Weekly market update - 5th of November 2018
Written and accurate as at: Nov 05, 2018 Current Stats & Facts
The market bounced back last week, with the S&P/ASX 300 gaining +3.2% following a relatively tumultuous fortnight.
There were some limited signs of progress in Sino-American trade relations, while a weaker oil price and US dollar also helped improve sentiment regarding the outlook for global demand. However there were some more mixed signals late in the week, as Apple Inc.’s earnings guidance disappointed expectations, while strong US payroll data saw bond yields snap up as the focus returned to the pathway for US interest rates. US 10-year Treasuries were yielding 3.21% by the week’s end.
This week sees the US midterm Congressional elections. The outcome, while difficult to predict, will be important in dictating the tone of President Trump’s subsequent trade negotiations with China. It could also feed through to further market volatility. At this point we would not be surprised to see the market continue to chop around, however there is still little to suggest that this is the start of a more protracted, recession-driven downturn.
Resources led the market (S&P/ASX 300 Resources +4.3%), but this in turn was driven by miners (S&P/ ASX 300 Metals & Mining +5.5%) as the iron ore price remained steady while a lower oil price weighed on oil and LNG stocks. Financials performed in line with the market (S&P/ASX 300 Financials ex property +3.5%) buoyed by some reasonable results, while A-REITs fell -1.8%. Growth stocks tended to outperform.
Mirvac Group (MGR, -3.7%) was among the worst performers as bond sensitive REITS – and especially those with some residential exposure – struggled. Scentre Goup (SCG), the markets’ largest REIT, was off -1.3%. Carsales.com (CAR, -2.9%) was also weaker following an AGM update which kept FY19 guidance in place, but flagged that it had been a soft start to the year with fewer car sales weighing on advertising demand.
Both Crown Resorts (CWN) and Star Entertainment (SGR) also gave AGM updates. Crown’s disappointed and the stock was off -2.9% for the week, while SGR was up just under 2% as revenues from its main Sydney gaming floor were better than many expected and it managed to keep VIP revenues flat.
Fund manager Janus Henderson (JHG, -0.5%) gave a quarterly update which revealed that earnings remain fine, but fund flows remain uninspiring, while modest performance is weighing on its ability to generate performance fees. JHG is trading on 9x next-12-month (NTM) P/E which implies a lot of bad news priced in, but it will be hard to see a near-term re-rating until fund flow trends stabilise.
Two of the Big Four banks delivered their FY18 results; ANZ (ANZ, +2.5%) and National Australia Bank (NAB, +2.1%). Both demonstrated little in the way of revenue growth but a reasonable amount of control on costs. ANZ remains the only one of the banks committed to cost reduction in absolute terms, while NAB’s cost growth came in at the mid-point of its guided range, below the expectations of many. Asset quality and, specifically, the performance of bad and doubtful debts, remain benign for both at this stage. The outlook is for 0-2% earnings-per-share growth and investor sentiment remains muted.
Macquarie Group (MQG, +10.1%) also reported, delivering a well-received set of results and managing to keep profit before tax flat on the prior corresponding period. The key issue is the increasing reliance on asset sales to support earnings - and some suggest they may be close to peak cycle on an operational basis. Nevertheless, with further asset sales flagged for the next year, they look set to support near-term earnings momentum. Fellow diversified financial AMP (AMP, +13.1%) was also among the week’s best as management sought to provide more detail on the rationale for their poorly-received deal to sell off the Life insurance and mature business books. The upshot is that it appears AMP has made the call that its wants to offload the Life business at almost any price, but the manner in which it has done so has knocked significant value off the entire enterprise. Further clarification around the cost out that would follow helped some recovery last week, as did speculation of a potential takeover.
BHP’s (BHP, +7.4%) announced the return on proceeds from its US shale disposal to investors via the combination of an off-market buyback and a special dividend. The sum effect of the sale and buy-back is ~10% accretive for earnings per share and BHP remains a strong source of cash flow generation and capital return in this market. Rio Tinto (RIO, +5.7%) also outperformed, while a tighter discount for lower-grade ore helped Fortescue Metals (FMG, +7.3%) do well. Elsewhere growth names such as CSL (CSL, +8.6%) enjoyed a bounce, while Qantas (QAN, +8.4%) – which had been hit by the combination of higher oil prices and concerns over global cyclicals – also gained ground.