Weekly Market Review
Written and accurate as at: Jul 27, 2017 Current Stats & Facts
The S&P/ASX 300 slid -0.7% last week, with strength in the banks offsetting weakness from resources and currency-sensitives. Rate-sensitives such as REITs (S&P/ASX 200 A-REITs +0.9%) and infrastructure (Transurban (TCL) +0.5%) tended to outperform following a weak start to July.
The long-awaited bank capital guidelines from the Australian Prudential Regulation Authority (APRA) hogged most of the headlines. There was a degree of trepidation in markets ahead of the announcement, with some analysts suggesting that banks would be forced to raise equity capital, which has weighed on their stock prices in recent months. As it transpired, the new Core Tier 1 target of 11% –- to be achieved over a couple of years –- was not particularly onerous, or surprising. ANZ (ANZ) is already at this target while the other banks, with provisions of roughly 10%, should be able to achieve the goal via asset sales and dividend reinvestment programmes. APRA’s announcement has two important implications. First, it relieves the pressure on banks to cut dividends – indeed, given that ANZ does not need to increase provisions it possibly opens a door to increased capital return to shareholders. Second, it draws a “line in the sand” in terms of capital requirements; although APRA are expected to adjust mortgage risk weightings later in the year, they have said they will do so in such a way that it does not create an additional capital impost upon the banks. This removes one source of uncertainty surrounding the banks around which foreign investors, in particular, had been wary and the stocks responded accordingly; ANZ gained +4.3%, while Westpac (WBC) (+3.3%), National Australia Bank (NAB) (+1.0%) and Commonwealth Bank (CBA) (+1.0%) all outperformed.
The insurance sector sold off, Suncorp (SUN) dropping -5.1% while Insurance Australia Group (IAG) (-4.6%) and QBE (QBE) (-2.7%) were close behind. We suspect that investors have been hiding from the banking headwinds in the insurance sector; – a trade which quickly unwound upon improved sentiment towards the Big Four. Medibank Private (MPL) (-6.6%) was among the week’s worst performers, with some noise about levels of affordability possibly leading to regulatory change in the sector.
Metcash (MTS) continued its strong-but-volatile run since reporting, gaining +5.6%. It has now well and truly regained the losses endured pre-results on some market fears that competitive pressures would result in a double-digit loss in sales revenue. This has not come to pass and we retain our conviction in the company’s ability to continue surprising the market’s muted expectations around earnings growth. Elsewhere, the retailers also did well after a period of sustained pressure linked to market fears about the effect that Amazon’s entry may have on the brick-and-mortar stores in Australian malls and streets. JB Hi-Fi (JBH) gained +6.8% while Harvey Norman (HVN) was up +7.3%)
Elsewhere, the retail REITs (Scentre Group (SCG) (+2.5%), Vicinity Centres (VCX) (+3.2%)) bounced back after being hit hard in recent weeks on the combination of slowing consumer spending and speculation over the arrival of Amazon on Australian shores. The retail sector is likely to come under close scrutiny in the upcoming reporting season and Myer Holdings (MYR) (-10.8%) has already downgraded expectations in the confession season.
Computershare (CPU) fell -5.6% along with other currency-sensitives as the AUD appreciated to almost USD 80 cents. The market took some comments from the Reserve Bank of Australia (RBA) around the theoretical “neutral” interest rate as a sign of imminent rate hikes. We believe this is a long bow to draw, given sluggish economic growth, and the RBA was quick to qualify its remarks later in the week. Nevertheless, the AUD remained elevated against recent levels. Our medium-term expectation is that the AUD trades in a range between 70 and 80 US cents and that we may remain at the top end of that range for a while. Again the outlook for exporters and currency-sensitive companies is likely to be another key focus of reporting season.
Other large cap underperformers included Incitec Pivot (IPL), which was down -6.0% on weaker ammonia prices. CYBG (CYB) was off -5.3% on the combination of currency exposure and some discussion of litigation from a new class of claimants of allegedly mis-sold products. NAB established a sizeable contingent liability fund as part of its divestment of CYB – around half of which has been subsequently paid out. Telstra (TLS) (-4.7%) also fell on concern over the threat to its dividend.
Santos (STO) (+9.0%) provided a bright spot, bucking the trend of its peers (Woodside Petroleum (WPL) (-1.9%)) and a lower oil price to post strong gains on the back of a quarterly production report which flagged volumes at the high end of guidance, lower costs and an improved balance sheet courtesy of accelerated debt reduction. STO has been hammered in recent months and it did not take much to see a snap back in the stock, which we have been adding to in several of the portfolios in recent weeks.