The Commonwealth Bank of Australia (ASX: CBA) share price has amassed a reputation as a winner on the S&P/ASX 200 Index (ASX: XJO). It’s hard not to do so when CBA shares have outstripped the performance of all of your ASX banking peers in recent years. Indeed, the CBA share price is the only one out of the ASX 200 big four banks to have enjoyed a new all-time high in the past 7 years or so. 

But CBA’s march has certainly slowed in recent months. At the time of writing, CBA shares are sitting at $101.15. That’s up a healthy 1.78% so far today. Alas, that’s pretty much the same level they were commanding in May last year, a good 10 months ago. And we haven’t seen the CBA share price get close to its all-time high of $110.19 that we saw late last year for a while now.

That represents quite a change of pace for CBA shares. When it last hit an all-time high in November last year, CBA had spent the preceding 12 months rising by more than 57%. That high watermark also represented a 20% premium to where CommBank shares were just before the COVID-induced crash of 2020. And back then, CBA was also at what was then an all-time high.

So now that CBA has been stuck in the mud for a few months, could this be a time to pick up its shares today? Is the CBA share price a buy right now? 

Buy or sell for the CBA share price? Here’s what the brokers say

Broker opinion remains mixed on the CBA share price. Investment bank Goldman Sachs is one such broker who isn’t wild about CBA shares and where they stand today. Upon news that the Bank would be offloading half of its share in China’s Bank of Hangzhou earlier this month, Goldman retained its sell rating on CBA with a 12-month share price target of $82.94. 

This broker reckons there is still too much of a premium priced into CBA shares. It points out that the bank trades expensively compared to its peers. If CBA indeed descends to this pricing level over the next year, investors would be out of pocket by close to 20%. 

But fellow broker Bell Potter disagrees. As my Fool colleague James covered earlier this month, Bell Potter is still buy rated on the CBA share price, with a 12-month share price target of $108. That implies an upside of roughly 7% going forward. This broker is more bullish on CBA’s overall metrics, including return on equity and cash flows.

So one of these brokers is going to be wrong over the coming year. Unfortunately, we don’t know which one yet. But investors will have a clear favourite, I’d wager.

At the current CBA share price, this ASX 200 banking share has a market capitalisation of $172.17 billion, with a dividend yield of 3.72%.

The post The CBA (ASX:CBA) share price has gone nowhere in 10 months… time to buy? appeared first on The Motley Fool Australia.

More reading

• Top brokers name 3 ASX shares to sell next week
• Why has the CBA (ASX:CBA) share price climbed 7% so far this month?
• Own CBA (ASX:CBA) shares? Here’s why the bank’s boss is ‘very optimistic’ for 2022
• Is the Westpac (ASX:WBC) share price the cheapest bank to buy right now?
• Record $36bn in dividends could help ASX share market recovery

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Amazon (NASDAQ: AMZN) announced a 20-for-1 stock split after the market closed on March 9. Typically, a split announcement draws a lot of attention to a stock and Amazon is no exception. 

Despite recent loss-taking by the broad market, Amazon’s shares were up more than 6% on the day following the announcement. That said, a pending split should not be the sole reason investors buy or sell a stock.

Let’s look at some of the details of the announcement and, more importantly, at Amazon’s business prospects to determine if investors should buy its stock before the split.

Amazon announces 20-for-1 stock split 

While Amazon announced the 20-for-1 stock split on March 9, the move will not take effect immediately. Management still needs to gain shareholder approval on a vote slated for May 25. If approved, Amazon will trade on a split-adjusted basis on June 6.  

Note, however, that the change will not increase or decrease shareholder ownership. You will not suddenly own 20 times more of Amazon’s business than before the split. Instead, your current ownership will be sliced more thinly. In the end, shareholders are left with the same magnitude of ownership, split into more pieces. 

Amazon’s business prospects 

Digging into Amazon’s business prospects, investors may find it more exciting than the news of the split. The company has increased revenue from $61 billion in 2012 to $479 billion in 2021. The explosive revenue growth has flowed to operating income, which increased from $676 million to $24.9 billion in that same time.

Amazon has evolved through the years, starting from a tiny bookseller to an e-commerce giant and now much more. Indeed, its more profitable Amazon Web Services segment has grown to an annual revenue run rate of $71 billion as of its quarter ended December 2021. What’s more, Amazon generated over $30 billion in advertising revenue in the trailing 12 months.

