Markets ended the week mixed as geopolitical tensions pushed oil prices higher and added uncertainty to the global inflation outlook. In this update, we explore the implications of rising commodity prices for interest rates and investment portfolio positioning, and discuss recent developments in Woodside Energy (ASX: WDS), Zip Co (ASX: ZIP), Alphawave Semi (LON: AWE) and the Ross River Solar Farm.
Market Updates
The S&P/ASX 200 Accumulation Index rose 0.4% over the week, supported by strong gains in energy (+7.2%) and utilities (+4.6%). The S&P/ASX Small Ordinaries Accumulation Index also finished up 0.4%.
Geopolitical tensions drove oil higher last week, with prices increasing 11.7%. On Friday, reports emerged that Israel had launched strikes on Iran’s nuclear facilities and senior military figures. Despite international calls for de-escalation, both sides carried out multiple waves of missile attacks over the weekend. Investors anticipate a fall in Iranian oil output and that a more serious conflict could see Iran close the Strait of Hormuz, a key shipping passage for Iraqi and Saudi oil, through which approximately 20% of the world’s oil is transported.
In global markets, U.S. large caps (S&P 500) and small caps (Russell 2000) declined 0.4% and 1.5% respectively in the week. The MSCI World Index (AUD) also decreased 0.7%. Markets were buoyed on Thursday by better-than-expected economic data – softer May inflation and improving small business sentiment – as well as reports that trade talks between the U.S. and China had led to a preliminary agreement to ease trade tensions. However, sentiment shifted on Friday on the news of Israel’s attack on Iran.
Key watchpoints for the week ahead include the U.S. Federal Reserve’s meeting on 17-18 June to decide interest rate settings and the release of May economic data in Australia on Thursday.
Stock Watch
Woodside Energy
Last week, the oil price rose 11.7% to US$74.23 per barrel on escalating tensions between Israel and Iran, with Friday marking the commodity’s largest single-day gain this year. Concerns over potential disruptions to global oil supply led to the increase, in particular the Strait of Hormuz. Iran has previously threatened to close the Strait in response to regional conflict, with analysts predicting a closure or sustained disruption could push oil prices above US$100 per barrel. Sustained higher oil prices are a tailwind for energy producers, including Woodside Energy, which benefits from oil-linked contracts that lift revenue and expand profit margins. Woodside’s share price increased 7.4% on Friday, supported by this favourable backdrop and the company’s attractive dividend yield.
Held in: WAM Leaders (ASX: WLE), WAM Income Maximiser (ASX: WMX) and Wilson Asset Management Leaders Fund
Zip Co
Last Tuesday, buy now, pay later provider Zip Co released a trading update and upgraded its FY2025 EBITDA guidance by 5% to $160 million, reflecting strong performance particularly in the U.S., where total transaction value (TTV) grew by over 40% year-on-year in the third quarter, ahead of consensus expectations. Encouragingly, this accelerateration has not been accompanied by any material changes to credit losses, leaving Zip with capacity to invest further into U.S. marketing to drive net new customer acquisitions and supports the medium-term top-line (revenue) outlook. Zip’s share price rose 22% last week and we believe there is further upside. The company’s earnings momentum remains intact and the valuation is undemanding relative to other ASX growth names that have rallied to record highs in recent months.
Held in: WAM Capital (ASX: WAM), WAM Leaders, WAM Active (ASX: WAA), WAM Microcap (ASX: WAX) and Wilson Asset Management Leaders Fund
Alphawave Semi
Alphawave Semi is a global leader in high-speed wired connectivity and compute technologies, critical to data centres, artificial intelligence and networking infrastructure. We hold Alphawave in the portfolio as a high-quality business with an attractive valuation, overlooked due to its UK listing. Our conviction grew after engaging with management, gaining confidence in the company’s market-leading technology, evidenced by its numerous partnerships with major semiconductor companies, and its multi-year earnings trajectory. In June, Qualcomm announced a $2.4 billion acquisition of Alphawave. The all-cash offer of 183 pence per share (US$2.43) represented a 96% premium to the prior closing price. While a takeover was not part of our original investment thesis, it was not unexpected given Alphawave is a rare strategic asset, well suited to a larger semiconductor player, and had been trading below its intrinsic value.
Held in: WAM Global (ASX: WGB)
Ross River Solar Farm (Palisade Group)
Ross River Solar Farm is a 148MW solar farm, located in Northern Queensland, comprising over 400,000 solar modules and 64 inverters, generating on average enough energy to power over 54,000 households per year. Most of the renewable energy generated by the solar farm is contracted to Energy Australia through a long-term offtake agreement to 2030, providing stable cash flows, protection against inflation and returns largely uncorrelated to public markets. WAM Alternative Assets invests in the Ross River Solar Farm through its investment partner Palisade Group, alongside several Australian super funds and institutional investors.
Held in: WAM Alternative Assets (ASX: WMA)
Higher oil prices encourage rate hawks
U.S. consumer price index (CPI) inflation surprised in May, rising by only 0.1%. This was a closely watched outcome for investors, given that the inflationary impact of tariffs was supposed to appear by May, but so far has not. Various explanations have been provided as to why tariffs haven’t filtered through yet, with the most credible being the delayed pass through, due to flexible payment windows, mitigation strategies and the technicalities of pricing inventories.
Our leading indicator of CPI inflation assembles various survey and market signals to gauge underlying pressures. The reliability of some of the consumer survey signals is being questioned by the Fed, even though its own measure of “Common Inflation Expectations” use them. Another interesting critique relates to business surveys signalling higher input prices paid. While these signals certainly provide insight into the impact of tariffs on imported products, they have been at odds with falling commodity prices – until now. The recent surge in oil prices, driven by the Middle Eastern conflict, is a major complication for the dovish case on inflation.
Doves (those who favour looser monetary policy) believe that tariffs will only have a transitionary impact on CPI, and may even be disinflationary over the longer-term if they dampen demand. However, the risk is that higher commodity prices could become the dominant driver of inflation in the year ahead. This would make it harder for the Fed to deliver the rate cuts that the bond market is currently pricing in.
However, as investors debate the outlook for the Fed, rising commodity prices could also support investment styles offering inflation protection. In the short-term, this would favour high-quality credit over long-duration government bonds. On a longer horizon, it would favour commodity exposure and pricing power tilts within an equity portfolio.
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