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Weekly Market Review

Written and accurate as at: Nov 20, 2017 Current Stats & Facts

The S&P/ASX 300 Price Index lost 1.2% over the week.  There were some early signs that the US market is rolling over from the momentum that had been building recently on the back of strong corporate earnings, and solid economic growth globally.  It wouldn’t be surprising for the market to see some further consolidation from here. In terms of the week’s losers, Resources were down 2.1%, as both Metals & Mining (-2.1%) and Energy (-2.0%) pulled back somewhat while Real Estate (-1.8%) also finished the week firmly in the red. It was a relatively quiet week on the macro front: the oil price gave back some of its recent gains as increasing US inventories and wavering demand forecasts weighed on sentiment. Copper also retreated moderately; whereas iron ore and bonds in general were somewhat flat.

Turning to the stock specifics, mining services and engineering firm Downer (DOW) finished the week 5.7% lower – the stock had run relatively strong in the previous weeks, and the sentiment shift in Resources saw DOW’s share price decline. Woodside Petroleum (WPL) also lost 5.5%, as Royal Dutch Shell sold out its remaining c. 13%, or $3.5bn equivalent holding in the former at a 3.5% discount – the stock finished the weak lower than the offering price nevertheless.  In addition, Orica (ORI) (-5.2%) continued to decline over the week, following the poor FY17 results released earlier in the month. The negative impact from both increasing business costs and price resets on new contracts (to a lower level), was worse than expected. Some Property Trusts also posted some losses, including Mirvac (MGR) (-4.3%) and Dexus (DXS) (-3.6%).

Elsewhere, JB Hi-Fi (JBH) (-3.1%) sold off once again as a result of speculation around Amazon’s much anticipated launch into Australia – we remain sceptical about whether Amazon will be able to launch its full service just weeks before Christmas. Whilst we acknowledge that Amazon’s arrival in Australia will intensify the competition landscape for domestic retailers, we believe the market is underestimating the obstacles Amazon has to overcome (and the time it takes) – including the lack of a proper distribution centre and the geographical scale of Australia should Amazon decide to introduce Prime – whilst at the same time overestimating the negative impact Amazon will bring in the short-term. In our opinion, Amazon’s arrival is more likely to squeeze out the much weaker/smaller players, than the likes of JBH which has the scale and capability to hold its ground. The lost market share of these smaller players is also more likely to be shared between Amazon and the large retailers, which will help to offset some of the headwinds on margins. The thriving business of Best Buy on Amazon’s home turf in the US is a living example of how the highest quality traditional bricks-and-mortar stores have been able to co-exist alongside the e-commerce giant.

On the other side of the tally board, Santos (STO) bucked the trend within the Energy sector, and finished the week 11.6% higher. Speculation around a revised takeover offer from Harbour Energy bolstered investor sentiment, despite the lack of any official announcement from either party – Santos did however reveal that it had some contacts with the suitor’s principal, Linda Cook, back in August.  Tabcorp (TAH) (+8.5%) was also up over the week with its scheduled merger with Tatts Group was given the greenlight again by the Australian Competition Tribunal on Friday.  While nothing new was revealed the approval was received well by investors. Furthermore, Computershare (CPU) (+7.6%) had its AGM during the week, which was positive but revealed little new information; whereas Dulux (DLX) (+7.5%) also reported its FY18 results and saw markets respond well despite an expected downgrade due to higher input prices. 

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