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

Weekly market update - 14th of August 2019

Written and accurate as at: Aug 14, 2019 Current Stats & Facts

The local market was down -2.6% (total return) over the week which began with a bout of risk aversion over a falling Chinese renmimbi and rhetoric of currency manipulation, but which settled down by Friday.

There was also some volatility in the Australian dollar, sparked in part by the RBNZ’s surprise decision to cut interest rates by 50bps.

There are two broad views of the current environment: One states that data is signalling a continuing slowdown in the global economy, which will lead to recession. The other is that we are likely to see a policy response, which will help support both the economy and also the equity market. 

Domestically we are seeing a version of this debate play out. The Coalition Federal government has set its stall out on maintaining a fiscal surplus - whereas arguably this is the one year where we need fiscal stimulus, given moribund growth and diminishing utility of monetary policy.  The means are there, in the form of the windfall of iron ore royalties, as well as government borrowing costs at less than 1%. What’s more, any more pressure on depositors – seeing term deposit rates likely going to 1.3% – is likely to prompt a political backlash.  So the debate will be whether logic prevails over political heel-digging

Market movers:

The market’s fall was broad-based with all sectors down.

A2 Milk (A2M, -9.4%) was the weakest performer in the S&P/ASX 100, on concerns that ongoing protests in Hong Kong may impact their volumes. Chinese exposure also weighed on Seek (SEK, -8.3%) given a disappointing result from one of its key competitors in China. SEK’s Chinese strategy is a key driver of the company’s outlook – and current valuation multiple.

Insurance Australia Group (IAG, -9.1%) was also weak. Its FY19 result was broadly in line with consensus expectations at an operational level. However, management flagged a new raft of costs to be invested in early stage ventures next year, which the market effectively wrote off and capitalised straight away. There was also no additional capital return and the company outlined a slower than expected margin improvement which all removed hope for more upside. The stock, which is heavily owned by quants, sold off aggressively. This reflects the general trend of reporting season – big moves either way on small incremental new developments. 

This response was an interesting contrast to Suncorp (SUN, +3.1%) which was also in line with consensus and also flagged potential headwinds. Here, the interim CEO stuck with a “back to basics” narrative and there was a sense of relief that the company did not re-base expectations.

Elsewhere concerns over the oil price weighed on Worley Parsons (WOR, -8.4%) and on Origin Energy (ORG, -5.9%). ORG and AGL Energy (AGL, -5.9%) are both also seen as vulnerable to ongoing headwinds from regulatory intervention in power markets.

Growth names Altium (ALU, -7.4%) and Xero (XRO, -7.0%) were among the key underperformers, with investors seemingly using the risk-off turn on Monday as the excuse to book some profits following a strong run. This was despite the Australian 10 year government bond yield falling from 1.09% to 0.94%. Even the defensive bond-sensitives suffered. Transurban (TCL) was off -5.7%, although this was also due to a capital raising to buy out the minority stake in Sydney’s M5 Motorway. However, Sydney Airport (SYD, -3.8%) and Atlas Arteria (ALX, -3.6) also underperformed.

The risk-off tone early in the week was evident in the strength of gold stocks, which dominated those few which were able to post a gain. Evolution Mining (EVN) was up +6.0%, followed closely by Northern Star Resources (NST, +5.7%) and Newcrest Mining (NCM, +5.4%).

That said, James Hardie (JHX, +9.6%) was the best performer in the S&P/ASX 100 on the back of a surprisingly good result. While US housing remains soft, JHX’s share of fibre cement is showing signs of growing and the fibre cement category itself is growing in usage, so 2 out of the 3 tenets of their story are now better placed. Pulp prices are also falling which is also supportive for JHX.

Investors also welcomed the reduction in uncertainty that accompanied AMP’s (AMP, +5.2%) new strategy and stumped up an additional $650m of capital to fund the plan. The strategy is based simply on reduced costs and a simplified structure; although significant questions over the execution remain.

Finally, Commonwealth Bank’s (CBA, -3.0%) result was not a great one, with management guiding to weaker margins. The outlook remains lacklustre although, like IAG, the yield will look appealing in the current environment. With the sale of the Life business, we believe management can maintain the dividend for the time being.  

You may also be interested in...

no related content

Follow us

View Terms and conditions