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Investor spotlight: a quarterly review

The first quarter of 2023 was defined by China’s re-opening, further rate rises, and a banking crisis but stocks still managed to climb.

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The first quarter of the calendar year 2023 has come to an end. In this week’s Investor Spotlight, we look back at the quarter that was and analyse the charts of three stocks that outperformed.

The year started with a bang

Courtesy of China’s rapid re-opening, along with a market positioned very underweight equities and perhaps thinned by holiday trading conditions, January saw a swift rally in global stock indices. Cyclicals outperformed as investors priced in upward risks to global economic activity, with the odds of recession – especially in the US – reduced significantly.

The dynamic saw the ASX 200, along with the FTSE 100 and other indices sensitive to value stocks, outperform its global counterparts, with Australia’s benchmark index coming within touching distance of record highs.

Investors were also buoyed by comments from Federal Reserve speakers about the possible beginning of disinflation in the US, which moderated expectations for future rate hikes and added to bets for interest rate cuts by the end of 2023.

Financial markets were brought back to earth in February

As the rise in asset prices loosened financial conditions, and as US economic data proved stubbornly strong, the first meeting of the US Federal Reserve saw the central bank slap down the notion of a pause (or reversal) of rate hikes. Stocks pulled back, as interest rate curves rose and steepened, with the trend of falling stock and bond prices that defined 2022 renewed.

Australian markets also ran head-first into the hawkishness of the country’s central bank. The first RBA meeting for the year was marked by a stark warning about upside risks to inflation and the need for the central bank to keep pushing rates higher to get it under control.

ASX 30-Day Cash Rate Futures shifted to imply a cash rate north of four percent and that would be held at that level until the end of the year. Sentiment across the ASX was also weakened by an underwhelming reporting season, which saw the heavyweight bank and mining stocks hammered.

Things got hairy in March

After testimony to the US Congress by Federal Reserve Chairperson Jerome Powell – at which the Fed head flagged another upward revision for future rate hikes – interest rate expectations spiked. Futures priced in a probable 6% Federal Funds Rate by the middle of the year and priced out almost any chance of rate cuts.

The move put too much stress on the US banking system and contributed to the rapid failure of several vulnerable banks, including the now infamous Silicon Valley Bank. The problems also bled into Europe, with Swiss authorities coordinating the forced takeover of Credit Suisse by UBS.

Eurodollar futures curve chart

Source: CME Group

Thanks to the swift actions of policymakers, bank runs in the US were halted, emergency liquidity extended, and in Europe, financial contagion was staunched.

With a crisis averted, market participants began to price in slower economic activity due to weaker credit growth and less aggressive monetary policy.

The case for fewer future interest rate hikes was effectively given the green light by the US Federal Reserve following its March rates decision, with the central bank stating it “no longer… anticipates that ongoing rate increases will be appropriate”.

Markets end the quarter on a high

The combination of weaker economic growth and lower rates weakened cyclical stocks but boosted higher-quality tech names. The tech-heavy US stock market finished the quarter on a high, outperforming many of its peers and adding more than 5% in value.

Meanwhile, the bank and mining-heavy ASX 200 lagged, however, a late March rally supported a two percent gain for the index. Market sentiment also improved markedly to round out the quarter, with the US VIX finishing March below 20.

Source: TradingView

Three stocks to watch

  • Tesla

Tesla was one of Wall Street’s outperformers in the March quarter, courtesy of a shift towards growth and tech. The stock gained 54.4% for the period, although it remains -55% from its all-time highs.

The company’s stock is in focus to begin the week, after the company reported its latest production delivery numbers. Total deliveries rose 36% from a year earlier to 422,875, while production for the quarter was 440,808.

The delivery figure presages the automaker's quarterly results, which are expected to show a greater than 20% contraction in earnings for the period to $0.86 per share.

The charts show a share price still in a downtrend, although momentum appears to be reversing. The 200-week MA is providing some support for the share price, while resistance looks to be around $208 then $280.

Tesla weekly chart

Source: IG
  • Meta Platforms

After a disastrous 2022, which saw the company shed as much as 75% of its value, falling yields and a shift in strategy have supported a 140% rise in Meta shares from its lows, with the stock gaining 80% last quarter.

Analysts are still expecting a dismal quarter of earnings for Meta, with EPS tipped to drop 27.18% from a year earlier. However, the estimated $1.28 per share EPS for the quarter will mark a third successive increase in earnings.

The most important issue for Meta will be how the business is managing its cost base, cash flow, and R&D expenses, especially after its bold foray into the Metaverse. Analysts are expecting improvements in Meta’s outgoings in Q1.

The technicals show a clear short-term uptrend for Meta stock, as the weekly RSI pushes into technically overbought levels. Sellers may emerge at the 200-week MA around $225 per share, while resistance may be found at $180.

Meta weekly chart

Source: IG
  • Liontown Resources

Liontown Resources stock surged last week after the company rejected a bid from the world’s largest lithium producer, Abermarle, which valued the company at $2.50 per share.

The share’s price is already trading at a premium to the original offer price, reflecting expectations of another, improved offer. The teasing of greater M&A activity in Australian lithium also pushed the shares of other ASX-listed lithium miners higher.

Liontown weekly chart

Source: IG

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