It has all crescendoed in excellent shareholder returns and earnings-per-share (EPS) growth. In the last decade, Amazon has compounded earnings per share at a rate of 47.1%. Similarly impressive, its share price has increased by more than 1,500% over that period.

Amazon’s stock price valuation 

Fortunately for potential investors, Amazon has been selling at its lowest price-to-earnings (P/E) ratio in the past five years. The market is concerned about how the economic reopening will affect sales and customer retention at Amazon in the near term. As a result, Amazon is trading at a P/E of 45, down from its peak of over 240 reached in 2018.

Before or after a stock split, Amazon is an excellent stock to buy for long-term investors. Better yet, to minimize the impact from trading activity surrounding the stock split, investors can split their purchase in two, buying half of their allocation before and half after the June 6 inflection point. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Should you buy Amazon stock now or wait until after the stock split? appeared first on The Motley Fool Australia.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Parkev Tatevosian owns Amazon. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns and has recommended Amazon. The Motley Fool Australia has recommended Amazon. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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If you’re looking for an easy way to invest in international shares for diversification purposes, then exchange traded funds (ETFs) could be the answer.

This is because ETFs allow investors to gain exposure to a large number of international shares through just a single investment.

But which ETFs should you look at? Listed below are three excellent ETFs that could be worth getting better acquainted with this month:

BetaShares Global Energy Companies ETF (ASX: FUEL)

The first ETF to look at is the BetaShares Global Energy Companies ETF. This ETF allows investors to gain exposure to the global energy market at a time when oil prices are at multi-year highs. BetaShares notes that the ETF includes energy producers that are larger, more geographically diversified, and more vertically integrated than Australian-listed energy companies. Among its holdings are energy giants such as BP, Chevron, ExxonMobil, and Royal Dutch Shell.

BetaShares NASDAQ 100 ETF (ASX: NDQ)

Another ETF for investors to look at is the BetaShares NASDAQ 100 ETF. It gives investors exposure to 100 of the largest non-financial companies on the famous Nasdaq index. This includes many of the most iconic companies in the world such as Alphabet, Amazon, Apple, Facebook, Microsoft, Netflix, and Tesla. And with the Nasdaq down heavily from its highs, now could be a good time to consider a patient, long term investment in this ETF.

VanEck Vectors Morningstar Wide Moat ETF (ASX: MOAT)

A final ETF for investors to look at is the VanEck Vectors Morningstar Wide Moat ETF. This Warren Buffett inspired ETF gives investors easy access to companies with sustainable competitive advantages or moats. The fund is currently invested across 46 attractively priced shares boasting these qualities. This includes the likes of Alphabet, Altria, Boeing, Coca Cola, Kellogg Co, Walt Disney, and Warren Buffet’s own Berkshire Hathaway.

The post 3 top international ETFs for ASX investors to look at this month appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns and has recommended BETANASDAQ ETF UNITS and BetaShares Global Energy Companies ETF – Currency Hedged. The Motley Fool Australia owns and has recommended BETANASDAQ ETF UNITS. The Motley Fool Australia has recommended VanEck Vectors Morningstar Wide Moat ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The AMP Ltd (ASX: AMP) share price has been on a downwards spiral after announcing its full-year results last month.

The financial services company delivered a mixed performance due to challenging trading conditions for the backend of the financial year.

At the time of writing, AMP shares are swapping hands for 92.2 cents, up 1.32%.

What happened to the AMP dividend?

In an effort to conserve its capital position, the board opted not to declare a final 2021 dividend.

The board noted that to support the transformation of the business going forward, a conservative approach to capital management was best.

As such, shareholders reacted on the day by initially driving up the AMP share price by almost 6%, but this was short-lived. Since 10 February when the company reported its financial scorecard, AMP shares have declined by around 15%.

Internal net cash outflows include the group’s payments such as dividend payments from Australian wealth management.

In FY21, internal AUM decreased to $83 billion from $86.7 billion at FY20. This primarily related to the transition of $9.2 billion from the New Zealand wealth management.

Nonetheless, the board did state that following the completion of the demerger in H1 FY22, AMP’s capital management strategy and dividends will be reviewed.

