Investment Market Update – May 2022

The Australian share market played catch up with most global share markets over May, with the ASX200 down 3%. It is now showing a negative return for the financial year to date of -1.4%.

May was a busy month for the Australian economy, with the first rise (0.25%) in the official cash rate since 2010, increasing the rate to 0.35%; inflation hitting a peak of 5.1%; a change in the federal government; and signs of house price moderation on the east coast of Australia.

On  June 7, the Reserve Bank of Australia (RBA) will set the cash rate for the month. Most analysts expect a rise between 0.40% to 0.75% but over the last week the odds of a smaller 0.25% rise have jumped significantly.

May 2022
 
Australia – ASX200
-3.0%
US – Down Jones
0.0%
US Nasdaq
-2.1%
UK – FTSE
+0.8%
Japan – Nikkei
+1.6%
China – Shanghai Composite
+4.6%
Financial Year to Date
 
Australia – ASX200
-1.4%
US – Down Jones
-4.4%
US Nasdaq
-16.7%
UK – FTSE
+8.1%
Japan – Nikkei
-5.3%
China – Shanghai Composite
-11.3%

Either way, assume an increase of 0.25% or 0.40%, taking the official cash rate to 0.60% or 0.75%. Longer-term interest rates have already increased over the last couple of months, with five-year term deposit rates now paying 3.50% compared with close to 1% six months ago.

One of the most significant uncertainties for investors over the next few months is company earnings forecasts. Analysts are now reviewing most listed companies to determine how they are travelling in the current economic climate.

Unfortunately, expectations for earnings forecasts for 2023 are starting to come down, due to cost inflation seeping into lower margins and the resulting lower profits. This remains a concern for all global equity markets over the next six months and is likely to be a key determinant of their performance over the short term.

May was a busy month for the Australian economy, with the first rise (0.25%) in the official cash rate since 2010, increasing the rate to 0.35%; inflation hitting a peak of 5.1%; a change in the federal government; and signs of house price moderation on the east coast of Australia.

News over the month

Incitec Pivot announces its intention to separate its two leading businesses.

In May, management announced the company would split into two separate companies. Dyno Nobel will own its explosives assets and Incitec Pivot Fertilisers its fertiliser assets.

The proposed separation will establish two customer-focused, technology-driven businesses set up for success in two essential industries.

Dyno Nobel is a global leader in technical explosives solutions, with solid margins and advantaged industry exposures. The company features strong customer relationships and partnerships and an attractive technology-backed growth outlook.

Incitec Pivot Fertilisers is a leading fertiliser and soil health company with an extensive and vertically integrated network which supports the East Coast market, a recognised globally strategic food bowl. The company is positioned to capitalise on leading a step-change in sustainable fertiliser and precision agriculture.

Incitec’s separation of its core business operations joins several others to have moved on a demerger plan, including GrainCorp, with its United Malt spin-off, and Tabcorp, which demerged its wagering unit.

In May Incitec Pivot’s shares were down 8.8%.

Santos commences the sale of its 51% interest in the Alaska-based Pikka project.

After carrying out a $21 billion merger with Oil Search, Santos has commenced the sale of one of the non-core assets it inherited from its rival.

Santos picked up a 51% interest in the Alaska-based Pikka project, which is valued between US$1.5 billion to US$2 billion. The company is keen to divest as the project is a significant geographic distance from its main assets in Australia and PNG.

Major global energy producers like ConocoPhillips, Exxon and Chevron are interested in buying Santos’ stake.

Santos shares were up 2.5% in May.

Kauri Wealth Management is a Fee for Service investment advisory business and as such my advice is built around ongoing personal relationships with my client base. Personalised independent advice is backed up by a breadth of industry knowledge.

I accept a limited number of new clients each year and would be happy to discuss this further with you. Please don’t hesitate to contact me.

Russell Lees
Senior Adviser
Phone: +61 439 852 963
Email: russell@kauriwealth.com.au

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