Citi initiates two ASX stocks with a Christmas buy

MARKETS WRAP

S&P 500 TECHNICALS

THE CALENDAR

It's a quiet day locally, with just a sprinkling of central bank speak overseas as well. Besides, tomorrow is the big day with US and UK CPI so use today as a day of rest.

THE CHART 

Before you start groaning that this is a boring and tedious chart, just stick with me on this. The chart is actually the starter to an interesting conversation - is the world's second-largest economy doomed to repeat the mistakes of the world's third-largest economy?

In 1991, the bursting of an asset-price bubble brought Japan’s high-growth era to an abrupt end, inaugurating a period dubbed the “lost decades”. In many ways, Japan is still going through that phase now given sub-target inflation was a big problem until only very recently and the Bank of Japan continues to pump the economy with stimulus packages (if you've heard of the term Abenomics before, this is what it refers to.)

Most crucially, economists believe Japan's GDP performance continues to be inhibited for the simple reason that the population is ageing much faster than the birth rate. All this stimulus will also create a giant debt bill, and in theory, a bigger headache. 

The same thing is happening in China right now. China's debt-to-GDP ratio continues to rise, the population continues to age, and they have an additional problem of a country-wide property crisis. 

So will China repeat Japan's mistakes from 30 years ago? Stay tuned to the data.

THE STAT

The Bloomberg Commodities Index is on track to outperform the MSCI World equity index significantly for a second consecutive year in 2022. (Source: Morgan Stanley)

The last time we had three straight years of outperformance? 1976-79. And here is the chart to prove it:

STOCKS TO WATCH

In the Christmas spirit, Citi has initiated two ASX stocks with a BUY rating (how nice of them, right?)

The coverage is all about two of Australia’s leading salary packaging providers. The reason for the initiation? A defensive customer base will afford protection from any macroeconomic headwinds in 2023.

Citi prefers McMillan Shakespeare (ASX: MMS) over Smartgroup Corporation (ASX: SIQ) on the basis of a more diversified business model for the former. Both businesses make a lot of money from novated leasing (i.e. loans for new or used cars) but the fact MMS makes less of its money from this than SIQ means it naturally has a more diversified balance sheet.

MMS' price target is $16.40/share while SIQ is sitting at $6.60/share.

Hans Lee wrote today's report.