Weekly Market Review
Written and accurate as at: Jul 17, 2017 Current Stats & Facts
The ASX/S&P 300 gained 1.1% in a week which remained reasonably quiet ahead of the reporting season.
Qantas (QAN) was among the weakest stocks, falling -5.7%. There was nothing on the newswires to prompt this divergence from its recent strength and there is a sense that there may be some profit taking given the stock remains up over 75% for 12 months, even after this fall. This, too, maybe the case for health care stocks CSL (CSL) (-2.4%) and Resmed (RMD) (-0.2%) which have made decent gains and underperformed despite the absence of any negative news. REITs continued their recent run of underperformance as Westfield (WFD) (-2.1%), Charter Hall Group (CHC) (-1.5%) and Stockland (SGP) (-1.2%) led the S&P/ASX 200 AREIT index down -0.7%.
Chemical company Incitec Pivot (IPL), which manufactures fertilisers and explosives gained 7.0%. The stock has been under the pump since the start of the year, reflecting seasonal lows in the price of both urea and ammonium nitrate (AN) based fertilisers. There seems near-term weakness to the company’s leverage to improving prices, which is supported by a strong cost reduction programme and the recent completion of their new AN plant in Wagaman, Louisiana, servicing its North American market. Last week’s rebound came on the back of a broker upgrade recognising that seasonal trends are bottoming and that demand is picking up in key fertiliser markets such as India.
Metcash (MTS) continued its strong-but-volatile run since reporting, gaining +5.6%. It has now well and truly regained the losses endured pre-results on some market fears that competitive pressures would result in a double-digit loss in sales revenue. Elsewhere, the retailers also did well after a period of sustained pressure linked to market fears about the effect that Amazon’s entry may have on the brick-and-mortar stores in Australian malls and streets. JB Hi-Fi (JBH) gained +6.8% while Harvey Norman (HVN) was up +7.3%)
The banks helped lift the market. Westpac (WBC) did best, up +2.7%, while Commonwealth Bank (CBA) (+1.2%), National Australia Bank (NAB) (+1.2%) and ANZ (ANZ) (+0.8%) all made gains. This week will possibly see the release of the long-awaited paper from the Australian Prudential Regulation Authority (APRA), which oversees the financial industry, that will provide further guidance on what the banks must do in terms of capital reserves in order to meet the regulator’s goal of an “unquestionably strong” financial system. The lack of clarity over whether banks would be forced to raise more capital to bolster their reserves has overshadowed the sector for some time, as the next iteration of international Basel Accords – first mooted in 2014 - have failed to materialise and APRA have decided to go it alone in setting their requirements. At this point the Big 4 banks are near 10% Core Tier 1 capital reserves; the stock price reaction to the new APRA paper will be driven by the size of the target and the degree to which the market believes it can be achieved organically via retained earnings, asset sales and dividend reinvestment programmes as opposed to an equity raising.