× Home Modules Articles Videos Life Events Calculators Quiz Jargon Login
☰ Menu

Weekly market update - 28th of May 2019

Written and accurate as at: May 28, 2019 Current Stats & Facts

We believe the broad outlook for the economy and earnings has changed favourably post the election. Recent conversations with several companies suggested some domestic weakness in the past couple of months, however, it has been hard to determine to what extent this reflected the elongated Easter holiday period and the election effect. We continue to see the next two months as critical in understanding the underlying state of the economy. Nevertheless, no change in government - and therefore no significant policy shifts - should improve sentiment for older consumers and help business confidence. The subsequent indications from the RBA of a June rate cut – and that APRA may reduce its mortgage serviceability test from 7.25% at the same time – gives us confidence that policymakers are actively trying to avoid a housing confidence-led downturn.

That said, it is important to recognise that the developments of the last week may lead to a deteriorating trend not eventuating - rather than a material pick-up in growth. So this is more a matter of reducing downside risk. This was reflected in a clear rotation within the market, towards sectors which were expected to see headwinds under Labor’s strategy.

Banks provide the clearest example. The sector gained +8.1% in the week, with the initial post-election surge bolstered by the subsequent announcements from the RBA and APRA. The net expectation is that the retention of negative gearing, lower rates and an easier serviceability hurdle will combine to stabilise the housing market and, in turn, reduce the pressure on the banks. Westpac (WBC, +10.7%) led the charge, given it has the largest residential mortgage exposure, followed by National Australia Bank (NAB, +7.9%), ANZ (ANZ, +7.7%) and Commonwealth Bank (CBA, +7.4%).

We agree that last week’s events are positive for housing and the economy and reduce the downside risk to the banks. However, we remain mindful that the strong week for banks also reflected the poor sentiment and large underweight and short positions in the sector prior to the election. Coupled with the fact that banks continue to face headwinds on multiple fronts, we think that last week’s outperformance is unlikely to be sustained and are not tempted to add to our bank exposure.

It is worth remembering that both house prices and household debt remain elevated, that housing affordability remains unappealing, and that we still have six months of significant housing supply coming onto the market. Policy actions may not yet be enough to turn the momentum in housing; although it is positive that policy makers are signalling they are focused on this issue now.

We would also highlight that while the direction for housing, credit growth and competition could all improve at the margin, the banks still face headwinds. Revenue, margins, costs and capital positions all face material challenges in the near term and earnings remain under pressure.

Housing-construction related stocks were also the big winners from last week. Adelaide Brighton (ABC, +13.4%) was the best performer in the ASX 100, while Boral (BLD, +11.5%), Stockland (SGP, +13.2%) and Mirvac (MGR, +5.8%) also did well. Again, we think that while some downside risk has been reduced, the sector still faces cyclical challenges.

Elsewhere, consumer stocks outperformed on improved economic sentiment, led by JB Hi-Fi (JBH, +8.7%), Nine Entertainment (NEC, +6.4%) and Flight Centre (+5.5%). Medibank Private (MPL) gained +12.2% as the threat of Labor’s proposed caps on private insurance premiums dissipated. This also helped Ramsay Health Care (RHC, +8.3%).

Oil-related stocks landed on the other side of the ledger. The ongoing Sino-American trade dispute fuelled concerns over global economic growth and saw the oil price fall -6.6% (West Texas Intermediate). This saw Oil Search (OSH, -4.9%), Origin Energy (ORG, -4.8%), Santos (STO, -4.3%) and Woodside (WPL, -4.0%) among the ASX 100’s worst performers for the week. The same trend saw Qantas (QAN) up +5.4%.

Defensives tended to underperform on the rotations towards banks and more cyclical consumer stocks. Woolworths (WOW) was down -4.3% and Coles (COL) -3.9%. AGL Energy (AGL) fell -3.2% and Sydney Airport (SYD) -2.7%.

Global testing and certification company ALS Group (ALQ, -12.0%) was the ASX 100’s worst performer. It delivered a decent FY18 earnings result, beating most expectations with good performance across its broad range of divisions. However, the stock fell as management struck a cautious tone on the outlook for its Geochem division, which provides sample testing for mining companies. While larger miners continue to provide increased volumes for testing, management cited a lack of funding for small mining exploration companies and are seeing a decline in volumes here. ALQ enjoys a diverse portfolio of businesses, including food and environmental testing, which should underpin earnings resilience over the cycle. However, they look likely to endure a softer patch in the near-term given weaker geochemistry volumes and increased competition in its Life Sciences division.

You may also be interested in...

no related content

Follow us

View Terms and conditions