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Weekly market update - 19th of November 2019

Written and accurate as at: Nov 19, 2019 Current Stats & Facts

The local market had a +1.5% gain last week as well as experiencing a change from value stocks back towards growth stocks – a reversal of the trend in recent months.

For several years the narrative has been ultra-low interest rates and abundant liquidity driving out-performance of rate-sensitive and growth stocks. In hindsight, mid-August looked like something of a nadir in terms of market concerns over global growth, reflected in the sub-1% yields of Australian 10-year sovereign bonds.

The increase in yields since that point – and the retreat from growth stocks – feels like a retracing from sentimental extreme towards a more realistic assessment of the global outlook, rather than the start of a persistent trend.

Last week’s rotation could reflect the market settling into a more reasonable bond yield level – and valuation range for stocks sensitive to rates. In this vein, we are mindful that the global economy remains fragile and sensitive to bond yields. Any signs of the latter rising too quickly could choke off growth.

Nine Entertainment (NEC, -7.9%) was among the market’s worst performers last week. Management downgraded the outlook for FY20 at the AGM as TV advertising revenue remained weaker-than-expected. The free-to-air ad market has been in structural decline for several years. But this has been exacerbated in the past 12 months by cyclical issues as companies cut their ad budgets given a soft domestic economy. This issue is well-known, but there was some expectation NEC would be cycling the start of this downturn – in Q4 2018 – and that the -5% to -6% trend would moderate to -1% to -2%. However management flagged that the decline remains in the minus 5-6% range and has now baked that rate into their expectations for FY20. It is important to remember that free-to-air TV advertising revenue has declined to around a third of NEC’s revenue since the merger with Fairfax Media. Stan and Nine Now continue to do well, as does the newspaper division. Domain Group (DHG, +9.9%), which makes up another third of the company’s value, has also been doing well in recent times.

Whitehaven Coal (WHC, -7.9%) fell along with coal prices on the news that Chinese coal inventories had hit their highest levels since 2014. Chinese coal demand has remained flat over the past 12 months. Slowing growth has taken its toll while there’s been an increase in domestic coal production.  

Incitec Pivot’s (IPL, -6.1%) result reflected a tough period as underlying profit after tax fell 56% in FY2019. The drought has weighed on fertiliser demand, which has been compounded by production disruption and renegotiation of several key contracts.

Growth stocks dominated the best performers, led by Afterpay Touch (APT, +22.0%). The company gave a largely positive update to investors at its  AGM, alongside the news of a $200m placement of shares to a tech-focused US hedge fund. Management focused on the AI expertise that the new shareholder can provide – and the possible access to new markets – as an offset to the placement’s dilution of existing holders. Fellow “WAAAX” stocks Wisetech (WTC, +6.1%) and Altium (ALU, +5.0%) also made some gains following a torrid period. Beyond technology, the China growth plays such as Treasury Wine (TWE, +5.7%) and A2 Milk (A2M, +4.4%) also outperformed.

CSL (CSL, +5.1%) has been one growth stock which has continued to outperform throughout the last couple of months. While there was initially some relief over recovery in the Chinese Albumin market after a shift to a direct marketing model, more recently there has been evidence of a shortage of immunoglobulin (IG) products in the US. This means better pricing for CSL and results in an important mix shift effect. CSL’s products are priced higher in the US than in Europe. As incremental production is focused on the US to meet a shortage in supply, it will help boost CSL’s overall margins.

Outside of the growth stocks, Flight Centre (FLT, +6.4%) emerged as an unlikely outperformer over the week. It initially fell on another management downgrade before bouncing back. Like NEC, the softer economic patch is weighing on demand. However in FLT’s case the market seems to want to look through near-term weakness, while the hit to NEC’s advertising in being capitalised into the outlook.

Elsewhere, James Hardie (JHX, +4.8%) continued to ride its recent strong result, possibly as quant-based earnings momentum strategies chased the stock in the wake of its recent upgrades.

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