Weekly market update - 10th of May 2021
Written and accurate as at: May 10, 2021 Current Stats & Facts
While headline Australian index moves have been muted recently, we see material shifts within the market. This is fertile ground for active investors. In addition, inflationary pressures continue to be front of mind for investors. As a result, we see rotation away from long-duration deflationary trades such as growth and low volatility/quality stocks towards shorter-duration inflationary trades like commodities and value stocks. This supports Australian equities relative to markets such as the US, given our higher weighting to commodities and value stocks.
The S&P/ASX 300 was up 0.75% last week, and the S&P 500 gained 1.3%.
Covid and vaccines
The tragic situation in India continues to hold attention and emphasises the danger that the virus and its mutations still pose. Elsewhere there was little deviation from recent trends. New daily cases continue to decline in the US. The EU finally appears to be getting on top of recent outbreaks, demonstrating the effectiveness of lockdowns. EU hospitalisations are also improving rapidly. With China, the US and the EU showing signs of control, many expect the recovery in global growth to remain intact.
More than 60 per cent of Israelis have had at least one dose of vaccine. Vaccination rates remain strong at 45-55%, though there is a question of whether this success rate will replicate this in other countries.
The rate of UK vaccinations started to slow after 45% had a jab. The US is at this point now. Surveys suggest about 20% of the population still strongly resists vaccination. There is now chatter around inducements to encourage the “wait and see” cohort. This issue has implications for the pace of re-opening and needs to be watched.
Economics and policy
The big news was the large miss in US payroll data, which showed 266,000 new jobs versus an expectation of 1.1 million. This figure is at odds with all indications for labour demand. The unemployment rate ticked up to 6.1%, the first increase since April 2020. Many are pointing to a “crowding out” effect of government stimulus. There is a sense that people have money in their pockets and are delaying job hunting until after summer, confident demand will still be there.
On the positive side, the participation rate increased by 0.2% to 61.7%. Significantly, both the average workweek increased to 35 hours and average hourly earnings increased by 0.7%, versus an expectation of no growth. This is especially remarkable given the big job increases came in lower-paid parts of the economy such as leisure and hospitality. Trends in wage growth are important to watch, given their importance for the inflationary pulse.
From a Fed perspective, this data stumble inserts a gap into the “string” of strong jobs reports that Fed Chair Powell says is needed to constitute substantial progress toward his goals. This is likely to calm market fears around balance sheet tapering for the moment.
Domestically the federal government flagged that the Budget would continue to be expansionary, with no desire to tap the brakes yet. Spending is likely to be highly targeted, including a focus on social outcomes. This is in line with a shift in thinking evident in other Western governments.
Markets
Commodities were strong last week, reflecting the focus on inflation. Iron ore rose another 13.2% to US$211 per tonne. Copper gained 3.1% and Brent crude 1.8%. The buoyancy transferred into equity markets seeing strength in the Materials (+3.9%) and Energy (+1.9%) sectors while Information Technology (-9.9%) sold off.
This thematic rotation — coupled with the buy-now-pay-later sector starting to cycle the high base effect of sales last year — saw Afterpay (APT) fall (-18.9%). Fellow WAAAX stocks Appen (APX, -21.5%), Altium (ALU, -15.0%) and Wistech (WTC, -10.2%) rounded out the ASX 100’s worst performers last week. Our preferred name in the space, Xero (XRO), held up better than the sector but was down 5.5%.
The health care growth names were also underperformers. Fisher & Paykel Health Care (FPH, -6.5%) and Ramsay Health Care (RHC, -6.5%) were among the weakest. ResMed (RMD, -5.0%) is likely still feeling the impact of a high base effect given the strength in ventilator sales this time last year.
CSL (CSL, -1.2%) bucked the broader trend in health care. However, uncertainty over the impact of lockdowns on plasma collection has weighed on the stock over the past year.
Travel stocks took a hit after fresh lockdown concerns in Sydney. Sydney Airport (SYD) was down 4.4%, and Qantas (QAN) lost 3.6%. This was against the backdrop of the Covid situation in India, which suggests international travel is likely to remain complicated for longer than many expected.
QBE Insurance (QBE, +7.8%) was the best performer in the ASX 100. It bucked the trend of recent halves and delivered an AGM update that did not downgrade expectations. Instead, management highlighted the supportive environment for growth in premiums, up 13% in the past year. IAG (IAG, +4.7%) and Suncorp (SUN, +4.5%) were also strong.
Westpac (WBC, +4.4%), ANZ (ANZ, -3.4%) and National Australia Bank (NAB, +0.5%) all reported last week. Results were generally in line with expectations and confirmed the more benign environment. The question now is whether the banks can continue to perform without the tailwind of rising yields in the near term. The outlook for costs is a key question in this regard. Westpac has far more scope here, and management grasped this nettle, flagging $1.5 billion of planned reductions to bring the cost base back in line with peers.
Elsewhere resources reflected commodity price strength in the outperformers as investors sought inflation hedges.
Copper miner Oz Minerals (OZL) gained 7.4%, contractor Worley (WOR) was up 7.3%, and rare earth play Lynas (LYC) moved ahead 5.5%. The diversified majors BHP (BHP, +5.0%), Rio Tinto (RIO, +4.9%) and South 32 (S32, +4.2%) all gained ground.
On the M&A front, Apollo upped its initial bid for Tabcorp (TAH, +2.4%) from $3 billion to $3.5 billion. There are now multiple suitors circling with credible bids.
As of Monday morning, Star (SGR, -1.8%) had also entered the ring with a merger proposal for Crown (CWN, -0.8%). There is a logic to the proposal including significant synergies; however, several prominent analysts suggest the bid may be too cheap.