Weekly equities note
Written and accurate as at: Feb 13, 2017 Current Stats & Facts
Australian equities gained 1.8% (S&P/ASX 300) in a week which saw the recent swings between ratesensitives and cyclicals persist. Economic data from the US suggested we are in a ’Goldilocks’ environment of decent growth without inflationary pressures, which should be broadly supportive of equities. The lack of inflation pressure saw rate-sensitive stocks outperform, on the assumption it relieves pressure on the Fed to raise rates at their March meeting. Hence the S&P/ASX 200 AREIT index gained 2.7%, while infrastructure stocks such as Transurban (TCL) (+5.1%) and Sydney Airport (SYD) (+4.8%) outperformed.
This also saw resources underperform for much of the week, although this began to reverse on Friday as President Trump flagged a major announcement on tax reform in coming weeks, which revived pro-growth and pro-cyclical sentiment. The S&P/ASX 300 was up 0.2% for the week, but this included a surge from a poor start to the week. These moves demonstrate the political-driven volatility currently present in markets and the importance of not having too large a thematic position within portfolios at this point.
Cimic Group (CIM) (+10.2%) – previously known as Leightons – was among the best performers in the market following a decent result, while Bluescope Steel (BSL) (+9.5%) built on recent gains as steel spreads continued to remain supportive. There were also outperformers among growth stocks, including TPG Telecom (TPG) (+7.1%), Vocus Communication (VOC) (+6.4%) and Dominos Pizza (DMP) (+4.5%).
Carsales.com (CAR) gained 7.4% following a result which was nothing dramatic, but which addressed the fears implied by the stock’s weakness leading into it. There were signs of stabilisation in their auto financing business, following a period in which it has eaten in to earnings, while the core Australian auto listing business continues to generate high-single-digit growth.
AMP (AMP) (+3.2%) also outperformed on the basis of an unexciting result which did enough to convince investors it is on the right track. The issues dragging on life insurance seem to have stabilised, while their recent reinsurance deal freed up some cash for return to shareholders. Management have flagged cost reductions, although a degree of confusion over their quantum has muted the investor reaction.
Strong electricity demand coupled with higher power prices saw AGL Energy (AGL) (+5.2) deliver a strong result. Supply legislation has helped force prices higher, but their risk going forward is the politicisation of power prices given high-profile shortages in recent weeks.
In Financials, Macquarie Bank’s (MQG) (+1.9%) quarterly trading update maintained their guidance for flat profits for the full year (end March). The market expressed some scepticism given they are behind the required ’run-rate’ to do so, however our analysis suggests they are on the right trajectory, supported by strong M&A flow and commodity price volatility, to deliver on expectations. Elsewhere, Commonwealth Bank (CBA) (+1.5%) announced they are pulling back on investor lending and subsidiary Bank West is no longer allowing for the benefit of negative gearing to be included as part of their means test. This is a marginal positive for banks, suggesting the competitive environment in mortgage lending may be easing. Furthermore, APRA have indicated they will no longer be waiting for the Basel guidelines on capital provisioning and will instead be issuing their own rules. While there is uncertainty over their form, it could ultimately remove the banking sector form their limbo of recent times with regard to their ultimate capital requirements.
South32 (S32) (-6.6%) was the major underperformer for the week, its divergence from stocks such as Rio Tinto (RIO) driven by its exposure to coal and manganese, which were weaker than iron ore and copper later in the week.
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