domestic data recently - across retail sales, house prices, loans & credit growth, and employment & unemployment."

• More hikes to come: "... the RBA changed their data-dependent reaction function of 'the outlook for inflation and the labour market': to "how much further interest rates need to increase"; rather than "The size and timing of future interest rate increases."

• Upside risks: UBS expects another 25 bps in March, with the risk of another 25 bps in May. Although they still expect the first RBA rate cut of 25 bps to take place in November 2023.

Sectors of Interest

Energy: WTI rallied over 4.0% overnight but Woodside shares were heavy, up just 0.8% (from session highs of 1.6%).

Woodside chart (Source: TradingView)

Healthcare: More specifically, CSL shares rallied to 14-month highs last week after Japanese rivals Takeda posted immunoglobulin and albumin sales growth of 23% and 47% respectively. Despite the breakout, CSL is now pulling back sharply, down -2.4% in the last three sessions.

CSL chart (Source: TradingView)

Lithium: Lithium stocks are trying to settle, with most names trading higher on Wednesday. Argosy continues to be a top performer, up 9.2% and possibly the only lithium name making fresh all-time highs.

On a side note, I rarely pay attention to price-to-earnings ratios but noticed that Pilbara Minerals and Allkem both have PEs of around 25-26. A 3 February Macquarie Research expects Pilbara Minerals to post $2.75bn net profit for FY23.

Taking that net profit estimate and today's market cap produces a PE of just 5.5.

Pilbara Minerals chart (Source: TradingView)

Interesting news and movers

Trading higher

• +12.8% Boral (BLD) – 1H results

• +9.2% Argosy Minerals (AGY)

• +8.8% Aeris Resources (AIS) – Drilling update (Tuesday)

• +6.0% Mincor Resources (MCR) – Initiated Overweight at Jarden

• +4.6% Suncorp (SUN) – 1H results

• +3.6% MMA Offshore (MRM)

• +3.5% Mesoblast (MSB) – Continuation rally, up more than 12% in last three days

• +3.8% Appen (APX)

Trading lower 

• -5.9% Elders (ELD) – Non-price sensitive presentation (Tuesday)

• -5.4% Accent Group (AX1)

• -5.4% Healius (HLS) – Downgraded to Underweight at Morgan Stanley (Tuesday)

• -4.1% United Malt Group (UMG)

• -3.3% Amcor (AMC) – Q2 earnings and FY guidance

• -3.0% Sonic Healthcare (SHL)

Broker updates 

Suncorp: Missed consensus but supportive underlying trends

• Citi: $13.50 target price; Retains Buy

• Notes: Suncorp's 1H23 cash earnings of $558m were 1% below Citi estimates and 8% below consensus. However, underlying margins remain in-line and cost to income ratio of 49.9% for 1H23 is ahead of 50% target.

BWP Trust: Slight miss

• UBS: $3.70 target price; Retains Sell

• Notes: UBS one liner "slight miss driven by lower than expected rental income and higher management fees, WALE and expiries remain a concern." (Note: More than 75% of rents expire between FY24-27 which UBS says more than offset the perceived defensive qualities of BWP)

AWC: In-line, resilient but volumes deteriorating

• Morgan Stanley: $17.00 target price; Retains Equal-weight

• Notes: " A solid result albeit with modest deterioration in the volume trajectory and increased caution in the outlook. We expect that AMC will continue to weather difficult markets well but that upside is limited, particularly if markets shift to a risk-on/growth focus."

Domino's: "Store rollouts a focus"

• Macquarie: $60.00 target price; Retains Underperform

• Notes: Busy first half with completion of Malaysian and Singapore acquisitions. Ingredient costs are softening, which should ease pressures on franchisees. Macquarie believes store rollout target is too ambitious until inflation is brought under control

Transurban: Traffic inbound!

• Macquarie: $14.51 target price; Retains Outperform

• Notes: Traffic and cost performance delivered a $20m or 2% EBITDA beat. CEO exit to overshadow an otherwise positive growth outlook.

Scans