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Weekly market update - 22nd of October 2019

Written and accurate as at: Oct 22, 2019 Current Stats & Facts

The local market finished with a modest gain last week as weak data from China saw a large sell-off in the mining sector.  This was partly offset by an improved sentiment towards Brexit which helped support Financials and Energy, even though Oil was weaker.  Santos  (STO, +4.7%) news of acquiring ConocoPhillips’s northern Australia business was also a supporting factor.

Bellwether growth stock Afterpay Touch (APT, -15.6%) was the weakest in the ASX 100 as UBS initiated coverage with a “Sell” rating. The analysis suggests APT would have to control a very demanding proportion of all US “buy now-pay later” transactions to justify its valuation multiple. 

Wisetech Global (WTC, -12.3%), another technology growth stock, also came under pressure. In this instance the company was attacked by a Hong Kong-based short seller, which ultimately prompted the exchange to halt trading in the stock. 

APT and WTC diverged from some of the fellow WAAAX tech stocks over the week, as Altium (ALU, +5.1%) and Xero (XRO, +4.4%) – continued to forge ahead.

Signs of progress on Brexit and a more constructive backdrop on US-China trade saw the gold miners come off. Newcrest (NCM) fell -6.0% and Evolution (EVN)-10.3%. In Northern Star’s (NST, -14.4%) case this was compounded by a disappointing quarterly production report, which saw output fall almost 40% from its previous quarter at its Pogo operation in Alaska.

Elsewhere the iron ore miners were weak. Fortescue Metals (FMG) fell -5.9%, BHP (BHP) -2.9% and Rio Tinto (RIO) -2.3%.

Bank of Queensland (BOQ, -5.0%) bucked the broader trend of financials outperformance. The new CEO delivered an FY19 result which made for grim reading, with pressure on revenues and margins as well as some small deterioration in bad and doubtful debts. All eyes now turn to National Australia Bank (NAB, +2.0%), ANZ (ANZ, +1.0%) and Westpac (WBC, +0.3%) which will deliver their FY19 results within the next few weeks.

There were also some further signs of pressure on domestic consumption as furniture retailer Nick Scali (NCK, -10.8%) and Southern Cross Media Group (SXL, -22.7%) – both small caps – issued earnings downgrades on the back of poor demand. Within the ASX 100 JB Hi-Fi (JBH, -2.7%) and Nine Entertainment (NEC, -2.4%) fell in sympathy.

While tax and interest rate cuts have been beneficial, it is important to remember they have been sufficient to stabilise the deceleration in domestic demand – not to improve it. As such, conditions remain tough in terms of domestic consumption. Companies such as NEC and Qantas (QAN, +2.8%), both of  deep value and many consider bad news to already be priced in. However with the Federal government seemingly committed to a policy of budget surplus rather than fiscal stimulus, it may not be the right environment to be taking a large thematic bet on a material improvement in the domestic situation.

CYBG (CYB, +14.4%) has been effectively trading as a warrant on Brexit in the last few weeks and was therefore the best performer in the ASX 100. While sentiment on a deal has improved, it is worth bearing in mind that it is an agreement on the framework within which an actual trade deal will be arranged. As a result, considerable uncertainty for the UK economy will remain – even if PM Johnson wrangles the numbers the pass his deal – until the details of a trade agreement are agreed.

Challenger (CGF, +13.3%) also did well as its quarterly update included better data on fund flows. There is some nuance here – a reasonable proportion of the improvement came from short-term, low-margin flows. Nevertheless, this demonstrates that investors see the scale of flows as the key metric for CGF at the moment.

Energy-related stocks outperformed. Contractor Worley Parsons (WOR, +6.5%) was among the best in the ASX 100. News of STO’s deal with ConocoPhillips was well received in the market not least for its diversified, bite-sized growth options. The acquisition in northern Australia also includes operational control of the Darwin LNG plant, putting it in an enviable strategic position. Caltex Australia (CTX, +5.0%) confirmed that oil refining margins had improved in recent months. While expected, confirmation drove a relief rally.

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