Weekly Insights 6-10 September
Economics here and abroad…
Value traders showed up on Friday after the week’s significant sell-off with the S&P/ASX200 (ASX:XJO) finishing 0.5 per cent higher. Almost every sector was higher, barring healthcare which fell 0.7 per cent after outperforming on Thursday, but by far the highlight was another rally in base commodity companies. Everything from aluminium to nickel and even uranium has seen buying pressure in recent months suggesting speculative activity is returning. Alumina (ASX:AWC) finished 6.3 per cent higher on Friday and 9.3 per cent for the week as the military coup in Guinea sent the price of aluminium skyrocketing; likely a short-term impact. Both Nickel Mines (ASX:NIC) and South32 (ASX:S32) were also stronger, finished 8.5 and 5.9 per cent to the positive respectively. The energy sector gained 1 per cent after Oil Search (ASX:OSH) and Santos (ASX:STO) confirmed they had agreed terms on their merger. Should the PNG Government approve the deal, OSH shareholders will receive 0.6275 STO shares with CEO Kevin Gallagher to remain in charge. Across the week every sector finishing lower showing the impact of a single day sell off, with materials finishing 2.6 per cent lower, property 2.5 and energy 1.9 per cent down over the five days. Fortescue (ASX:FMG) was the largest detractor, falling 12 percent, the majority of which was due to the large dividend payment. Both BHP (ASX:BHP) and Rio Tinto (ASX:RIO) fell 2.6 and 4.6 per cent respectively as the iron ore price continued to weaken with Technology One (ASX:TNE) the top performer, jumping 11.2 per cent.
US markets finished lower with the Dow Jones Index and S&P500 closing 0.8 per cent lower with the tech-focused Nasdaq underperforming again, dropping 0.9 per cent. Investors continue to tentatively balance the threat of inflation and tapering of bond purchases with the potentially more concerning chance that the US economy will slow significantly. The country is averaging over 150,000 new cases a day yet only 53 per cent of the population is fully vaccinated according to MarketWatch. Despite mandates from the President all but forcing the public and private sector to require vaccinations the threat of lockdowns and a further weakening in the ‘reopening’ trade stands out as a significant risk. All three major indices were lower for the shorter four day trading week with the Dow Jones weakest, down 2.2 per cent due to its reliance on energy and financial companies. The S&P500 and Nasdaq both fell 1.7 per cent with Apple (NYSE:AAPL) a major drag. Shares in Apple fell over 3 per cent on Friday after a court delivered a mixed decision following Epic Games’ complaints about the restrictions placed around their App Store. The decision removes restrictions on how app developers can be paid but the App Store will remain the only way apps can be downloaded onto Apple phones.
• Australia: Consumer Inflation Expectation
• Australia: NAB Business Confidence
• Australia: House Price Index
• US: Inflation Rate
• Core Inflation Rate
• Australia: HIA New Home Sales
• Australia: Westpac Consumer Confidence Index
• China: House Price Index
• China: Retail Sales
• China: Unemployment Rate
• US: NY Empire State Manufacturing Index
• US: EIA Crude Oil Imports
• Australia: Unemployment Rate
• Australia: RBA Bulletin
• US: Retail Sales
• US: Initial Jobless Claims
• EU: Inflation Rate
What we think…
Over the weekend, Australia hit a significant turning point in its fight against Covid-19. The Federal Government outlined guidelines for states to follow by reopening most sectors of the economy for people once 70% of adults in the state have had two vaccine doses as early as mid-October. It’s a massive shift from what the market was becoming used to; a stop-start economy where sudden outbreaks would trigger a snap lockdowns on a constant basis. Most market analysts were expecting the current lockdown to continue through to early next year. With the recent announcement, the pandemic looks to have hit its peak both here and overseas. Because the share market reflects future earnings usually months out, the market has already moved to a post-covid world.
Despite the news, markets experienced big falls last week. These recent jitters can be blamed on the Delta Strain as it continues to incite concern and volatility. There’s also the issue of how central banks will cope with the orderly reduction of stimulus. This week on the local front, this Delta virus uncertainty is starting to impact momentum, as we saw last week and on Thursday and Friday. All important jobs data is due out on Thursday. On Commsec’s morning news, “CBA Group economists expect that the data will show around 300,000 lob ‘losses’ with the jobless rate lifting from 4.6 per cent to 5.2 per cent and the participation rate down from 66.0 per cent to 64.9 per cent.”
