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Weekly market update - 5th of November 2019

Written and accurate as at: Nov 05, 2019 Current Stats & Facts

The local market finished down -0.4% for October after a fall of -1.0% last week. There were positive developments in terms of global economic data, but this was offset locally by a weak bank sector following a disappointing result from ANZ (ANZ, -6.65) and Westpac.

On the global side, forward-looking indicators such as the ISM manufacturing index demonstrate that uncertainty over trade and policy continues to weigh on sentiment. However co-incident indicators – such as the US payroll data released on Friday – are coming in stronger than many expected. The risk is that weaker sentiment does start to change corporate behaviour, feeding through to weaker employment in the US. However as we stand today the environment is broadly supportive for equities. There is reasonable growth, but not strong enough to switch the Fed from its easing bias. Outside the US the Chinese ISM was also slightly better than consensus expectations.

ANZ’s result dragged down the heavyweight banking sector. ANZ was the worst performer in the ASX 100, while Westpac (WBC) fell -4.0%, Commonwealth Bank (CBA) -3.1% and National Australia Bank (NAB) -2.6%. While the issues facing banks on revenue, earnings and capital are well known, ANZ’s result still came as a slightly negative surprise. Some of this is due to ANZ’s relatively large exposure to institutional loans, part of which is Asian-based and has the additional pressure from falling global rates.

ANZ has also been the only bank attempting to reduce costs in an absolute sense in recent years. It has been successful in reducing costs from over $9bn to $8.6bn currently – towards a stated target of $8bn. However management flagged that while the long-term target remained, costs were likely to rise over the next year. Capital provided one of the few bright spots. Changes to the Reserve Bank of New Zealand’s treatment of capital are likely to eat into the previously large surplus ANZ enjoyed, but there are solid indications they will be able to manage the position while maintaining dividends for the moment. ANZ’s result painted a clear picture of the tough environment for banks.

Elsewhere AREIT GPT Group (GPT) was down -4.4% following a quarterly update which disappointed on the retail side, while Unibail-Rodamco-Westfield’s (URW, -3.2%) update revealed the ongoing weakness in US malls.

Lendlease (LLC, +4.8%) did best in the ASX 100 on the view that weakness in the apartment market may have reached its nadir.

There were signs of the ongoing rotation away from growth stocks with Afterpay Touch (APT) down -6.6% to finish the month at -19.5%. But this is not a broad-brush effect in the Australian market. Xero (XRO) was up +4.3% for the week – the second-best result in the ASX 100. XRO is up +10.8% for October. ResMed (RMD, +4.3%), Cochlear (+3.1%) and Seek (SEK, +3.5%) also outperformed during the week, demonstrating the scope for stock picking within the growth thematic.

Qantas (QAN, +3.2%) was up as investors taking advantage of its stock buy-back covered their positions. Iluka (ILU) gained +3.1% as management countenanced the possibility of selling off its iron ore royalties. BlueScope Steel (BSL, +3.0%) rounded out the week’s best performers on some optimism of improvement in the US steel market.

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