Weekly market update - 22nd of October 2018
Written and accurate as at: Oct 22, 2018 Current Stats & Facts
The market calmed down last week, following the previous volatility, to post a small gain. It was interesting to note that it was the bond-sensitives and some of the more unloved and under-owned stocks which led the market’s modest bounce. Many of the growth stocks which ran so strongly through August – and led the market’s drop the previous week – have yet to snap back. This less aggressive buying of the dips is in contrast to the sell-off and rebound in February and suggests there may be more circumspection in today’s market. This, in turn, could lead to further near term volatility particularly given the currently elevated degree of geopolitical risk.
In this vein, sentiment regarding China seems to have deteriorated in the last few days, alongside both the Chinese A and H-share markets. Further rhetoric and brinkmanship on trade may continue as we enter the final few weeks before the US Congressional midterm elections and the uncertainty over what a new trade deal would look like – or even if one is forthcoming at all – continues to periodically shift markets.
At a broad market level, A-REITS outperformed, up +1.9%, while other bond-sensitives such as infrastructure also did well, with Transurban (TCL) up +2.5% and Sydney Airport (SYD) +2.6%. Financials ex-REITs gained +1.2%, while Resources pared back some of the recent outperformance, to end down -0.4%.
Afterpay Touch (APT, -9.3%) was among the market’s worst performers. Most of the recently high-flying small cap tech stocks struggled last week, however in APT’s case this was exacerbated by the news of a Senate inquiry into payday lending, which may affect how APT’s services are classified and ultimately regulated. It is an exemplar of recent growth stock momentum which has stalled in the last two weeks, pulling back from stretched valuations. Several of these stocks have attractive opportunities for expansion, but it is fair to say that valuations for some reflected only this positive outlook, with smaller regard for the uncertainties and risks involved. This can leave stocks vulnerable to very sharp pull backs on minor disappointments – or even just the absence of more good news – which is what we have seen in the last two weeks.
British Bank CYBG (CYB), which spun out of National Australian Bank (NAB), was off -6.3% despite there being nothing much in the way of news-flow. It is now 9.4x price/next-12-month earnings, which may suggest that as the mid-tier bank is gaining coverage by UK banking analysts, it is being valued alongside its larger peers, which all trade on a single-digit P/E multiples. Risk remains relative to Brexit and a recession could provide a headwind to growth via both bad debts and a lower outlook for interest rates. Like the frictions between China and the US, there is likely to be further noise and volatility as the UK and EU try to hammer out a post-Brexit agreement. Elsewhere, Boral (BLD, -4.4%) came off in response to management comments regarding the effect of poor weather in the US on the near-term outlook and demand.
Annuity provider Challenger (CGF, +9.3%) outperformed on supportive fund flow data. A2 Milk (A2M, +7.0%) bounced back from recent weakness as the market took a positive view on a management update, interpreting comments as confirmation of the outlook provided at the most recent results presentation. Aristocrat (ALL, +5.7%) was another of the few growth stocks to outperform, as feedback form the Global Gaming Expo in Las Vegas supports continued strong demand for ALL’s products in the North American market.
Then there were a raft of the more unloved stocks which had a good week: AMP (AMP, +5.7%) was chief among these, while Telstra (TLS, +2.3%) and Metcash (MTS, +5.0%) also did well. MTS may have enjoyed a boost as upcoming market debutante Coles begins its roadshow ahead of the spin-off from Wesfarmers (WES). Coles’s new CEO appears to be focused initially on getting the service proposition, store layout and supply chain right and taking a less aggressive approach on price discounting in order to win market share. MTS would benefit from a reduction in the price deflation which has squeezed the supermarket industry in recent years.