Weekly Market Review
Written and accurate as at: Nov 06, 2017 Current Stats & Facts
The market retained October’s momentum into the first week of November, with the S&P/ASX 300 up +1.0% in a reasonably broad-based gain. Resources led the way (S&P/ASX 300 Metals + Mining +3.6%), while AREITs (S&P/ASX 200 AREITs +0.6%) and small caps (S&P/ASX Small Ordinaries +1.5%) also made decent headway. Performance in financials was mixed, as the bank AGM and reporting season continued, while there was some weakness in retail. Bond yields came off slightly in the US, and more so in Australia, on the sense that while the underlying economy remains OK, there is not enough impetus to support an aggressive round of rate hikes. In this vein, US wage growth data came in softer than expected on Friday.
Regional banks Bendigo & Adelaide Bank (BEN) (-7.4%) and Bank of Queensland (BOQ) (-6.2%) were among the market’s worst performers last week, as the former indicated at its AGM that a pick-up in competition could offset some of the recent gains from mortgage repricing, providing a headwind to margins – which had shown some signs of improvement over the last half. BOQ’s fall was largely in sympathy. The market did not react well to National Australia Bank’s (NAB) (-2.6%) restructuring programme, announced at their annual result. While cash profits were largely in line with the market’s expectations, the announcement of a $1.5bn increase in spending over three years – in a combination of above and below the line charges – which will leave the bank’s cost profile largely unchanged in terms of 2020 market expectations, is a disappointing result. The bank retains its dividend reinvestment plan in order to meet its capital targets, and will need to see bad and doubtful debts (BDDs) remain benign if they are to avoid pressure on their dividend.
Outside of financials, packaging company Amcor (AMC) fell -6.5% as management guided to a softer environment at their AGM. Part of this was down to higher input costs – particularly in resin – which should reverse over time. However they also mentioned the confluence of specific issues in some of their emerging market businesses, which are crucial in driving the company’s growth.
JB Hi-Fi (JBH) (-3.2%) slipped, along with most of the retailers, after Myer’s (MYR) (-7.0%) quarterly sales figures disappointed, while there is speculation that an announcement of Amazon’s strategy for Australia may be imminent. Domino’s Pizza (DMP) was off -1.9% on media noise about the effect of wage increases as its existing employee benefits agreement was terminated. This issue was well flagged, although in combination with a slightly tougher competitive environment and slowing growth in the takeaway food market, DMP’s upcoming AGM will be interesting in terms of management’s guidance.
Telstra’s (TLS) (-1.4%) strategy day added little in terms of insight. They outlined an aggressive plan on costs, although the market remains sceptical at this stage. The company also said that mobile revenue has tended slightly negative in Q1 FY18, contradicting the signs of improvement cited at their annual result. Telstra certainly offers reasonable value at these levels – and a pre-franking yield of 6.3%.
Oil Search (OSH) (-2.0%) was a notable underperformer given that its peers did well as the oil price gained +2.5% for the week; Woodside Petroleum (WPL) was up +6.6% and Santos (STO) +4.8%. The divergence was down to some puzzlement at OSH’s announcement of an acquisition of the rights to develop an oilfield in Alaska’s Northern Slope region. At $400m it is not a large deal, but will require significant capex to start pumping, in a time when the company has its hands full with further development of its PNG LNG assets.
Outside of the other oil stocks, junior telcos Vocus Group (VOC) (+6.2%) and TPG Telecom (TPM) (+6.2%) both bounced on little more than some speculation that pressure on broadband service providers may see some changes in the industry. Mining services company Downer EDI (DOW) (+4.5%) reacted well to the absence of any negative surprises flagged at the AGM around its recent Spotless acquisition. The strong performance in resources was driven by the majors: Rio Tinto (RIO) gained +4.5% and BHP (BHP) +4.1% as they continued to bounce back from September’s weakness.
Qantas (QAN) gained 4.2%, with a sense that this was in response to a market over-reaction to company’s guidance in the previous week, when the stock was off -6.7%.