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Weekly market update - 20th of August 2019

Written and accurate as at: Aug 20, 2019 Current Stats & Facts

The domestic equities market continued its weakening trend last week with the All Ordinaries recording a loss of -2.4%; and the Small Ordinaries down by -3.7%. Sector-wise, ten out of the eleven GICS sectors were in the red, with Health Care (+1.7%) being the exception. Resources (-4.1%) were the biggest laggard, as the Energy sector (-5.0%) dragged; whereas Industrials (-2.0%) incurred smaller losses.

A brief inversion of the bond yield curve in the US during the week, where the yield of the 10-year Treasury fell below that of the 2-year note, triggered an exodus from the equity market to their safe-haven counterpart. In that vein, the US 10-year bond yield declined by 19bps to finish the week at 1.54%; and its Australian equivalent was 8bps lower at 0.88%.

Historically, an inversion of the yield curve has been a leading indicator of recession, However, on the domestic front there has been a lack of new evidence suggesting any further deterioration in the economy this time around. We have instead seen some early signs that the Australian economy could be more constructive than many have feared, particularly in the realm of domestic consumer spending. Equally, in the US, some of the economic leading indicators have also stabilised. 

Against the tumultuous macro backdrop, stock-specific news was abundant as reporting season remains centre stage. On the negative side, Magellan (MFG, -13.2%) was the worst performing stock within the ASX 100. The fund manager’s plan for a $275m capital raising coincided with a deteriorating market, weighing on its share price.

Packaging company Orora (ORA) was also -14% lower after releasing its FY19 results. The market’s expectation in the run-up to the results was for ORA’s Australian operation to be slightly weaker, and there was no surprise coming out of it. However, it subsequently turned out that its US operation was a lot weaker than many had anticipated, largely due to a poor January; although management did note the trend has stabilised throughout the following months. ORA provides packaging products for Amazon and a number of fast food companies in the US, and its comments around the trend stabilisation potentially provides a marginally positive read-through for the US economy. Nevertheless, ORA’s results dampened the sentiment for Amcor (AMC, -7.4%), which is yet to report its own figures.

CYB Group (CYB, -12.4%) fell again on Brexit uncertainty, which continues to drag along; whereas market darling Cleanaway (CWY, -8.7%) incurred a selloff as the growth star failed to meet market expectations on headline revenue expansion, and delivered a somewhat lighter guidance for the next year.

After the big run on the back of its recent capital raise, AMP (-10.1%) gave back some of the gains last week. While the new turnaround plan for the company is somewhat encouraging, the risks around future outflows should not be overlooked.

Oil Search (OSH, -10.0%) was the largest detractor from the Energy sector over the week, as the new Prime Minister of Papua New Guinea (PNG) put up a tougher stance around contract renegotiation – there is an ongoing arbitration between the PNG government and the LNG players including Oil Search. 

Elsewhere, the share price of Nine Entertainment (NEC, -8.3%) dropped, even though it is yet to report (it reports this week). The market took a negative cue from outdoor advertising company oOh media (OML, -29.1%), which confirmed a very weak advertising trend and cascaded through to all the ad-related companies. 

Also on the changing industry trend, a positive message from Telstra (TLS, -5.3%) on Mobile was clouded by a poorly explained statement regarding the negative effects from the NBN. The former came in better than many had expected for TLS, due to an improvement in the decline in revenues from out-of-bundle spending. In addition, as other competitors are all starting to put through price increases, investors might begin to see the corner turning or at least some degree of stabilisation for the Mobile sector, Management also delivered an upbeat update on the cost-out front. The good news was however overshadowed by the company’s new estimate on the NBN’s effects. Previously gauged at $3b, it is now a $3.4b negative impact on earnings cumulatively. There was also a lack of communication from management to help investors identify the source of the new costs which was proven disappointing (and whether they were already counted in its Enterprise business). 

Woodside (WPL, -5.9%) declined after posting its 1H19 results. The company has yet to find a solution for either the Scarborough or the Browse project. The lack of progress on the new projects made some investors wary, as WPL’s volume production will go into decline in the next few years. The longer the delays in commissioning the new projects, the harder it is for the company to fill the earnings hole down the road.

On the positive side of the register, JB Hi-Fi (JBH, +11.1%) was the best performing ASX 100 stock over the week. July was quite strong for JBH itself, which was another potential indicator that the domestic economy may not be as bad as many had thought. With the majority of personal tax refunds coming though in August, it could provide another fillip for domestic consumer spending. In the same vein, Dominos (DMP, +3.7%) and Star Group (SGR, +2.7%) also gained.

In housing, REA (+3.5%) advanced despite delivering a somewhat soft set of results. Listings were weak but largely in line with expectations. Pricing has been strong, while management also noted that more site traffic has been evident. This is an early indicator of an improvement in housing, particularly when taken alongside the pickup in clearance rates. Similarly, Domain (DHG) also added +6.2%.

Fortescue Metals (FMG) bucked the trend of the other iron ore miners last week, adding +5.5% despite the muted price movement of iron ore. Some investors could be positioning themselves ahead of the miner’s results release in late August, as there is a large amount of franked dividends expected. 

CSL (+3.4%) posted a strong set of results for FY19. The company continued to deliver strong top-line growth, predominantly driven by product volume. In particular, there was a significant improvement in albumin sales into China in the second half, after a disrupted first half due to approval issues.

ALS (ALQ, +3.9%), a mineral testing service provider that we own also gained. As the gold price continues to rise, investors are expecting more exploration to happen, and thus more testing services required from ALS.

QBE (+2.0%) printed a set of messy results. Although the company has done a reasonably good job in cleaning up its business lines and benefited from pricing increases, its investment book suffered as global yields continue to edge lower. Overall, the operating environment remains challenging for the insurer.

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