Previously, AMP declared a special fully franked dividend of 10 cents per share in FY20.

AMP share price snapshot

Over the past 12 months, AMP shares have fallen around 35% in value, with all of these losses coming in 2021. When looking over a 5-year time frame, AMP shares are down more than 80%.

AMP has a price-to-earnings (P/E) ratio of 17.50 and commands a market capitalisation of roughly $2.97 billion.

The post Has the AMP (ASX:AMP) dividend gone the way of the dodo? appeared first on The Motley Fool Australia.

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• These 3 ASX 200 shares are topping the volume charts on Wednesday
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Motley Fool contributor Aaron Teboneras has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The share market is sensitive and jittery this year, to say the least.

The prospect of inflation, interest rates and now the consequences of a war in Europe are understandably making investors nervous, and the action has been volatile.

Because of this environment, Ophir Funds co-founders Steven Ng and Andrew Mitchell said that many ASX-listed companies that reported decent financials in February still saw their stock price do a freefall.

“Any result in our industrials-centric portfolio that was not perfect — i.e. a large beat on actual earnings and raising of future earnings guidance — was dealt with harshly,” they said in a letter to clients.

They provided two examples, and why they bought more of those ASX shares after the price fell.

Buy while others are worried about temporary problems

Telecommunications provider Uniti Group Ltd (ASX: UWL) and fashion retailer City Chic Collective Ltd (ASX: CCX) dropped a heart-breaking 21.3% and 20.4% over February.

In fact, they have plunged even further in March, taking their year-to-date losses to 32.2% and 43% respectively.

This is despite City Chic reporting at the top end of its guidance range and Uniti meeting expectations, according to Ng and Mitchell.

“Not results that would normally warrant such harsh share price treatment.”

Investors punished the ASX shares for a couple of specific tailwinds — high inventory levels for City Chic and a new housing construction slowdown for Uniti.

But Ng and Mitchell believe the problems are transient.

“We don’t believe [the issues] will prevent them from overdelivering on earnings in the next few years,” they said.

“As such, we have continued to use the price weakness to add to the positions.”

City Chic shares closed on Friday at $3.13 while Uniti was at $3.12.

Australian shares will be fine in 2022

According to Ng and Mitchell, the market currently expects the S&P/ASX 200 Index (ASX: XJO) to enjoy about 12% earnings growth for the 2022 financial year.

“This is still above average and suggests that the Aussie share market can still generate reasonable returns this year — providing it’s not derailed by an escalation in the war or by central banks taking away the punchbowl too quickly.”

The post 2 punished ASX shares that don’t deserve to be (and experts are buying) appeared first on The Motley Fool Australia.

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Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Uniti Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The Elders Ltd (ASX: ELD) share price has started the week with a bang.

In morning trade, the agribusiness company’s shares have jumped 11% to a decade-high of $13.34.

Why is the Elders share price surging higher?

Investors have been bidding the Elders share price higher today after responding positively to a trading update.

According to the release, Elders revealed that it expects its underlying earnings before interest tax (EBIT) to increase 20% to 30% in FY 2022. Management notes that this outlook exceeds the market expectations based on the mid-point of the earnings expectations of sell side analysts covering the company.

Elders’ Managing Director and CEO, Mark Allison, commented: “Elders’ performance so far in our financial year 2022 has been strong and exceeds our performance after the first five months of FY21. After finalisation of the February trading numbers, which continue improved earnings for the first quarter, we now believe we will exceed analysts’ consensus for the full year to 30 September 2022 and produce an Underlying EBIT result in the range – which is necessarily broad given we are only five months into our financial year.”

What is driving its strong form?

The release explains that Elders has experienced an improvement in its Retail and Wholesale segments compared with the same time last year. This is due to increased sales and favourable seasonal conditions in most parts of Australia.

And while management acknowledges that some of these sales are forward purchases by primary producers seeking to mitigate the risk of instability in supply chains, it still considers the majority of sales are a result of increased activity.

In addition, the company’s Agency business continues to perform strongly as a result of high prices in both sheep and cattle. This is being offset slightly by lower volumes due to restocking and the good availability of feed on farm. Real Estate is also exceeding expectations due to increased turnover and high demand.

