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Weekly market update - 9th of September 2019

Written and accurate as at: Sep 09, 2019 Current Stats & Facts

The market was up 0.7% last week – and +1.1% inclusive of dividends. There was something of an improvement in sentiment on trade, with mid-week comments stoking hopes of de-escalation in tension.

Recent surveys and feedback suggests that many institutional investors are positioned defensively with high cash balances – meaning that any signs of an improvement in sentiment can prompt a rapid reaction as liquidity chases the market. Hence at its lowest point on Wednesday the index was down -1.53% for the week, however the shift in sentiment saw a +2.20% rebound from that point to the week’s end.

Improved sentiment fed through to an increase in bond yields. US Treasury 10 years increased from 1.50% to 1.55%, while their Australian equivalents rose back above 1%; from 0.89% to 1.07%. Commodities were also better; oil was up 2.6% (WTI) and both copper and iron ore also made gains.

Erstwhile NAB spin-off CYBG (CYB, -21.8%) was the worst performer in the S&P/ASX 100  following the announcement of an additional provision of GBP 350-400m against mis-selling claims for its payment protection insurance. A looming deadline for claims to be lodged prompted a last-minute rush to file claims which, while expected, has been far larger than most anticipated. While the actual payout amounts have been running in the low teens as a percentage of claims made, there are also the administration costs in processing the claims which renders the final amount required highly uncertain. The net effect of CYB’s provision equates to 10% of the company’s capital base. This means that while it remains adequately capitalised, it does remove the buffer that could help cushion the shock of an adverse Brexit, or fund a buyback in the case of a more benign outcome.

Beyond this, the thematic effects of improved sentiment largely drove the underperformers. The bond-sensitive defensive yield stocks lagged, such as Spark Infrastructure (SKI, -6.5%), Goodman Group (GMG, -5.8%), Charter Hall (CHC, -4.5%), Mirvac (MGR, -3.8%) and Sydney Airport (SYD, -2.3%). We are mindful that while rates remain low, the bond-sensitives have generally enjoyed a year of stellar outperformance. The implication of similar outperformance over the coming twelve months would be Australian bond yields falling to zero.

The gold miners also underperformed as the gold price fell -0.9%. Newcrest (NCM) was off -0.6%, while its smaller peers Northern Star (NST) and Evolution Mining (EVN) fell -4.1% and -2.1% respectively.

The growth stocks continued to do well despite the sell-off in bonds, with Afterpay Touch (APT, +9.4%) the best performer in the ASX 100. Xero (XRO), was up +4.8%. Its annual Xerocon event emphasised its dual pathways for growth. The outlook for subscriber growth in its core accounting software looks solid, underpinned by a drive into the UK and US which have far lower penetration of small business online accounting than its home markets of Australia and New Zealand. At the same time, its open platform structure allowing a wide range of services– such as payroll, payment automation, labour scheduling and cash flow management – offers the ability to become an attractive full platform partner for small businesses.

Elsewhere, the Papua New Guinean government confirmed it would honour the terms signed between its predecessor and a Total-led consortium for development of the Papua LNG project. Oil Search (OSH) – with a 23% stake in the project – gained +7.1%. While this reduces some of the political risk, negotiations over the terms for expanding the existing PNG LNG Project – where OSH has a 29% stake – remain outstanding.

Better commodity prices saw the S&P/ASX 300 Metals & Mining index gain 2.7% (inclusive of dividends), led by Iluka Resources (ILU, +6.3%), South32 (S32, +5.7%) and Fortescue Metals (FMG, +5.1%).

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