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Weekly equites note

Written and accurate as at: Jun 08, 2017 Current Stats & Facts

The rotation from cyclicals to defensives maintained its momentum into last week, and saw the S&P/ASX 300 finish the week 0.6% higher. The dial was moved away from resources towards bond-sensitives, with A-REITs posting a gain of 1.2% and Energy down -2.2% (WPL -2.7%, STO -7.0%). Industrials also added 2.2% over the week and was the best performing sector with both Sydney Airport (SYD, +5.8%) and Transurban Group (TCL, +3.1%) benefiting from the rotation thematic. On the other hand, the weaker oil price continued to weigh on the energy sector. The extension of OPEC’s current quotas was largely expected and did nothing to allay the volatility in a week which saw the oil price slide 4.3%, despite a slightly better inventory data during the week.

The May US payroll data released on Friday was also soft, with 138k new positions created against a 185k forecast. More importantly, the previous month’s numbers were revised downwards significantly, which in total averaged 121k over the past three months. Wage growth also disappointed at an annualised rate of 2.5%. Taking all this together, the market has become more sceptical about the strong momentum that stemmed from Trump’s election and his pro-growth rhetoric from last year. That said, this hasn’t changed expectations on the rate hike in June from the Fed, with the market pricing in around a 90% chance of a hike. We believe this is tied to the fact that the broader measure of the US employment, the under-employment rate, is still improving, which reached its cyclical low of 8.4% lately.

Stock-wise, Henderson Group (HGG, +11.5%) was the standout last week. The share price of the asset manager rallied despite a lack of any new information from management. There was some slightly improved flow data; however this had been previously communicated.  Metcash (MTS, +6.9%) also bounced back strongly, as concerns around the IGA retailers’ underlying sales trend dissipated. This confirms our previous view that the sell-off of Metcash was overly done by the market. Qantas (QAN) was up 4% as earnings momentum continues.

Domino’s Pizza (DMP) was down 7.1% last week, after delaying the release of its own investigation report on franchisees until December. A report from Deutsche Bank that suggests returns of Domino’s franchisees here are lower compared to franchisees in other markets may have also weighed on DMP’s share price. In our view however, Domino’s franchisees are better off on a net basis given the much higher sales density they are benefiting from locally. TPG (TPM, -6.8%) and Vocus (VOC -6.1%) also got sold off last week, as the market rotated away from small telecom stocks.

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