All in all, FY 2022 looks set to be a very positive year for Elders.

The post Why is the Elders (ASX:ELD) share price jumping 11% to a decade-high? appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Elders Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Netflix (NASDAQ: NFLX) skeptics had a field day with January’s fourth-quarter report. Customer growth came in just below management’s guidance and the official user-growth projections for the next quarter were downright disappointing. The stock plummeted 21% lower the next day as the bears finally found some hard data to chew on.

However, the Netflix worriers are laser-focused on the wrong data point. Let me explain.

Subscriber slowdown sparks a stock stampede

The management team said as much in the fourth-quarter earnings call. Co-CEO Reed Hastings noted that the quarter was healthy due to higher viewer engagement and lower subscriber churn. CFO Spencer Neumann pointed out that Netflix is adding customers even in this lull, just at a slower pace than usual. Overall, Netflix’s leaders tried to steer the discussion in a more productive direction, but the effort was in vain.

Investors saw this discussion, shrugged, and moved on to cut Netflix’s share price down to size. 

How Netflix views its financial figures

A few weeks later, Netflix had another chance to point investors at the right metrics. Speaking at last week’s Morgan Stanley Technology, Media, and Telecom Conference, Neumann gave this succinct description of how Netflix evaluates its business:

I think there’s probably an overly focused attention on subscriber numbers.

What we focus on is, building a great business. We’re focused on growing revenue, growing profits, growing cash flow, and that’s about driving not just membership, but in increasing engagement and obviously, as we increase member value, pricing occasionally into that value that we create.

So for us, it’s the combination of those things as opposed to a year-to-year or quarter-to-quarter member number. And we believe, with high conviction, that we’ll continue to drive double-digit revenue growth, continue to increase our profit margins as we’ve talked about. And not just that path to cash flow breakeven, but now growing positive free cash flow.

Netflix is a passion brand

In other words, it would be silly to focus exclusively on growing the membership counts.

To that end, Netflix would perhaps be best served by slashing prices and licensing lots of content from other producers at pennies for the dollar. That approach would pull in millions of price-sensitive customers, but those subscribers would have little reason to stay loyal to the Netflix service. Another bargain-bin streaming service could easily steal those customers away.

So Netflix makes billion-dollar investments in producing original shows and movies of prize-winning quality, and then charges a premium price for the opportunity to watch that exclusive content. As the company states in its publicly available long-term plan, Netflix wants to be a top-shelf name that people get excited about and are willing to pay more for:

“Netflix is a focused passion brand, not a do-everything brand: Starbucks, not 7-Eleven; Southwest, not United; HBO, not Dish.”

There’s a constant tug-of-war between subscriber growth and monetizing efforts. Right now, Netflix has a slightly tighter focus on boosting the bottom line than on optimizing subscriber counts. Throw in the uncertainty of the ongoing pandemic and geopolitical tensions, and you may get a brief period of limited subscriber growth.

But the long-term growth story remains massive. Balancing that line between growth and profit, Netflix wants to generate meaningful cash profits and pour most of the winnings back into a robust business model and content portfolio for the long haul. So staring yourself blind on a quarter or two of modest subscriber growth is a big mistake.

At a 51% discount to October’s all-time highs, Netflix is a no-brainer buy today. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Are Netflix bears looking at the wrong numbers? appeared first on The Motley Fool Australia.

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Anders Bylund owns Netflix. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns and has recommended Netflix and Starbucks. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. Southwest Airlines and recommends the following options: short April 2022 $100 calls on Starbucks. The Motley Fool Australia has recommended Netflix and Starbucks. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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It has been a case of another day, another decline for the Magellan Financial Group Ltd (ASX: MFG) share price.

In morning trade on Monday, the fund manager’s shares are down 5.5% to a new multi-year low of $13.43.

This means the Magellan share price is now down 70% over the last 12 months.

Why is the Magellan share price falling again?

Hot on the heels of revealing a very poor investment performance for its flagship global fund on Friday, which you can read about here, this morning Magellan provided an update on its dwindling funds under management.

According to the release, at the close of US trading on Friday 11 March, Magellan had funds under management of approximately $69.1 billion. This comprises $39.2 billion in global equities, $20.4 billion in infrastructure equities, and $9.5 billion in Australian equities.

