Weekly market update - 30th of January 2019
Written and accurate as at: Jan 30, 2019 Current Stats & Facts
The local market continued to make gains into 2019, adding a further 0.4% last week. Underlying performance was mixed: the bond-sensitive REIT sector added +2.2%, while the index heavyweight banking (-0.5%) and Metals & Mining (-1.2%) sectors lost some ground.
With market concerns over the pace of Fed hikes having receded – for now – the market remains focused on the outcome of this week’s negotiations between the delegation of Chinese vice-ministers and their US counterparts. The looming Brexit deadline also offers a binary outcome, with limited visibility.
While the outcome on US/China trade – deal, no deal, or an extension of the existing ‘truce’ period – is likely to swing markets in the near term, the more important underlying factor is the deceleration of Chinese growth. Ultimately, this is about the pace of domestic growth and the key factor will be whether the government chooses to respond to a weaker economy with the sugar-hit of property-focused stimulus, or with slower-acting consumer focused measures such as tax cuts. Some commentators believe the latter remains favoured and the government will look for an excuse to avoid property stimulus based on the issues of affordability and capital misallocation that result. Ultimately, if the government can avoid property stimulus, we believe iron ore prices could moderate over the year.
AMP (AMP, -12.0%) took another hit as management warned that its 2H18 result will be particularly soft. As always with AMP the issue has complications, however it looks as though the key drivers of the downgrade relate to weakness in the discontinued businesses – mainly the Life Insurance and Mature books. The core businesses remain weak, but largely in line with expectations. AMP remains in limbo pending the recommendations of the Royal Commission – due late this week – and the strategy under its new CEO. In this respect, the warning is part of a strategy to rebase market expectations, from which a new strategy can be launched. Elsewhere in financials, Challenger (CGF, -18.9%) also issued a profit warning for FY18, citing one off issues with poor investment returns, but also downgraded their market outlook. Ultimately the annuity business is seeing increased margin pressure, while at the same time CGF’s growth prospects look to be softening.
ResMed (RMD, -11.4%) delivered a quarterly result which beat earnings expectations but missed revenue by ~3%. Softer sales in flowgen machines outside the US was partly to blame, alongside disappointing revenue trends in some of its recently acquired technology units. RMD remains a market leader in a growing industry and remains attractive on a structural basis. However, having gained 44% in 2018 and reaching over 30x next-12-month P/E, there is a sense that the valuation had got too far ahead of itself, rendering it vulnerable to what was a relative mild disappointment.
Yield-sensitives generally outperformed. REITs Charter Hall (CHC, +7.1%), Mirvac Group (MGR, +5.3%) and Dexus (DSX, +5.0%) were among the market’s best performers, while infrastructure stocks Atlas Arteria (ALX, +4.0%) and Sydney Airport (SYD, +3.9%) also outperformed. Elsewhere, there was also a bounce among some of the consumer stocks, with Star Entertainment (SGR) up +6.6%, JB Hi-Fi (JBH) up +6.5%, Carsales.com up +5.0% and Aristocrat Leisure (ALL) up +4.4%.