Weekly market update - 14th of November 2019
Written and accurate as at: Nov 14, 2019 Current Stats & Facts
Sentiment has bolstered on the back of US-China trade optimism, a seeming reprieve on a hard Brexit and ongoing monetary easing, driving a 0.79% gain in the local market last week.
The market’s more constructive view was reflected in higher bond yields. Australian 10-year sovereigns rose 19bps to 1.29% and have now retraced 46bpps from their October lows. US 10-year Treasuries were up 20bps in the week to 1.93%, 48bps from their lows.
Hopes of a reflation trade saw Metals & Mining (+2.2%) and Energy (+2.6%) outperform. Defensives such as the gold miners (Newcrest (NCM, -6.8%), REITs (-1.8%) and infrastructure (Transurban (TCL, -2.7%) lost ground.
This thematic trend accounted for most of the worst performers in the ASX 100 over the week. Beyond this, Flight Centre (FLT, -5.5%) fell after management issued a profit warning for 1H FY20 as one-off costs eat into what is otherwise reasonable top-line growth. Medibank Private (MPL, -4.8%) also warned that claims inflation was picking up, crimping its outlook for margins. Claims per policy were previously said to be growing 2.0% in FY19, but this was revised to 2.4%. And 2H19 was now said to be running higher at 2.7-2.8%, with this pace continuing into 1H20.
James Hardie (JHX, +10.3%) was the best performer in the ASX 100 following a strong half-year result. Profit was up 17% and there was an upgraded outlook for the full financial year. While the outlook for the Australian housing market remained muted, management expected to continue winning more share. At the same time, James Hardie continues to benefit from modest growth in the US housing market.
Xero (XRO, +8.3%) also delivered a well-received result. Revenue gained 32% over the year but subscriber strength drove the reaction. XRO now boasts 2.06m subscribers, after 478,000 new additions over the year. Highlights included an additional 73,000 new subscribers in the UK in 1H FY20, which suggests XRO’s strategy of focusing on the one-off opportunity afforded by a shift to mandatory online tax for businesses is playing out.
This has been a strong year for listed property with the AREIT index, up +23.9% for the 12 months to October. Thematic tailwinds from low cash rates and bond yields driven by the growth REITs – eg Goodman Group (GMG), Mirvac (MGR), and Charter Hall (CHC) – and by the defensive bond-sensitives – eg Charter Hall Long WALE (CLW), Viva Energy REIT (VVR). Shopping centre property have gone backwards – eg Scentre Group (SCG), Vicinity (VCX) and Dexus (DXS) has under-performed more recently on a softer outlook for the Sydney office market, which is about 70% of DXS’s book.
Demand for B-grade space has softened as the take-up of shared office space has increased. There is a strong pipeline of premium office supply coming on-line in the next couple of years. The Melbourne office market has a better outlook, with low rent differential between the CBD and suburbs driving decent demand for the former. There has been strong interest from institutional equity investors in the listed property sector, enabled by $4.5bn in additional capital raised in the last 12 months. This is the largest amount of capital raised since the GFC (though in that instance it was recapitalisation in response to stressed balance sheets). More recently there has been some rotation away from the sector on the view that bonds have hit their near-term lows.
There have been some recent transactions in lower-quality retail shopping centres which probably wouldn’t have happened six months ago. Retail assets have been written down in value, but there are definitely bids there at the right price, bolstering some confidence in the sector. We are mindful that in the US and UK, there have been “waves” of under-performance in retail malls as they underperform, stabilise, then underperform again. Simon Group, the largest mall REIT in the US, is at 13.8x PE vs Scentre Group (SCG) at 15x, so our domestic malls still look expensive versus global comps.
The outlook for residential developers remains patchy. Deposits are generally improving in NSW and Qld. Inquiries are improving in Victoria but not leading to an improvement in turnover from the main developers. Ultra-cheap deposits and surplus supply is resulting in potential buyers walking away from deposits as cheaper opportunities become available. Developers remain focused on affordable product in areas with strong population growth. The sector needs a pick-up in confidence. At this point the rate cuts have not provided it. The effect of the Federal government’s first home buyer incentive remains to be seen.