This means that Magellan’s funds under management have fallen by $8.1 billion or 10.5% from $77.2 billion since its most recent update on 25 February.

The damage has been felt hardest in global equities, which is down 16.8% from $47.1 billion since its last update. Both infrastructure and Australian equities were down by approximately $100 million over the same period.

Management advised that the weakness in its funds under management reflects market movements (including foreign exchange and recent market volatility), net outflows, and notifications of intention to redeem.

In respect to the latter, Magellan revealed that it has experienced net outflows of approximately $5 billion since its most recent update. This comprised net institutional outflows of $4.7 billion and net retail outflows of $0.3 billion. It has also received notifications of intention to redeem of $1 billion, which has been reflected in the above figures.

Unfortunately for shareholders, last week the team at UBS warned that it is seeing an emerging risk to infrastructure funds under management. This follows the recent underperformance from this side of the business. So this may not be the end of its fund outflows.

The post Magellan (ASX:MFG) share price hits multi-year low after fund outflows accelerate appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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Once a week I like to look at ASIC’s short position report to find out which shares are being targeted by short sellers.

This is because I believe it is well worth keeping a close eye on short interest levels as high levels can sometimes be a sign that something isn’t quite right with a company.

With that in mind, here are the 10 most shorted shares on the ASX this week according to ASIC:

• Flight Centre Travel Group Ltd (ASX: FLT) remains the most shorted ASX share after its short interest rose week on week to 17.8%. Short sellers don’t appear to believe that the travel market recovery will be as smooth sailing as the company may like.
• Betmakers Technology Group Ltd (ASX: BET) has seen its short interest rise again to 12.6%. Short sellers aren’t giving up on this betting technology company despite its shares falling 30% in 2022. The prospect of rising rates is weighing heavily on the valuations of tech shares like Betmakers.
• Nanosonics Ltd (ASX: NAN) has short interest of 12.2%, which is flat week on week. A major and sudden change to its sales model in the United States has been weighing heavily on the infection prevention company’s shares.
• Webjet Limited (ASX: WEB) has short interest of 10.5%, which is up week on week. It appears as though short sellers believe the market could be too optimistic on the travel market recovery.
• Mesoblast limited (ASX: MSB) has short interest of 9.9%, which is up slightly week on week. Short sellers have been going after this biotech after its lucrative deal with Novartis was cancelled. Combined with poor trial results and high cash burn, Mesoblast’s future looks challenged.
• Redbubble Ltd (ASX: RBL) has short interest of 9.2%, which is flat week on week. This ecommerce company’s poor form has been weighing on sentiment. In addition, changes to Apple’s privacy settings appear to be hurting margins and leading to higher marketing costs.
• Polynovo Ltd (ASX: PNV) has seen its short interest reduce to 9.2%. This medical device company’s underperformance and lofty valuation appear to have attracted shorts.
• Kogan.com Ltd (ASX: KGN) has seen its short interest ease materially to 9%. Some short sellers may be locking in their returns following a sharp decline in this ecommerce company’s shares over the last 12 months.
• EML Payments Ltd (ASX: EML) is a new entry in the top ten with short interest of 9%. With this payments company’s shares trading at ~30x estimated FY 2022 earnings, some short sellers appear to believe they are overvalued.
• Appen Ltd (ASX: APX) is another new entry in the top ten with 8.4% of its shares hold short. There are concerns that demand for this artificial intelligence data services company’s offering could fall materially if major customers, such as Facebook, take things in-house.

The post These are the 10 most shorted ASX shares appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns and has recommended Appen Ltd, Betmakers Technology Group Ltd, EML Payments, Kogan.com ltd, Nanosonics Limited, POLYNOVO FPO, and REDBUBBLE FPO. The Motley Fool Australia owns and has recommended Appen Ltd, EML Payments, Kogan.com ltd, and Nanosonics Limited. The Motley Fool Australia has recommended Betmakers Technology Group Ltd, Flight Centre Travel Group Limited, and Webjet Ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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As inflationary pressures continue to mount on global markets, the US has just experienced its highest jump in core inflation in 40 years.

There are a multitude of undertones feeding into the inflation narrative, not in the least the enormous quantitative easing (QE) programs made by central bank’s over the last 2 years in response to the COVID-19 pandemic.

