A challenging week for energy, and a comparatively strong week for real estate (reopening) and information tech (secular growth), across the ASX.
The quarterly results from WPL and STO’s modestly disappointed the market, but mostly the flatter pricing for oil, and some modest declines in natural gas pricing pressured the sector. At a distant third, China’s intervention into coal markets did coalesce around the first two impacts to reduce investor appetite towards the sector.
We remain comfortable with our energy exposures. The sector remains cheap, has numerous semi-structural tailwinds (the absence of capex) to offset the more obvious structural headwinds (energy transition) and is a solid inflation hedge.
Quality and Growth outperformed Value, which is interesting in a week in which bonds continued to sell-off (as yields moved higher).
The very long duration 20yr+ T bond ETF continued to suffer, as did fixed income more generally, including the higher carry Investment Grade credit. We remain underweight fixed income, although we are happy to close the underweight when the US 10 year moves towards 2.25-2.5%.
Domestically, credit spreads have also widened somewhat. We are also underweight credit, within fixed income, viewing spreads as unattractively tight.
Copper and gold remain relatively buoyant, with gold still in favour as an inflation hedge (even though it doesn’t really work all that well, compared to say TIPS). Were we to take an exposure, it would be in a high quality gold producer like NCM.
Thermal coal was sold off heavily, although not visible yet in the graph below. The Jan22 most actively traded thermal coal futures is down by ~30% over the past few days, in response to China’s interventions.
For the most part, stocks like Whitehaven (WHC) didn’t follow the commodity price up (and hence traded on PE multiples of ~3x) and presumably, won’t follow the price down as aggressively either.
Still, not one that we would look to own in our flagship Core Equity Portfolio, although (valuation dependant) our absolute return portfolios might be interested.
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