Weekly market review
Written and accurate as at: Sep 14, 2017 Current Stats & Facts
The S&P/ASX 300 shed -0.5%, with a poor week for financials dragging down an otherwise reasonable return from the rest of the market.
ANZ (ANZ) fell -1.9%, leading the other banks lower as Commonwealth Bank (CBA) lost -1.6% and Westpac (WBC) and National Australia Bank (NAB) shed -1.3% and -0.8% respectively. However it was the insurers and diversified financials who were hardest hit. Insurance Australia Group (IAG) (-4.7%), Suncorp (SUN) (-2.7%), QBE Insurance (QBE) (-1.8%) and AMP (AMP) (-3.5%) all fell in response to a combination of concerns linked to the devastation from hurricanes Harvey and Irma in the south eastern United States. In the first instance, these falls reflected the expected surge in claims on the US insurance sector as a result of the hurricane damage. However this largely sympathetic fall in local financials was exacerbated by the notion that the near-term economic effect may be so detrimental as to delay expected interest rate hikes by the US Fed. This saw bonds rally and US 10 year Treasury yields fall back to 2.05%, further undermining sentiment regarding financials.
Lower bond yields also weighed on the US dollar, which compounded the weakness for currency sensitive financials such as fund manager Janus Henderson (JHG) (-4.8%) and Macquarie Group (MQG) (-4.3%). MQG has been successful in maintaining its earnings in the last two years, largely defying market expectations and shrugging off occasional bouts of share price volatility linked to a spike in fears around market liquidity. Its success has been due, in large part, to the change in strategy from a primarily transaction–driven investment banking model to one more reliant on annuity-like asset management revenue.
Bonds have thus far defied predictions made amid the euphoria of the “Trump trade” at the turn of the year that US 10 year yields would quickly rise above 3%. Apart from a brief flirtation with 2.6% in March, they have largely tracked between 2.2% and 2.4% for much of the year. This has allowed some of the bond-sensitive Australian stocks to partly recover ground lost in H2 2016, given the significant difference that remains in their dividend yield versus bonds. Infrastructure stocks, for example, have delivered double-digits gains year-to-date, versus a flat return for the ASX 300. That said, it has been interesting to note that A-REITs, in aggregate, have not participated in this rebound; the S&P/ASX 200 A-REIT index is down -3.6% for the year to date. In this case, structural concerns over the retail sector are trumping the bond yield thematic. Index heavyweights Scentre Group (SCG) (-12.3% ytd), Westfield (WFD) (-15.6% ytd) and Vicinity Centres (VCX) (-9.7% ytd) have dragged A-REITs down, overwhelming otherwise decent performance from the industrial and office-focused stocks such as Goodman Group (GMG) (+16.3% ytd). The retail underperformance is founded in sluggish consumer spending, punctuated by flares of concern over the arrival of Amazon in Australia. The degree of uncertainty inherent in the “Amazon effect” is evident in stock price volatility; last week, for example, saw SCG and WFD bounce +4.4% and +2.4% respectively following a weaker month. We acknowledge the uncertainty, but continue to believe that it may drive bouts of mispricing which could prove to be lucrative investment opportunities in the coming months.
Resources were mixed for the week. BHP (BHP) (-0.7%) and Fortescue Metals (FMG) (-0.5%) were a touch softer, while Rio Tinto (RIO) (+1.2%) and South32 (S32) (+4.7%) made gains. Key commodity prices gave back some of their recent gains which, in combination with some disappointing Chinese import data and the strong run from miners, could see some short-term weakness. Nevertheless, we remain reasonably sanguine on the outlook for resources, with prices underpinned by supply discipline and ongoing Chinese capacity reduction. Oil bucked the trend and ended the week higher, helping Santos (STO) (+2.2%) extend its recent strong run.