Weekly market review
Written and accurate as at: Mar 23, 2018 Current Stats & Facts
The Australian share market held reasonably flat for the week. Resources staged a rebound, gaining +2.1% following a weak period, while listed property also finished up. The major banks all fell between -2.6% (Commonwealth Bank (CBA)) and -1.4% (ANZ (ANZ)) – – as the Royal Commission pursued an aggressive line of questioning. The fact that the banks were not among the week’s worst performers is consistent with the amount of negative news already reported, with bank valuations at historically low levels. The Royal Commission’s ultimate recommendations have created a high degree of uncertainty in the sector. The Commission's impact on lending standards and the RBA's decision to raise interest rates has become topical.
The week’s biggest news was the announcement that Wesfarmers (WES) would de-merge and list Coles. This moves reflects the board's view that the limited growth outlook for Coles, which accounts for ~60% of WES’s capital and 35-40% of its earnings, is acting as a brake on the group’s growth profile as a whole and limiting the ability of new M&A deals to have a materially accretive effect. The move addresses a key issue for management and opens the door to future M&A activity. The stock gained +7.0% as the market welcomed the announcement, while Metcash (MTS) fell -5.4% on the news that WES had lured the head of their IGA division to be CEO of the new listed company.
The crucial question is what does this mean for the supermarket industry structure in terms of competitive intensity and grocery price discounting. Comparing the historical approach of the outgoing and incoming heads of Coles, it may suggest that the decline in grocery price deflation may continue, which would relieve some pressure on all players in the supermarket industry.
Gold miner Newcrest Mining (NCM) (-8.6%) was among the week’s worst performers, following news that seismic activity at its best asset, the Cadia mine in the NSW Central West, saw the wall on a tailings dam collapse. The outflow was captured by another tailings dam, with no environmental impact. It may prompt a review of operations to determine whether the mining method used is provoking the seismic events, given this is the second event in as many years. Tabcorp (TAH) (-5.4%) was also a material underperformer as industry data suggested that it continues to lose market share to on-line betting companies based out of Darwin. It is important to note that the addition of a point-of-consumption state tax this year could help level the playing field for TAH versus the on-line competition. Elsewhere, both Insurance Australia Group (IAG) (-3.5%) and AMP (AMP) (-3.3%) gave back some of their recent gains.
South32 (S32) (+5.6%) was among the best of the resource stocks, while Iluka Resources (ILU) (+3.5%) and BHP Billiton (BHP) (+3.0%) also outperformed.