Weekly market update
Written and accurate as at: May 14, 2018 Current Stats & Facts
Australian equities continued to run up last week with stock-specific factors persisting as the driver of returns. Resources again led the pack. While sentiment around commodity prices remains supportive – with oil edging up and iron ore remaining flat last week – there is also a sense that the miners and oil stocks are benefiting from a lack of alternatives as the Royal Commission continues to scare some investors out of financials. Certainly the resource stocks are offering the greatest near-term certainty in terms of earnings profile on the back of commodity price strength. Property trusts edged upwards while financials underperformed. The budget offered little in the way of surprises. The key stock-level outcome was a plunge for Link Administration (LNK, -17.0%) given that changes to superannuation which make it easier to consolidate accounts will weigh on its revenues, which are based on individual accounts.
Outside of LNK, AMP (AMP, -9.9%) was among the market’s weakest as it took another leg down following its 2018 annual general meeting (AGM). Again, the update provided no surprises in terms of underlying business trends. However the board departures and “no” vote on the remuneration report created a lot of media noise and attention, prompted some relatively speculative analyst notes on the company’s future value, and saw a degree of investor panic. Stepping back from the noise, the company has lost roughly $5.3bn in market value over the last eight weeks, which equates to ~80% of the value of AMP’s platform and advice business at that time. The stock now trades on less than $11bn market cap which, once the other unrelated businesses are discounted, implies a valuation of $2bn for the platform and advice business. This is roughly the market cap of platform competitor Netwealth (NWL) – yet AMP’s platform business earns around ten times more than NWL’s each year. This highlights the extraordinary scale of AMP’s sell down and the nadir to which sentiment has plunged. That said, there are few market analysts suggesting that AMP is worth less than it is trading today – the prevailing concerns are around momentum trading, the effect on sentiment from law suits, or material earnings downgrades.
Chemical companies Orica (ORI, -9.3%) and Incitec Pivot (IPL, -6.9%) both fell in response to disappointing earnings reports. ORI’s issue is that they are failing to gain leverage to a supportive environment, with the need to increase strip ratios (the ratio between tonnes of rock mined to ore extracted) seeing higher miner demand for explosives. The fault lies with the Yara Pilbara ammonium plant, a joint venture on Western Australia’s Burrup peninsula, where delays in production have forced the company to ship product from the east coast to fulfil contracts in the west, substantially increasing costs.
Elsewhere, CSR (CSR, -9.1%) also delivered a disappointing report, while JB Hi-Fi (JBH, -6.3%) was down after a broker note highlighted issues at Good Guys. A persistent lack of rain continued to weigh on Graincorp (GNC, -6.1%) while a higher oil price saw Qantas (QAN, -3.2%) down slightly.
Janus Henderson (JHG, +8.9%) saw a bounce, along with most of the asset managers. JHG delivered a quarterly update in which fund flows were not great – but not as bad as some in the market had feared, while the additional detail on cost reduction was well received. Macquarie Group (MQG, +5.0%) was also stronger, possibly benefiting from rotation within financials away from the banks and AMP. Resource stocks were strong, with Rio Tinto (RIO, +3.6%) benefiting from a stable iron ore price, Oil Search (OSH, +7.2%) benefiting from a stronger oil price, and BHP Billiton (BHP, +5.3) benefiting from both. Tabcorp (TAH, +6.1%) bounced back from oversold levels, while Amcor (AMC, +4.5%) also regained some ground lost in recent weeks, helped by some stock purchases from the CEO.