Weekly market update - 28th of October 2019
Written and accurate as at: Oct 28, 2019 Current Stats & Facts
Sentiment on trade has stayed broadly positive and US earnings have held up better than many thought, resulting in the local markets gaining +1.3% for the week.
There were no new material developments on US-China trade, however signs still point to a formal agreement to “Phase 1” of a deal , which has helped stabilise sentiment. At a broader level, it is important to remain mindful that questions over intellectual property, competing technology and China’s role in the global economy are likely to remain issues for some time to come. Nevertheless, modest signs of rapprochement reduce the downside risk of an escalating trade war, supporting equity market sentiment.
US earnings reflect a softer global economy but have not been as bad as many feared. Google trend analysis shows the term “recession” – which went parabolic in August – has returned to previous levels, suggesting fears around the US economy have mellowed from the dire scenario painted a few months ago. Oil, which has served as a workable proxy for sentiment on global growth, rose around 5% for the week.
US bond yields crept up – 10-year sovereigns shifted from 1.75% to 1.80% over the week. Aussie government bonds did not follow suit, with 10-year yields falling from 1.10% to 1.05%. This could reflect the Federal government’s lack of desire for further fiscal stimulus, leaving monetary policy to do the heavy-lifting in terms of economic support. There has been chatter around the nature of potential Quantitative Easing in Australia, with talk of cheap funding for banks to help encourage lending.
Resources led the Australian market – up +2.6%. The Banks gained +1.1% and AREITs +1.8%. The Small Ordinaries underperformed, up only +0.4%.
Technology companies underperformed. The air seems to be coming out of some of the highly-rated growth stocks. Wisetech (WTC, -12.1%) was the bellwether, as it continued to flounder in the wake of a short-seller attack. It has now lost -22.5% of its market cap following the attack and is -30.6% off its early September highs. Xero (XRO, -4.1%), Altium (ALU, -3.6%) and Afterpay Touch (APT, -1.2%) fell in sympathy.
Cleanaway Waste Management (CWY, -10.2%) flagged that earnings for 1H FY20 would be flat vs 1H FY19, rather than the mid-single-digit growth previously expected. Management cited a slower economy and lower commodity prices as key reasons, along with the effect of a landfill levy introduced in Queensland. It serves as a reminder that, for all the success that CWY has achieved in terms of operational efficiencies and cost reduction in recent halves, it still remains a cyclical stock. Management maintained full-year guidance, although the stock reaction reflected a wary market.
Qantas’s (QAN, -4.3%) quarterly update included a number of one-off hits to earnings, such as changes in bond yields and the disruption in Hong Kong. However, the airline also noted competitor Virgin Australia (VAH) was talking of adding capacity towards the end of FY20, despite previous statements to the contrary. QAN noted they would consider increasing capacity in response. This is a key area to watch; the stable, rational duopoly in domestic skies has underpinned QAN’s surge in profits over the last five years.
We would be wary of any shift in primacy from profit to market share. We maintain it would be illogical for VAH to increase capacity, given its already stretched balance sheet and pressure on cash flow. Nevertheless, we will keep a close eye on this issue. We are also mindful that QAN is likely to see some support this week as institutions who take advantage of the off-market buyback may then choose to cover positions. Changes in the register also mean QAN is again eligible for inclusion in the MSCI indices.
JB Hi-Fi (JBH, +10.0%) was the ASX 100’s best performer for the week as an AGM update revealed sales grew +3.7% in the September quarter, defying weak economic conditions. Smartphone sales helped the core JB Hi-Fi stores, while trends improved at the Good Guys, where sales fell -1.8% for the quarter versus -3.4% in the previous period. Many investors appeared positioned for a downgrade – given the recent experience with Nick Scali Furniture and Southern Cross Media – causing a short squeeze.
CYBG (CYB, +9.8%) rose along with expectation of an orderly Brexit. While the risk of a no-deal Brexit has diminished, we note there is still a broad range of potential outcomes. At this point PM Johnson is tilting for a general election, which would require a two-thirds majority of Parliament for approval. Labour leader Corbyn is withholding agreement until the EU confirms an extension to the October 31 deadline. Brussels will wait for some clarity on the UK before it considers extending the deadline. Uncertainty abides, which may limit further near-term gains from the Brexit-sensitives.
Elsewhere Sydney Airport (SYD) gained +7.7% on the release of Productivity Commission report which found Australian airports were not abusing their market position, rejecting airline demands for commercial arbitration. That said, the government is not obliged to adopt the Commission’s recommendations and we may not have heard the last on this issue.
Resources were strong. There were no surprises in Fortescue Metals’ (FMG, +6.4%) quarterly production update. The company continues to print cash. There were some signs of relief on two fronts for Whitehaven Coal (WHC, +6.9%). The LNG spot market appears to have turned a corner – substitution towards cheap gas has put pressure on the coal price over the last year – while Chinese hydroelectric output also seems to have fallen, prompting greater demand for coal. This may also have helped South32 (S32 +5.7%). Santos (STO, +5.1%) was the best performing of the oil/LNG names.
ResMed (RMD, +7.2%) delivered yet another decent quarter with a slowdown in price deflation underpinning good revenue momentum. Star Entertainment (SRG, +6.7%) also delivered a well-received update. VIP revenues remained steady, in stark contrast to competitor Crown (CWN, +1.3%) which has been hit hard by a reduction in high-rollers from China. SGR management noted they were yet to see a meaningful pick-up in demand in response to tax cuts. That said, it enjoyed a strong start to FY2018 and is doing well against that tough base effect. Management is remaining conservative in their outlook for the remainder of the year – and have increasingly easier comps, leaving them in a reasonable position to do well against guidance.