Updated: Feb 28
Unless you have been living off the grid, you would have seen that Russia invaded Ukraine last week, which was horrible news to read. The rest of the world has mostly been united in response against this, except few countries.
This has been in the form of condemnation, financial and trade sanctions, and private companies cutting relationships and divesting from Russia. This ranges from local bottle shops pulling Russian made vodka from their shelves, BP divesting from Russian oil company Rosneft (who are one of the main suppliers of fuel to the Russian military), to Western allies blocking Russia from SWIFT, a communications system related to financial transactions and payments between banks worldwide.
The market responded by diving upon the announcement of the war, only to finish off the week rallying. Both the S&P 500 and the Nasdaq ended up flat for the week last week, while the ASX was down. We have made the necessary changes in our portfolios to make them more resilient throughout this conflict whilst having above average cash on hand to take advantage of opportunities when they arise.
It is interesting to note that Ukraine’s GDP is roughly the same as Nebraska’s, despite Ukraine having a population of 44 million and Nebraska having just 2 million. There will be greater specific impacts in areas Ukraine and Russia specialises in, where for example both Ukraine and Russia make up 30% of the world’s wheat exports, as well as 80% of the world’s sunflower seed production.
Although all the talk is about Ukraine, and rightly so, companies have still been reporting and important economic indicators are still being released. This remains just as important as it ever was for all those invested in the market.
Rio Tinto (ASX: RIO) reported a record-breaking annual profit, underlying earnings up 72% to US$21.38 billion (A$29.6 billion). The previous record for corporate in Australia was back in 2011 when BHP recorded underlying profit of US$21.68 billion. The Australian dollar was much stronger back then so that performance was much less than Rio’s current profit in Australian dollar terms.
This allowed them to pay out a record US$16.8 billion (A$23.24 billion) in dividends with a pay-out ratio near 80%. This final and special dividends brought Rio’s full dividend for the year up to a record US$10.40 per share. This almost doubles Rio’s previous high of US$5.57 paid out in fiscal year 2020.
This result was underpinned by record iron prices, supported by decade high prices in copper and aluminium which Rio also produces. These commodity price tailwinds were seen with BHP’s strong results last week.
Warren Buffet’s Berkshire Hathaway (NYSE: BRK.B) posted strong fourth quarter results, with operating earnings up 45% year-on-year to US$5.02 billion. Despite share buybacks totalling $6.9 billion for the quarter, Berkshire maintains its monster balance sheet where its cash position is currently US$146.72 billion.
The print for Australia’s Wage Price Index came in at 2.3% year-on-year growth for the fourth quarter, which was roughly in line with economists’ forecasts. With RBA governor Phillip Lowe continuing emphasising that he wants to see wages grow further before even considering raising rates, he and the other members of the board will take into account these latest figures.
US GDP growth for the fourth quarter came in at 7%, in line with expectations. We are encouraged to see economic growth remaining very strong.
Looking to the week ahead, the RBA will be making their decision on interest rates tomorrow. Although they will keep the overnight rate at 0.1%, we look forward to hearing any further clues they give about when the first rate rise will be this year, which is currently priced in the market for around June. With Australia barely tied to the Russian economy, any impacts to Australia will only be felt through other countries that may be impacted from financial and trade sanctions they have implemented on Russia. We will be interested to see if the RBA addresses this, and what it means for interest rates this year.
Fourth quarter GDP figures for Australia will also be released, with economists’ expecting a decline of 2.7% from the previous quarter. This is mainly due to Covid-19 disruptions such as tail-end of the major lockdowns and the Omicron wave which began in December last year.
The US unemployment rate for February is expected to come in at 3.9%, down from 4%, with nonfarm payrolls expected to increase by 381,000.
A few big names will be reporting this week.
This includes Macquarie Bank (ASX: MQG). This is a company that we like, where despite its size it continues to find ways to grow. Their asset management operations continue to grow, where they continue to dominate in the infrastructure space. Their funds under management is over A$750 billion.
Over in the US, Salesforce (NASDAQ: CRM) will be reporting, with revenue expected to be at US$7.24 billion. Consumer giant Costco (NYSE: COST) will also be reporting, where they are expected to announce revenue of US$51.35 billion and earnings per share of US$2.75. We are interested to see how they deal with inflation, including the extent to which they pass increased supply costs onto consumers. We are hoping that some of the growth they record will be beyond simply just price increases.
Have a great week,
Sam Waldron - Research Analyst