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Weekly market update - 6th of May 2019

Written and accurate as at: May 06, 2019 Current Stats & Facts

Last week was relatively quiet on the macro front, with news-flow dominated by trading updates at the Macquarie Australia Conference and the bank results. The S&P/ASX 300 fell -0.75%, taking a breather from its recent good run. Most of the major subsectors went backwards.

Metals & Mining was off -2.1% despite the iron ore price holding reasonably steady; BHP (BHP) shed -1.8% and Rio Tinto (RIO) -3.3%. Oil weakened and saw Oil Search (OSH,-5.6%) and Santos (STO, -4.9%) under pressure. Qantas (QAN, +3.2%) strengthened on the same trend.

Financials ex property fell -0.7%. Speculation is mounting that APRA may reduce the serviceability test rate for mortgages from its current 7.25%, to alleviate some of the pressure on subdued mortgage growth rates. This, in turn, could reduce the perceived need for a cut in interest rates from the RBA. Implied rate cut expectations receded over the week, weighing on Bank of Queensland (BOQ, -5.6%), which has greater potential leverage to rate cuts than its larger peers.

Both ANZ (ANZ, +0.0%) and National Australia Bank (NAB, +0.0%) delivered results which were mainly in-line with consensus expectations. In both cases, decent results from markets-related divisions offset ongoing weakness in the core lending business. The key feature of ANZ’s outlook is a commitment to aggressive cost reduction targets. There are some questions about its ability to meet targets, but efforts to do so differentiate ANZ from the other majors, which are not focused on reducing costs.

There was some weakness in diversified financials, with fund manager Janus Henderson (JHG, -15.0%) reporting further fund outflows.

Macquarie Group (MQG, -5.3%) delivered a very strong result, with revenues and profits up 17% for the year. Non-recurring items such as the realised gains from asset sales (eg Quadrant Energy) and from the commodity portfolio played a key role in the result. This is a common theme in recent MQG results, however the new CEO departed from the usual script to guide the market towards lower earnings for FY20, with the stock down as a result. There is some debate over whether this reflects a new CEO’s wish to rebase the market’s expectations, or if it is just the reality that several parts of MQG’s business have been performing beyond normalised expectations for several years now. We suspect MQG has been a beneficiary of the tough times at the retail banks, with investors and quant strategies rotating to a large-cap financial with positive earnings momentum. A shift in momentum presents a quandary to these investors and may see further weakness here.

The AREIT sector was down -4.2%. Retailers have highlighted that conditions remain tough for brick-and-mortar retailing, although premium malls continue to deliver a clear advantage versus regional malls or the high street. Scentre Group (SCG, 6.3%) holds a good property portfolio, but was weak as the pressure on traditional retail shows no signs of abatement. Dexus (DXS, -4.9%) also came off as it raised capital to fund the purchase of two office towers in Melbourne.

Last week did see several well-received updates, which highlights the view that most of the opportunities in the Australian market now tend to be stock-specific.

ResMed’s (RMD, +11.6%) result was a clear improvement on last quarter’s, with management also doing a better job in outlining the longer-term benefits of their recent string of cloud-based acquisitions

Nine Entertainment (NEC, +7.5%) indicated that while the overall trend in TV advertising remains weak, they are offsetting this via better market share. Stan continues to see good growth, as does their digital channel.  Investors may be under-estimating the value in these divisions.

Seven Group’s (SVW, +5.1%) management upgraded earnings guidance which, while bringing them into line with the market’s expectations, does confirm the supportive underlying trends from mining and infrastructure capex.

Woolworths’s (WOW, +2.7%) update revealed decent growth in like-for-like sales which demonstrated that they have the upper hand over Coles (COL) at this point. This is emphasised by the fact that COL’s sales growth was reliant on their promotional campaigns such as the Little Shops collectables. Both companies have seen signs of a pick-up in price inflation for fresh food, but not yet so much in packaged goods. Much of the sales growth is coming through on-line sales, which are at a much lower margin.

Finally, it was another good week for Afterpay Touch (APT, +16.1%) which continues to deliver solid growth in transaction volumes as more retailers adopt its system. Some credible analysts believe that its valuation rating does not reflect the degree of uncertainty over the businesses’ sustainable margin, given the likelihood of increased competition and underestimating the scope for credit losses over the longer-term. Nevertheless, at this point momentum remains driven by volumes, which continue to be strong.

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