The result has been a flooding of liquidity in financial markets, propping equity indices around the world to reach heights never once thought possible.

ASX shares have no doubt fared well over this time as well, such that the benchmark S&P/ASX 200 Index (ASX: XJO) was setting record highs last year, shown on the chart below.

However, inflation appears to be getting too far ahead of governments around the world, and conflict from Europe only adds to the pressure. Commodity indices have soared to decade-long highs as well.

Add in red hot markets for housing, mortgages, equities, and now, raw materials, the stage is set for inflation to continue driving north from 2022, many experts say.

What got us here?

The pandemic resulted in a number of unconventional measures of government and monetary policy around the world.

In the US, its central bank released untold amounts of liquidity into the system through its QE programs. Inflation has basically followed suit along the way (shown below).

Government-enforced lockdowns from COVID-19 then sent global supply chains into turmoil, resulting in supply backlogs and manufacturing bottlenecks.

The US Fed responded by releasing several, multi-trillion dollar “bazookas” as they were labelled, in order to flood the system with liquidity.

Let’s just dispel something first – the US (or any central bank) wasn’t ‘printing money’. None of them do.

In fact, there isn’t really such a thing as printing or creating money. The only money ‘creation’, is done via banks when lending money on credit to obtain interest.

Instead, the government ‘prints money’ through its bond-buying programs, by purchasing Government bonds and mortgage backed securities (MBS) from the public markets. It does this via its own federal reserves.

The impulse effect is that there is a huge flood of money onto the scene, as the Government has in a way released more liquidity into the system.

In effect, the US loaned investors money, which is an unconventional way of conducting monetary policy.

Normally, it’s the other way around – the Government issues bonds and the public buys them. That is, investors are loaning the Government money by buying their bonds.

This is typically done to finance large capital projects, such as roads and other infrastructure.

For their risk, investors earn some interest and their principal back after a set time. Don’t forget – in this standard scenario, the Government pays.

But this time it’s different. This time, with QE programs, the US lent investors the money – meaning they are now liable to pay back that debt, with interest – and not the other way around.

One other factor driving the liquidity spike and inflation jump is record low interest rates that have been at nearly zero for a few years now.

These record low rates have allowed borrowers to take on more debt at lower cost in all aspects, not just obvious areas like housing.

Low interest rates are also great for asset prices, considering the impact they have on valuations, discussed below. Hence with record low rates, it’s not surprising to see global stock markets charge higher these last couple of years.

That’s also been fuelled by a huge thirst for growth and tech shares, such that the ASX and US indices are heavily weighted towards these themes.

But as the liquidity has flushed its way throughout the economy, aggregate prices have caught up to speed. Now US inflation is at record highs of almost 7% and shows no signs of slowing down.

What does this mean for ASX shares?

The US has finally thrown its term of ‘transitionary’ for the current rate of inflation out the window. It has now accepted that inflation is a problem and that actions must be taken.

The best tool central banks have in curbing inflation is to influence interest rates in the real economy, in order to reign in spending and cost increases. In Australia, the Reserve Bank does this via the cash rate.

Market pundits are already pricing in a number of rate hikes from both the US and Australia this year and next.

As such, the bond market has begun pricing in the chance of a rate hike as well, a fact that has hurt the valuations of ASX large cap and small cap shares in 2022, as seen below.

Valuations and the yield on long-dated bonds are inversely related, such that an increase in yield will compress stock valuations.

Not only that, but these yields tend to match the direction of various rate movements in the real economy, and give a good sign into the current state of affairs.

Now let’s bring it all together so it’s clearer – Inflation is at 40-year highs in the US. Central banks try and raise aggregate interest rates to curb inflation.

In Australia, that’s done via the cash rate. Bond yields often reflect this rate, and these bond yields are inverse to stock valuations.

If these interest rates rise, this might hurt the performance of ASX shares due to this relationship.

The result of this activity so far has been a correction in ASX shares in 2022 as bond yields have begun climbing once more.

So if inflation continues running hot in the US – the world’s largest economy by GDP – and central banks respond by jacking up rates, this could further influence stock valuations here in Australia.

The post US inflation is at 40-year highs. What does this mean for ASX shares? appeared first on The Motley Fool Australia.

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Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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