Macquarie's seven counter-consensus stock calls

Welcome to Charts and Caffeine - Livewire's pre-market open news and analysis wrap. We'll get you across the overnight session and share our best insights to get you better set for the investing day ahead.

MARKETS WRAP

US markets closed for Labor Day holiday

• FTSE 100 - 7,287 (unch)
• CAC 40 - 6,093 (-1.20%)
• GERMAN DAX - 12,761 (-2.22%)
• UK 10YR - 2.944%
• EUR/USD - 0.9930 (Sank below 99c at one point in early trade yesterday for the first time in 20+ years)
• GBP/USD - 1.1517 (Sitting at lows not seen since the Global Financial Crisis)
• BRENT CRUDE - US$93.28/bbl (OPEC+ agreed to cut production by 100K barrels per day at the end of its latest meeting)
• DUTCH NATURAL GAS FUTURES - 214.67 (-11.66%. But earlier in the session, futures surged 35% as the Russians chose to keep a key pipeline shut indefinitely)

SPI FUTURES - 6,837 (+0.08%)

RBA PREVIEW

The major houses all have a 50 basis point hike pencilled in this afternoon. Inflation is still public enemy number one, and like most other major economies that aren't the US, rising bond yields are doing not a lot of good for the currency. 

As for the language shifts, ANZ argues that a focus on recent inflation pressures or dropping the “even keel” reference would be hawkish. Their peak rate is nearly 4%, and it won't be reached by the end of mid-2023. 

Morgan Stanley feels differently, arguing that we could be near the terminal rate for this stage of the rate-hiking cycle. Chris Nicol argues that the cash rate is moving closer to entering "restrictive" territory. The expected slowdown seems widely anticipated but he argues that several key headwinds are still not in the price for risk assets - namely how long rates will have to stay this high. 

For something a little different, Vishnu Varathan at Mizuho Bank argues that mounting risks to the housing market mean the RBA could opt for a slightly dovish 40 basis point hike this afternoon. But as he puts it:

That said, the RBA is far from done. And somewhat more calibrated and arguably staggered rate hikes to 3.00% by early 2023 is par for the course.

Finally, a view from Dr Peter Tulip of the Centre for Independent Studies. Tulip formerly worked at the RBA for many years, and his views now form part of the RBA Shadow Board. Here's what he had to say in his call for a 75 basis point hike:

The RBA expects it will deliver underlying inflation above the target range and unemployment below the NAIRU throughout the forecast horizon. A higher path of interest rates would move both these variables closer to their targets, so is unambiguously preferable. 

STOCKS TO WATCH

Contrarian is the theme of the day in our stocks to watch segment. And it all starts with this chart from Macquarie equity analysts, who say their FY23 earnings forecasts are now negative after a big run in August.

Driven partly by soft guidance, there were twice as many FY23 EPS downgrades as upgrades. The rate of downgrades was higher among small caps, which have less pricing power. But it was soft guidance that also seemed to dictate a lot of on-the-day share price moves. Macquarie's analysis found that positive guidance earned a company significant share price improvements. That's particularly vital in this world where, in some cases, in-line results are no longer good enough.

With all this in mind, the team has compiled a list of counter-consensus calls. All of these are either concrete buys or sells. But the calls are designed to reflect what the next earnings cycle could look like - good and bad.

The out-of-consensus outperform-rated stocks are: Iluka Resources (ASX: ILU), Qantas (ASX: QAN), and Ampol (ASX: ALD).

The out-of-consensus underperform-rated stocks are: Fortescue Metals (ASX: FMG), Seek (ASX: SEK), Bendigo and Adelaide Bank (ASX: BEN), and Sonic Healthcare (ASX: SHL).

THE CHART

Today's chart is an interesting one because it's a chart that looks like the US, but actually isn't. This is the Australian financial conditions chart, thanks to Credit Suisse. It's all being driven by a very hawkish rates market, where an Australian 10-year yield can now fetch you a 3.66% yield. That's the highest since July 2014 and a long way from where it was during the depths of the COVID-19 pandemic. 

Equities investors, you've been informed (or warned).

THE STAT

It's not just one stat today. It's a whole table. 

If you read the wrap yesterday, you'll know I had a snarky remark about S&P 500 year-end targets. Every research house makes them, and before the end of every year, there will be a slew of upgrades or downgrades as earnings and sentiment change. 

So if you like year-end targets, wait until you see these figures. Vanguard has released its 10-year, annualized, nominal return projections. Yes, you read that right. 10 years in advance. While those returns are interesting, it's the median volatility I have far more interest in. Look at the figures that Vanguard is expecting for equities volatility over the next decade! Then again, how can you possibly predict a decade in front after the two years we've had?

Other key highlights which caught my eye:

• Likelihood of a U.S. recession in the next 12 months at about 25% and in the next 24 months at about 65%.
• Vanguard is downgrading our China growth forecast for the full-year 2022 from 3.0%–4.0% to 2.5%–3.5%.
• We expect the Federal Reserve to increase its federal funds rate target to a range of 3.25%–3.75% by the end of the year.

THE QUOTE

In a normal world, and given my view on the U.S, European and Chinese economies, I would be enthusiastically selling crude oil.
I’m not, and that worries me.

When the facts change, so do the investors. Even Jonathan Pain of The Pain Report who has written extensively about markets for more than 40 years is very concerned that the track record of years gone by isn't adding up.

Today's report was written by Hans Lee.

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