Insights for Investors by Investors

Weekly Insights

23-27 August 2021

Economics here and abroad…

The ASX200 closed the week up 0.37 per cent, following an easing of Covid-19 cases throughout NSW and Victoria. Australian trade data is due out this week, but the market looks to be more focused on the second quarter GDP numbers and monthly building approvals. Australia could be headed towards another technical reception or double dip recession, with some economists saying it was more than likely. Treasurer Josh Frydenberg advised states of national plans to ease restrictions once the 70 per cent vaccination rate has been reached.

In the US, policymakers met for the Jackson Hole meeting calling for the US central bank to speed up its tapering timeline. The Dow Jones Industrial Average finished Friday’s session +0.64% (224 points), finishing the week lower, falling 1.1%. In commodities Gold Futures for December delivery were up 1.45% to US$1821.15 a troy ounce. Crude oil rose 1.88% to US$68.69 a barrel.

What we think…

Locally, reporting season is almost over with just two days remaining, corporate earnings have come in far better than expected.

Analysis has shown that as much as 5 per cent of GDP is set to hit shareholder and fund manager bank accounts this week with a record $51 billion in dividends already declared in addition to $15 billion in buybacks. This comes on top of $34 billion in takeover offers currently in process. FN Arena had 93 company results beating expectations, 123 companies reporting in line and 54 companies missing expectations. Eighty per cent of company results were at least in line or beat expectations. But this could revert amid tough lockdown restrictions in Sydney and Melbourne which has estimates at 550,000 workers being stood down during these lockdowns. Treasurer Josh Frydenberg told the Nine Newspapers, that Australia will open and come out of lockdown as one country. By opening up “as one country and in accordance with the plan will not only give people hope but provide a springboard for our economic recovery.”
Irrespective, the economy will decline by 0.1 per cent in the June quarter. Fears are that the following quarter will be in the red as well with some analysts forecasting these lockdowns are costing the economy $2bn a week. In total the lockdowns have cost the economy an additional $25bn. The ABS will release the June quarter result on Wednesday.

Highlights for August

  • Energy remains under pressure with Ampol (ASX:ALD) shares falling on a weaker earnings report and growing concern about a slowing economy.
  • Property manager Charter Hall (ASX:CHC) rose after reporting a 20 per cent increase in profit to $668 million, with profit growing at double that rate hitting $476 million. Management have capitalised on the pandemic, acquiring another $6 billion in property, whilst benefitting from $4 billion in revaluations, which took total assets in their managed funds to $52 billion.
  • Spark Infrastructure (ASX:SKI) shares rose after the board agreed to accept KKR’s offer to takeover the group at a price of $2.95 per share; the deal will still require regulatory approvals, hence the discount.
  • Reliance Worldwide (ASX:RWC) shares fell despite doubling profit to $188 million and delivering a record dividend. The group has seen significant growth in every key market as stuck at home consumers have turned to renovations rather than travel.
  • Event Hospitality & Entertainment (ASX:EVT) shares rose after narrowing its loss from $48 to $27 million, as the company was decimated by lockdowns.
  • Pfizer (NYSE:PFE) share rose after receiving formal approval of their COVID-19 vaccine, this is on top of the emergency use at the current time. It is a big step forward towards mandatory vaccinations.
  • The US market appears to be weakening with the services PMI falling to 55.2 from 59.9 and manufacturing to 55.4. On the positive side home sales continue to surprise up 2 per cent.
  • The Chinese government crackdown on big tech appears in its infancy but shares are turning the corner.
  • Woolies shares rose on an increase in revenue and 77 per cent increase in profit with the contribution from IGW near quadrupling in a boon for shareholders. The company saw a significant jump in profit as finance costs reduced and online sales continued to grow at a 50 per cent rate. The highlight by far was the 55-cent final dividend, up 15 per cent for the year, and the announcement of an off-market buy back to return excess franking credits to shareholders; shares were 0.4 per cent higher.
  • Link Administration (ASX:LNK) fell with the company now trading well below the offer price of 2020’s private equity takeover deal. Having held the company before, we saw great value in the PEXA platform which LNK continues to own but a challenged environment for their core administration and servicing businesses. This was proven correct by the 6 per cent fall in revenue and 18 per cent fall in profit after the company was forced to write-down the value of their loan servicing business. The dividend was flat on 2020’s payout.
  • Port operator Qube Holdings (ASX:QUB) increased its dividend by 15 per cent despite a ‘messy’ year. Revenue improved by 14 per cent to $2.2 billion, but earnings fell 11 per cent due to a number of asset sales. Profit was up 31 per cent to $159 million which was a new record driven by bulk commodities, forestry, grain and container volumes. The company highlighted a strong grain harvest as a tailwind for 2022 along with the expected recovery in global trade and shipping.
  • Ramsay Healthcare (ASX:RHC) was higher after the company returned to pre pandemic level dividends, announcing a 103 cent payment, on the back of a 13 per cent increase in earnings to $2.05 billion. Revenue has begun to recover as the UK and parts of Australia reopened, growing 7.3 per cent to $13.3 billion. Management flagged a growing pipe of growth opportunities.
  • Wesfarmers announcing a 17 per cent increase in its final dividend and a $2 per share capital return following a stunning year from the well managed company. Profit increased 16 per cent to $2.42 billion, driven by double digit growth at Bunnings and KMART and a solid return from Officeworks. Revenue at the former was 12 per cent stronger, not bad for a mature business, with KMART, Target and Catch Group together growing 69 per cent amid an e-commerce boom.
  • Kogan (ASX:KGN) and Link (ASX:LNK) unable to live up to inflated expectations.
  • WiseTech Global (ASX:WTC) was the standout with Qantas (ASX:QAN) also rising after outlining their plans to exit this lockdown mess.
  • It was more of the same at Jackson Hole with little in the way of new commentary for markets to digest. Fed Chair Powell confirmed the possibility that tapering begins this year assuming the economic recovery continues as expected. As we know from 2020, that is a significant assumption. Markets responded by closing at new records.

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