The ASX is expected to move up today after US equity markets stormed higher overnight.
ASX 200 futures were trading 48 points higher, up 0.67%, this morning.
The local market seems to be gaining some momentum after finishing higher (0.23%) yesterday to close at 7,050, led by Materials and Energy which gained 1.25% and 1.24% respectively.
Financials underperformed after a large European Bank downgraded the Australian banking sector, citing higher funding costs, competition for deposits, rising bad debts and tighter regulation. The downgrade caused Bendigo Bank to fall 3.1%, NAB to lose 2.24%, Bank of Queensland to dip 1.7% and Westpac to lose 0.74%.
IG Markets analyst Tony Sycamore writes, “The market recovered from a shaky start to end the day higher after the release of cooler-than-expected inflation data. The monthly CPI indicator for February rose by 6.8%, lower than the 7.4% rise in January and well below the 8.4% print of December, suggesting inflation has peaked and turned lower.”
Sycamore notes that with inflation turning lower, the probability that the RBA will pause its aggressive rate hiking cycle is increased.
The Reserve Bank of Australia (RBA) will meet on Tuesday to discuss policy.
Will the RBA pause rates?
A pause in April will be a welcome relief to mortgage holders but will also coincide with what is typically the best-performing trading month of the year.
The RBA will certainly take yesterday’s CPI figures into account when making its decision.
CreditorWatch chief economist Anneke Thompson had this to say on the matter: “Following yesterday’s retail trade data, which showed that spending in Australia has been flat on average since September 2022, today’s monthly CPI data showed inflation is continuing to moderate. This is good news for borrowers, as it shows the RBA that its efforts to reduce inflation through increases to the cash rate are really beginning to pay off now.
“There are some areas, however, where prices continue to rise. The cause for most concern is rents, which is a rare category in which price rises are not moderating.
"Rents grew 4.8% over the year to February 2023, the same as the month prior. In contrast, the increase in the cost of building a dwelling, while high at 13% year-on-year in February 2023, has moderated since January when it was 14.7%.
“Unfortunately for renters, it is likely that these price increases will stay elevated as the housing supply cycle moves to an abrupt slowdown once the stock under construction completes.
"Given that younger people tend to either rent or be in the very early stages of paying off any home loan if they are homeowners, it is not surprising that CreditorWatch’s Business Risk Index data for February 2023 shows that areas where the median age is relatively young are likely to have higher levels of business insolvency. The opposite applies for areas dominated by older people.”
Frollo chief customer officer Simon Docherty also weighed in.
"The drop in inflation is a strong and positive sign that the RBA's monetary policy measures are starting to take effect. This is welcome news for Australian consumers who have been struggling with the rising cost of living over the past year.
“Data from our budgeting app shows that consumers have been allocating an increasing portion of their income towards essential expenses like groceries, healthcare and insurance. Many have also turned to unregulated credit sources such as Buy Now Pay Later providers, with the average BNPL user spending over $400 per month on repayments.
“As a result, it was only a matter of time before consumers began to reduce their spending and tighten their budgets. However, policymakers must balance the need to slow down the economy with the potential impact on consumers and small businesses. It's important to ensure that the economic slowdown doesn't have a severe knock-on effect on everyday Australians."
ETF market to grow to $200 billlion
The Australian exchange-traded product (ETP) industry is expected to reach a record $200 billion in size by 2025 with at least 350 products listed on the ASX.
Global X ETFs Australia is confident of growth despite the market remaining volatile for some time to come.
ETFs make up around 90% of the Australian ETP market.
“By 2025 we anticipate there will be more than 350 listed ETPs on the Australian market, which will be worth more than $200 billion. There are still gaps in the market for providers to list innovative investment solutions and ETFs are the most convenient and cost-effective vehicles for to Australian investors to build their portfolios,” Global X head of Distribution Kanish Chugh said.
According to ASX data, in the past 12 months, the Australian ETP industry jumped in size by 7.1% to $136.2 billion, with 301 products listed – up 16% from 244 a year earlier.
42 new ETPs were launched and new asset classes added to the market, including cryptocurrency and carbon credit ETFs.
“There were also a significant number of environmentally conscious and sustainability-focused ETFs launched, highlighting the shift in the ETF market to values-based investing,” Chugh said.
“Australia was also the first nation in the Asia Pacific to list cryptocurrency ETFs, which highlights how local investors and providers are striving to innovate and leading the way in ETF product development and meeting investor demand.”
Chugh said the product market would continue to broaden on the back of sustainability goals and themes including battery technology and lithium.
“Looking ahead, Australian investors will be able to gain access to an ever-broadening range of ETFs to suit their investment needs and gain a better understanding of how to use ETFs to effectively build whole portfolios, rather than use actively managed funds or listed invested companies,” he said.
Chugh predicts more fund managers will enter the ETP market in 2023.
“Given rising competition, investors need to look under the hood of ETFs to get a real understanding of the assets in which they are investing. On the provider side, it will become more important for ETP providers to deliver greater value to investors with a relevant point of difference.”
Research from S&P Dow Jones Indices, the SPIVA® Australia Scorecard has found that during the first half of 2022, around 50% of Australian equity funds underperformed the S&P/ASX 200.
Over the same period, 40% of Australian property trust funds underperformed their respective benchmarks, while a majority of funds lagged in the fixed income and small-cap equity categories. Over a longer period, most active funds underperformed in every reported category over longer-term horizons (three, five, ten and 15 years).
Read more on Proactive Investors AU