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Weekly market update - 20th of November 2018

Written and accurate as at: Nov 20, 2018 Current Stats & Facts

The local market fell -3.3% last week in terms of price, although the Accumulation index was only down -2.9% as both Westpac and ANZ went ex-dividend. Uncertainty over trade and the effects of rate hikes in the US continue to dominate the narrative, weighing on sentiment. It is also dragging on cyclical stocks, despite little sign of any material deterioration in the underlying economic picture and earnings expectations remaining firm. The S&P/ASX 300 accumulation index is now down -7.2% over the quarter to date, versus a -6.6% fall in the MSCI World Total Return. This is unusual, given that the Australian market has historically been more defensive. This is partly explained by the cloud surrounding the Big Four banks, in combination with a reasonable exposure to both domestic and global cyclicals.

Defensive sectors fared best, with listed property down -1.6% and the infrastructure stocks such as Transurban (TCL, +0.1%) and Sydney Airport (SYD, +0.5%) also outperforming, while an 12bp fall in US 10 year Treasury yields to 3.06 reflected the risk-off mindset.

West Texas intermediate oil fell -6.2% as strong US production is driving inventory growth, while the Saudis and Russians are also making noise about further volume growth. Outside of oil, a slightly weaker US dollar helped commodity prices hold up reasonably well, with both iron ore and copper making gains. The S&P/ASX 300 Resource index was slightly better than the index, down -2.8%, with BHP (BHP) off -3.1% and Rio Tinto (RIO) -2.3%.

There has been a pick-up in corporate activity in recent times and last week saw further developments in the takeover bids for both education and university placement company Navitas (NVT, -2.1%) and hospital operator Healthscope (HSO, +11.5%). HSO knocked back an offer from a consortium of Australian Super and BGH Capital several months ago, however announced last week that they would allow full due diligence by a competing bid led by Canada’s Brookfield Asset Management. Meanwhile NVT have also knocked back a bid – also led by BGH Capital, alongside NVT’s founding CEO – and instead put forward a five year strategic plan for the company.

We also saw results for Duluxgroup (DLX, -5.6%) and chemical company Incitec Pivot (IPL, -7.1%). DLX delivered in-line with the market’s expectation, growing ~4% at both the top and bottom line. While management continue to deliver.  IPL’s result was reasonable. Stronger ammonia prices helped drive 11% EBIT growth, however unplanned outages and other operational issues held the company back from a better report – although these were well flagged by management. Looking forward, the company is expected to keep growing earnings in the high teens, generate good cash flow and return capital via buybacks.

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