Highlights for August
- The ASX200 (ASX:XJO) suffered one of its worst weeks this year, falling 116.30 points or (-1.55%) with 95 per cent of the largest 200 companies share price’s dropping. Every sector was lower and significantly so, with the major selling pressure hitting the popular smaller companies, technology, and consumer sectors.
- Macquarie (ASX:MQG) rose last week on the back of a strong update to the market.
- The Santos (ASX:STO) and Oil Search (ASX:OSH) merger looks set to proceed with management of the former highlighted ‘green opportunity’ that will be unlocked by the deal. On the one hand they touted the high quality, low cost growth assets that will close to double and ultimately support stronger free cash flow. With this funds they intend to pursue a number of clean energy projects including air capture in the Cooper Basin and hydrogen; both companies finished modestly higher.
- According to management BHP (ASX:BHP) contributed $34 billion to the Australian economy in 2021, comprising $11 billion in supplier payments, $6 billion in dividends and $12 billion in tax.
- Flight Centre (ASX:FLT) was a standout last week after the NSW Premier continues to outline the way out of COVID lockdowns hinting at their own ‘Freedom Day’. But it was all about the Reserve Bank of Australia who held their September meeting.
- Many economist had been predicted a reversal of the $4 billion weekly bond buying that had seen the central bank purchase as much as $200 billion worth of state and
- commonwealth government bonds since the beginning of the pandemic. They were proven wrong, with Governor Lowe confident that the economy will bounce back from virus lockdowns afflicting the two most populous states and confirming the ‘tapering’ of purchases would go ahead as expected.
- The RBA did, however, put the decision around further tapering of purchases on hold until at least February 2022. They noted some sectors of the economy were booming, those supported by governments, with many others struggling but expects this to “delay” not “derail” the recovery; we can only hope. The cash rate target was held steady at 0.10%.
- Guinea is the home of a number of mines central to the production of aluminium, Rio Tinto’s Simandou project is located there. News this week about a military coup sent the price to decade highs but reports now suggest the mining sector has been exempt from curfews and strict controls. The region is incredibly important producing half of all bauxite consumed by Chinese refineries.
- Passively managed, index following strategies have gained in popularity in recent years, benefitting from he strong performance of the benchmark, but the tables may be beginning to turn. According to Standard & Poor’s research, some 55 per cent of all active equity funds outperformed the benchmark despite it returning 27.8 per cent for the financial year.
- Telstra Corporation (ASX:TLS) shares rose on news that CEO Andy Penn was visting the PNG Government to discuss the acquisition of Digicel.
- In a somewhat unexpected result shares in Home Co’s new Wellness Property Trust (ASX:HCW) rose 16 per cent on listing, which given it owns a diverse portfolio of property assets suggests they may have been undervalued in the float price.
- Both Santos (ASX:STO) and Oil Search (ASX:OSH) fell after announcing the extension of their exclusive due diligence discussions around a potential merger. A slowing global economy continues to push the oil price lower.
- Magellan Group (ASX:MFG) saw retail assets under management increased just 0.3 per cent in August on the back of stronger global markets, with institutional assets 1 per cent higher.
- Aggressive private equity group BGH Capital pulled their offer for Hansen Technologies (ASX:HST) which provides billing and other software support to a diverse range of major businesses.
- Washington H Soul Pattison (ASX:SOL) fell despite indicating they expect 2021 profit to double once again, based on the strong performance of a number of underlying investments. Specifically, they highlighted the strong coal price as benefitting New Hope (ASX:NHC), along with copper miner Round Oak and Brickworks (ASX:BKW) which is benefitting from the Home Builder renovation boom.
- Qube Holdings (ASX:QUB) rose after the company announced the acquisition of the Newcastle Agri Terminal for $90 million. The port will be purchased from grain traders CBH and Viterra, funded through undrawn debt facilities and see earnings further diversified into the booming NSW grain sector.
- Macquarie (ASX:MQG) reached a new all-time highs on the positive after announcing that half year profit to the end of September is set to double 2020’s result. It will be down on the first half of 2020 but still a strong result. The annuity style businesses like banking have benefitted from lower provisions, however growth in asset management was broadly flat as their recent acquisition is unlikely to be accretive. They are also facing strong comparables after the sale of their rail businesses in 2020. Macquarie Capital continues to perform strongly, benefitting from the sale of their UK Smart Meter portfolio and continued merger and acquisition activity. More importantly, realisations through which Macquarie sells assets it managed and locks in management fees are set to increase as the global economy returns to normal.