Weekly market update - 4th of February 2020
Written and accurate as at: Feb 04, 2020 Current Stats & Facts
The market staged a strong start to 2020 with the broader market gaining approximately 5% in January. But with Resources up only +0.65% and Financials in line with the market, gains were concentrated in Healthcare and Consumer Staples.
This rotation away from cyclicals — and towards bond-sensitive defensive and growth stocks – is a reversal of the prevailing theme of the last quarter and reflects a cautious turn in investor sentiment in recent weeks. Coronavirus has played a role, but even prior to this uncertainty there had been some weaker signals on global growth. Copper has fallen more than 8% during the month and oil is down almost 20%, while gold is up 1%. People are now looking for further monetary easing to support the global economy, with a further 50bps of rate cuts currently priced into the bond market.
US 10-year bond yields contracted 41bps to 1.51% over the month. Their Australian equivalents came in 42bps to 0.95%. Strong gains in the equity market suggest investors have only been taking the signal on the change in the discount rate, rather than worrying about the implications of a possible slow-down for corporate earnings. This may change as we move into reporting season.
The coronavirus has prompted swifter and more draconian measures than previous epidemics — including travel bans and the isolation of Chinese cities. This could exacerbate near-term economic effect, but be more positive on a medium-term view. There are reports suggesting the daily recorded rates of infection growth outside of Hubei province are decelerating. However, there is still a great deal of uncertainty. China’s leaders have made it plain they will inject liquidity and act to support the economy and markets to counter the effects of the virus. We, therefore, remain mindful that a sell-off in cyclical stocks — initially on concern over global growth and then exacerbated by fears over the effects of coronavirus — may prove to be short-lived if we start to see stimulus measures.
A few companies kicked off the year with a downgrade. Treasury Wine Estates (TWE, -20.0%) released its results early and shifted full-year earnings growth expectations from 15-20% down to 5-10%. Management cited a squeeze on its bulk wine business in the US, which is seeing rising costs from Australian grapes. Stronger competition is limiting its ability to pass on these rising costs.
Health insurer NIB (NIB, -13.7%) downgraded full-year operating profit by 15%. This reflected broader pressure on the health insurance industry structure. Younger people are opting out of private health insurance, or trading down, as the requirement to cross-subsidise older holders is leading to higher premiums. At the same time, claims inflation remains strong. In the near-term, there is no obvious solution and the industry remains under pressure.
Insurance Australia Group (IAG, -7.6%) also downgraded its expected insurance margins from 14.5-16.5% versus previous guidance of 16-18%. This followed a review of natural perils claims, prompted by a 2019 hailstorm. Underlying operations remain decent and the industry structure remains supportive in terms of its ability to price risk. A one-off remediation charge also exacerbated the downgrade.
Elsewhere the combination of bushfires and the coronavirus — and the potential effects on travel and tourism — hit a raft of stocks including Flight Centre (FLT, -10.8%), Qantas (QAN, -9.9%), Star Entertainment (SGR, -9.1%) and Sydney Airport (SYD, -3.1%). The underperformance of global cyclicals such as BlueScope Steel (BSL, -5.4%) and Alumina (AWC, -5.2%) indicates broader uncertainties over the global economy.
The list of better-performing stocks looks like a carbon copy of 1H 2019 and reflects a more negative bent in sentiment and lower bond yields. Afterpay Touch (APT) was up 31.7%, while fellow technology stocks Altium (ALU, +14.7%), Appen (APX, +12.9%), Wisetech (WTC, 7.1%) and Xero (XRO, +7.0%) also outperformed.
Health care, the other key growth sector, was also strong. ResMed (RMD) was up +14.4% and CSL (CSL) +13.2%. The latter continues to benefit from a shortage in plasma supply in the US. More efficient use of blood in surgery has meant the Red Cross, which supplies 25% of the market, has not been growing collections. Meanwhile, demand for immunoglobulin products sourced from blood plasma has been growing in the mid-to-high single digits each year. CSL has benefited from the twin tailwinds of higher US prices, as well as a mix shift as it supplies more product into the US.
Consumer staples such as Woolworths (WOW, +15.7%) and Coles (COL, +11.5%) benefited from a more defensive investor mindset. Many believe valuations in both look stretched, given low single-digit earnings growth.