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Note from the MD: Surging commodities to dent debt ahead of Budget night

March 23, 2022

Note from the MD: Surging commodities to dent debt ahead of Budget night

There’s now less than a week until the Federal Budget is released, and already the rumour mills are turning at full-speed as commentators speculate about what we might see.

There’s now less than a week until the Federal Budget is released, and already the rumour mills are turning at full-speed as commentators speculate about what we might see.

One thing that’s certain, though, is that recent commodity price action will help put a dent in the national debt, which is sitting close to $1 trillion.

Prices for things like wheat, metals (particularly aluminium and nickel), oil and coal all exploded after Russia invaded Ukraine, pushing the general price for raw materials to levels not seen since 2008.

Some analysts have even noted commodity prices are on track to experience their sharpest rise since the 1970s.

Where the prospective contents of the upcoming Budget get more contentious is on tax relief. There’s a bit of debate surrounding the Low- and Middle-Income Tax Offset and whether it will be kept for another year or axed in favour of a one-off cash payment to combat rising living costs.

To my mind, the rising cost of living will be a major issue for the Budget and I suspect we’ll see a few initiatives designed to help Australian households.

Treasurer Josh Frydenberg has even flagged a possible cut to the fuel excise as petrol prices continue to climb, with some talk of pausing indexation on the excise to curb further increases.

With an election just around the corner, everyone is expecting Labor to issue a strong response, and maybe even look to deliver a second Budget if they form government after Australians hit the polls.

While all this plays out, markets have continued to climb. The ASX notched up its fourth day of gains in five days on Tuesday, with the XJO up 35 points in morning trading.

This continued its rebound from a double bottom in late February and early March.

This morning the XJO pushed above the 200-day MA and 7400 levels that had contributed to resistance on Monday and Tuesday this week, and were around the height of the previous rebound on the 10th and 17th of February.

Keep an eye on whether the market can hold above this level for the rest of the trading day. IV is still relatively high at 17 but has pulled back from recent highs of 25, meaning traders are still seeing the potential for volatility in the market.

Looking ahead, the case for rate rises as early as June is mounting, with inflation still on the up and up and the US Federal Reserve taking a hawkish stance as it battles to keep a lid on prices.

In Australia, inflation is now tipped to hit 5% or more in the months ahead, making it more likely that the Reserve Bank will act on rates sooner than was previously expected.

Higher inflation could also cause problems for some businesses, and investors should be keeping an eye on the numbers and thinking hard about what they mean for portfolios.

Price gains of that size will benefit some miners but already alarms are sounding for what elevated prices could mean for weaker economies.

One investor who trusts a bottom-up strategy when looking for new opportunities is Andrew Smith, head of smaller companies and microcaps at Perennial Partners.

Perennial Partners, one of Australia’s largest and most diverse smallcap investment teams, manages the Microcap Opportunities Trust – a high risk/return fund that, as at January 2022, delivered 163.6% in cumulative returns since its inception in 2017.

Andrew will be joining us this Friday, 25th March, at 12pm (AEDT) for The Insider: Meet the Fund Manager webcast, where he’ll provide insights into the fundamentals-led investing approach he takes to narrow down companies with attractive value. He’ll also discuss some of the key stocks in Perennial’s portfolio that could be well placed to navigate the current economic environment. To join us for this session, click here.

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