Weekly market update
Written and accurate as at: Apr 09, 2018 Current Stats & Facts
The S&P/ASX 300 gained +0.5% last week. Tit-for-tat trade threats between the US and China dominated headlines, getting the market off to a weak April start as China responded to President Trump’s proposed tariffs with a range of their own, including on the politically sensitive soybean sector. The recovery which followed suggests a consensus belief that the rhetoric is masking negotiations which will reach a mutually acceptable conclusion. That said, while both sides continue to talk on a range of issues – most notably on North Korea – Chinese authorities have explicitly stated there is no back-channel communication on tariffs or trade reform. The US came out with a raft of additional proposals later in the week which saw US equities sell off on Friday.
At this point we believe that some sort of negotiated outcome is the most likely result. But in the interim both sides will bluff the other, trying to convince them that they are willing to bear pain, so we are likely to see further provocative statements –- and further stock market volatility. Without any timetable, periodic surges of trade-related concern could persist for weeks or even months before we see a conclusion. We remain mindful of the risk that this issue presents – however at this point we do not believe we are witnessing a significant threat to global trade and as such would treat bouts of weakness as buying opportunities. For all that, Chinese authorities are less sensitive to stock market volatility than the Americans, and they remain very focused on growth as the Communist Party looks to entrench stability and legitimacy as the economy evolves. We believe they would be reluctant to imperil economic momentum at such a sensitive time, rendering them more likely to try and arrive at some negotiated outcome.
Softer-than-expected payroll data following February’s surge also weighed on US equities late in the week. We would not read too much into this – with the economy operating at close to full employment it is difficult to deliver large gains each month. We see wage inflation as a more important factor – this came in a touch higher and suggests the labour market remains firm and supportive of consumption.
Increases on the ASX were broad-based with resources (+1.0%), A-REITs (+1.6%) and Financials ex-REITs (+0.6%) all ending in positive territory. Navitas (NVT) (-6.5%) was one of the worst performers after it released enrolment data for its University Partnerships division, with 3% growth for first semester coming in below consensus expectations. Changes to student visa rules have made it easier for international students to study in Australia, which tends to favour the large universities which deal with students directly, rather than the middle-ranking universities in NVT partnerships. Tabcorp (TAH) (-3.9%) was also down, as investors expressed concern over speculation that it continues to lose market share in wagering, providing an additional challenge for a company already attempting to digest the recent acquisition of Tatts. Elsewhere, Nine (NEC) (-2.6%), Dominos Pizza (DMP) (-2.6%) and AMP (AMP) (-2.6%) all drifted lower, although with no new material news.
LNG producer Santos (STO) (+16.0%) provided the week’s big news story as it received another takeover offer from US private-equity-backed Harbour Energy. The bid is all-cash, but indicative, conditional and subject to due diligence. At $6.50 it comes at a 30% premium to the previous closing price.
Elsewhere, Scentre Group (SCG) (+2.9%) announced a buy-back, however the fact that it moved up broadly in line with the sector – with Westfield (WFD) up +2.5% – suggests the market is not treating it as material. A2 Milk (A2M) (+5.8%) rallied as management dismissed the concerns over increased competition which had seen the stock sell off in the previous week. The banks bounced off their recent lows, with Commonwealth Bank (CBA) up +1.6%, while BHP (BHP) gained 1.5% – despite a further fall in the iron ore price – as the market gained increased confidence in the sale of its US onshore gas business. Qantas (QAN) was also among the best performers, up +3.8% despite the lack of any material news.