Weekly market update - 3rd of May 2021
Written and accurate as at: May 03, 2021 Current Stats & Facts
We saw strong US earnings last week, particularly in technology. The Fed also struck a dovish tone, which may spell the end for the recent rally in bonds.
However equity markets confirmed that we remain in a consolidation phase — as flagged in last week’s note. The S&P 500 was flat and the S&P/ASX 300 lost 0.48%.
The market is focusing on the narrative of peak growth in the US. While this may mean some very early cyclicals have reached their top, we believe this narrative underestimates the likely duration of economic strength.
This is supportive of stocks with exposure to these longer-dated trends, such as housing and materials demand — and those still heavily discounted due to the impact of Covid.
Covid and vaccines
The awful situation in India emphasises the risk that Covid still poses when it is unchecked.
While this dominated Covid-related news last week, it is increasingly evident elsewhere that vaccines are working incredibly well. There is debate about the efficacy of particular vaccines and the duration of protection. But ultimately vaccines are designed to keep people out of hospital and relieve pressure on the healthcare system. They’re doing this successfully.
In terms of hospitalisations, the US avoided a Spring Break surge. The EU is turning a corner. Hospitalisations in the UK and Israel have dropped to their lowest levels since the start of the pandemic.
If the US follows the same path as Israel we should see case numbers fall sharply in the next month. This would re-ignite the re-opening trade and could see bond yields start to climb again.
We are experiencing further declines in new first vaccine doses in the US. As we flagged last week this should free up vaccine supply for other countries.
Data on Novavax’s larger trial should be published in the next few weeks as part of the process to receive approval. The trial had some issues with participants taking other vaccines as they became available, distorting the Novavax data. The terms of the trial have now shifted. This is important for Australia, which has signed supply agreements with Novavax.
Curevac is also due to publish data for its vaccine. Its trial has also been run in Latin America, which means it will provide the first data on an mRNA-based vaccine against the more problematic variants.
Economics / Policy
US Q1 GDP grew 10.4% in nominal terms and 6.4% inflation-adjusted. This nominally takes it back above the pre-Covid level. In real terms, it is almost there.
This huge surge in growth has been driving substantial earnings beats in the US reporting season.
It came despite a large drawdown on inventories, some of which is unwinding excess product built up in 2020. However incredibly strong demand also played a role. Apple noted that its revenue would have been US$3-4 billion higher without constraints on semi-conductor supply.
The second quarter is expected to be even stronger, with nominal GDP expected to rise 16%.
This is helped by strong personal income numbers, supporting consumption. The latest round of stimulus has boosted personal income to about 30% higher than before Covid. This will fall back given the stimulus cheques have been sent out. But it has helped build savings, which could fuel further consumption growth over a prolonged period.
This combination of re-building inventories, consumption fire power and higher levels of investment due to the infrastructure bill and a move to clean energy all support our longer-duration growth perspective.
The other key data point was the US Personal Consumption Expenditures (PCE) index, which showed the first signs of inflation building up. The year-on-year change was 0.9% in 2020. It was 1.8% in March 2021 and is forecast at 2.5% in April. That said, a lot of this relates to bottlenecks in the economy. The focus for more persistent inflation will be wages, which at this point remain under control.
The Fed meeting was interesting. Powell acknowledged strong improvement in economic momentum, but was very relaxed regarding inflationary signals. At this point the Fed is expecting near-term inflationary signals to be transitory.
Biden released his US$1.8 billion American Families Plan. All elements had been pre-reported. Expectations are low in regard to how much gets through.
In Australia there was lower-than-expected inflation data. On face value this supports the RBA position on holding rates at 0.1% for years. But the bulk of the beat came from lower housing-related inflation due to government stimulus, which is unlikely to be sustained.
The other important message out of Australia was the Treasurer providing a framework for fiscal policy which was more explicitly expansionary. It indicated that in the near term we should expect more stimulus in the upcoming budget, partly funded by the boom in fiscal receipts as a result of high commodity prices and stronger growth.
We also saw stronger credit growth in housing coming through. This will help banks, which report this week.
Markets
Consolidation remains the theme, but the underlying risk to bonds is building after the recent rally.
US earnings have been very strong, but with limited price reactions. This highlights concern over peak growth and crowded trades.
There is an interesting distinction in the market between reflation and re-opening trades. The former relates to materials and investment-leveraged stocks, the latter to the industries that were damaged by lockdowns and could not trade.
The former has performed far better and is far better held. This leaves potential rotation towards the re-openers once confidence on vaccine availability builds.
One of the big themes of US reporting season was inflation. This was reflected in the benefits commodity producers are getting and the input price pressures other companies are seeing.
There have been parabolic rises in commodities such as lumber, corn and steel among others. This must be watched in terms of margin pressure.
Over the past month technology has led the Australian market, driven by the rebound in bonds. Materials continued to see strength on earnings upgrades. Utilities and staples lagged even as the market rotated back to defensive bond sensitives, given a lack of positive earnings momentum.
Beach Energy (BPT, -23.7%) was the worst performer in the ASX 100. Management downgraded the reserves for its Western Flank project. While only a 5% drop in overall reserves, it is their highest margin asset and the downgrade is closer to 20% in terms of the company’s valuation.
JB Hi-Fi (JBH, -7.7%) announced the surprise departure of the CEO to join Premier (PMV). There is risk that this implies little further upside in JBH. That said, we are encouraged by the appointment of the previous CEO — who was responsible for the turn-around of The Good Guys — into the role. JBH’s sales numbers remain solid, though they are starting to feel the base effect of last year’s strength.
Woolworth’s (WOW, -7.0%) sales update highlighted slowing momentum. Its premium over Coles (COL, +3.9%) closed, driven perhaps by the latter’s narrative that the trend to more local shopping is unwinding. This also hit Metcash (MTS, -7.3%). At this point we see little evidence in the numbers to support this case.
ResMed’s (RMD, -3.5%) result disappointed. It is another COVID winner seeing earnings unwind — which the market knew. But the stock was still down because underlying mask growth was light, as was cash flow.
Downer’s (DOW, +4.5%) strategy day was well received. There was little in the way of news, but overall it emphasised how the business is shifting to an urban services focus with lower capital intensity. It did highlight some growth areas such as defence. Management announced an on-market buy-back.
Viva Energy (VEA, +8.6%) gave a generally positive market update. Momentum on fuel volumes is improving. There is still anticipation of government support for its refining business.
Fortescue (FMG, +4.3%) rose despite disappointing quarterly sales. The discount for its ore to higher grade supply has come through sooner than expected given high steel and coking coal prices. There is scope for further cost increases at its trouble Ironbridge project. Nevertheless a high iron ore price and 20% free cash flow yield is winning the day at this point.
Finally, Tabcorp (TAH +2.9%) saw the bid for its wagering business form Entain increased from $3 billion to $3.5 billion.