Weekly market update - 17th of October 2018
Written and accurate as at: Oct 18, 2018 Current Stats & Facts
Ultimately, we think last week’s -4.7% drop in the S&P/ASX 300 can be boiled down to the combination of three factors. The first and most important cause is the market’s increased focus on tightening liquidity, with Chair Powell stating that the US Fed benchmark rate is a “long way from neutral,” suggesting further rate rises to come as inflationary pressures build within the US economy. This notion proved a particular headwind for the growth stocks, with many of the market’s recent leaders in the tech and health care sectors among the worst performers last week.
The second issue came with several US companies pre-announcing results and revealing higher input costs are starting to have an impact on their outlook. This raised concerns of decelerating earnings following a strong upgrade cycle. This is an issue which has already raised its head in Australia, where a weaker AUD pushed up input costs in the last reporting season. While the upcoming earnings season will serve as an important barometer on the state of the US cycle, at this point we think we may have seen the worst of the input cost effect in the pre-season confessions.
Finally, there are also a number of signs of softness emerging in the Chinese consumer space, such as data suggesting that the auto sector is facing its first year-on-year decline in sales for the first time in almost thirty years. With Golden Week consumption not as strong as hoped, last weekend’s cut in the reserve requirement ratio (RRR) is being interpreted as a response to subdued consumer demand, rather than pre-emptive stimulus to offset trade sanctions. On the trade front, the Trump Administration’s bellicose rhetoric continued last week and we see little sign of this relenting before the meeting between Presidents Trump and Xi in November.
Gien this there is a good chance of more near term volatility. We last saw a similar drop in February, followed by a swift bounce back. However this time we think people are making a more material adjustment in their thinking with regard to tightening liquidity and what this means for the market and, in particular, the growth names.
Looking out from here, the Australian market remains relatively defensive given that a significant proportion of it has already been significantly discounted (Financials) or has reasonable earnings support (Resources). This is in contrast to markets like the US which has a larger proportion of highly-rated growth stocks. Nevertheless, it was the defensives which outperformed on the ASX in the midst of last week’s volatility, with REITS only down -2.6%, while Financials (-4.9%) and Resources (-5.0%) underperformed. The latter’s move was driven in part by weakness in oil after a strong run.
Turning to stocks, trading updates from Nine Entertainment (NEC), Fairfax Media (FXJ) and Domain (DHG) ahead of formal NEC/FXJ merger proceedings were not well received by an already jittery market. NEC’s update was relatively benign. Market-wide advertising was slightly weaker than expected, in part due to flagging viewership at Channel Ten, while NEC continues to take market share and management reiterated their expected guidance range for FY19. However it was DHG - majority owned by FXJ - which concerned investors as it revealed weaker than expected listings, particularly in its traditional heartland of Sydney’s Inner West. While there is some seasonality in play, the net implication could be up to a 15% earnings downgrade. DHG’s -19.7% fall could be explained as a natural reaction to lower revenues and rising costs at a highly-rated growth stock in an already weak market. However NEC’s -18.9% fall (and FXJ’s -19.3%) looks less rational given DHG will form only one third of the combined group.
Beyond this, it was the growth stocks which had done best in recent months – such as small cap tech stocks Afterpay Touch (APT, -16.7%), Wisetech Global (WTC, -13.4%), Appen (APX, -12.3%) and Altium (ALU, -11.4%) - which wore the greatest pain. Chinese consumer-related stocks such as Bellamy’s (BAL, -12.7%) and Treasury Wines (TWE, -8.2%) also struggled against ongoing speculation over the scale and scope of new regulations governing the daigou sales channel.
Elsewhere, the alumina/aluminium complex reversed last week’s gains as Norsk Hydro arrived at an agreement with the Brazilian authorities allowing the Alunorte refinery to continue operating. Alumina (AWC, -13.1%) and South32 (S32, -8.3%) fell in response. Oilsearch (OSH, -9.1%) and Santos (STO, -7.6%) both fell on a weaker oil price while BlueScope Steel (BSL, -10.6%) fell in response to the US-Canada trade deal and signs of slightly weaker Asian steel spreads.
There were few positive performers for the week. Navitas (NVT) was up +21.9% following news of an approach from private equity. Gold stocks were generally up, including Newcrest Mining (NCM, +1.7%), while Fortescue Metals (FMG, +5.0%), Dominos Pizza (DMP, +4.2%) and JB Hi-Fi (JBH, +0.7%) all managed to buck the broader trend.