Weekly market update
Written and accurate as at: Apr 30, 2018 Current Stats & Facts
The Australian market rose +1.4% last week, driven largely by stock-specific factors given there was little in terms of material developments on the macro side. There was some excitement as US 10 year bond yields broke 3.0%, but then subsequently subsided again, while the Aussie dollar continued its recent slide to finish below US76c. Copper fell slightly, but commodity prices were broadly stable.
There was some market chatter about the potential for significant personal income tax cuts in the budget. We think that any such cuts could act to offset the recent headwind of the Medicare levy, however there are additional issues which limit their ability to stimulate retail spending. The first is the oil price, which continues to creep higher – particularly in AUD terms – with pump prices crimping the potential for further discretionary spending. The second is the scale of household debt – an issue highlighted by UBS as a factor in their Westpac (WBC) downgrade. We believe that there were some questionable assumptions in the UBS piece, nevertheless is served to remind people of the issue in the context of banks having to reassess their cost-of-living assumptions as part of responsible lending requirements. As the assumptions for Melbourne and Sydney are increased, people may find that they can borrow less. There will also be less appetite for mortgage refinance. The net effect will be further compression on people’s ability to spend money – another genuine headwind for consumption. This also supports our view that Australian rates are unlikely to rise for some time.
Boral (BLD, -13.1%) was the market’s worst performer as management downgraded earnings expectations for both the Australian and North American business, citing adverse weather in both instances, as well as some small operational issues. Despite management’s focus on the weather, we think there are three underlying issues that the market is focusing on. The first is whether a reduction in coal-fired electricity production in the US means that BLD’s ability to grow margins in their flyash unit is lower than first thought. The second is whether the other smaller parts of the Headwaters acquisition in the US are also proving more problematic than anticipated. The third issue is the surprising lack of leverage to the Australian construction cycle – possibly as a result of issues with the Western Australian brick business.
AMP (AMP, -6.5%) also continued to slide, under pressure from the revelations from the Royal Commission which claimed the roles of the Chair and General Counsel. The management change we have seen is probably a necessary first step in this process, however there is still scope for significant kitchen-sinking and rebasing of expectations before any strategy for recovery under new management.
Elsewhere, we saw some of the froth dissipate from the high-flying dairy names, with Bellamy’s Australia (BAL) and A2 Milk (A2M) off -6.9% and 6.4% respectively. The news that the US may ease its sanctions against Russian aluminium producer Rusal saw both Alumina (AWC, -5.7%) and South32 (S32, -5.1%) give back some of their recent gains. Qantas (QAN, -5.3%) was also weak despite the lack of any material news-flow ahead of their third quarter trading update this Wednesday. We expect a decent outcome from the update and suspect that some of the recent selling has been in response to a higher oil price.
Private hospital network Healthscope (HSO, +17.2%) was among the market’s best last week as it came under offer from private equity. There was also a reasonable snap back from several growth names such as Dominos Pizza (DMP, +12.0%), Treasury Wine Estate (TWE, +8.2%), TPG Telecom (TPM, +7.8%) and CSL (CSL, +6.6%).
Gold miner Newcrest (NCM, +7.0%) pared back some recent falls as their quarterly update revealed that production following seismic activity at the Cadia mine in NSW were not as bad as many feared. Meanwhile Metcash (MTS, +10.8%), also did well following a sell-side upgrade and channel checks which indicated improved trading and a more benign competitive environment for their IGA supermarket franchisees.