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Weekly market update - 18th of February 2020

Written and accurate as at: Feb 18, 2020 Current Stats & Facts

The local market gained 1.5% last week, despite ongoing concern over the impact of the coronavirus and extended restrictions on flights from China. Recent gains imply investors remain confident that the effects of the virus can be contained – and that the low-rate environment and liquidity can continue to support the market.

Financial stocks led the way last week, up +3.6%. There is a sense of some rotation into sectors regarded as least-exposed to the possible effects of the virus. With updates from the banks not being as bad as many feared, investors may feel more confident parking money in the sector. Resources lost ground, down -0.33% as concerns over Chinese demand continued to weigh.

Beach Energy (BPT, -11.3%) was the worst performer in the ASX100. It has been in something of a sweet spot for a couple of years, with low capex requirements and high free cash flow as a result of its acquisition of Lattice Energy in 2017. However, it is now needing to dial up the capex on some long-dated projects which will put pressure on free cash flow.

Packaging company Orora (ORA, -9.4%) was also weak following a 4.1% decline in earnings over the half. This stems largely from its US business, which highlights challenges in some pockets of the US economy, even as the headline data remain reasonable. ORA has put new management in place to address the US issue. We also remain mindful that the proceeds from the sale of its domestic fibre business to Nippon Paper for $1.72 billion helps underpin the share price. ORA’s erstwhile stablemate Amcor (AMC, -7.0%) also fell post result. In this instance management tightened their guidance and slightly upgraded the full-year earnings outlook, citing lower interest costs and synergies from the Bemis deal coming through sooner-than-expected. The stock’s fall seems to be on the view that the underlying business is not performing as well as expected. O

Boral’s (BLD, -8.4%) results missed expectations and it is facing issues in the US. The fly ash business acquired as part of the Headwaters acquisition continues to disappoint, while new problems have emerged in its stone business. Meanwhile, the infrastructure cycle in Australia remains stalled as contractors deal with cost blow-outs on a number of key projects. The CEO has announced he will depart in 2020, but not until after the yearly results. This issue also weighed on the results for Downer EDI (DOW, -7.8%), which is still trying to properly digest its takeover of Spotless in 2017.

Elsewhere Treasury Wine (TWE, -5.7%) lowered full-year expectations again. With the impact of COVID-19 waiting in the wings we are mindful that it may not be the last downgrade. The virus also weighed on the outlook for Cochlear (COH, -4.2%).

Challenger (CGF, +13.0%) was the best performer as management continued to defy a tough environment to maintain earnings.  Evolution Gold (EVN, +12.2%) snapped back from a soft week.

TPG Telecom (TPM, +9.1%) and Vodafone won their challenge against an ACCC ruling that they could not merge. As a result, the mobile phone industry moves potentially back to three players. Telstra (TLS, -0.5%) was off slightly despite a reasonable result which showed it continued to turn the corner.

Goodman Group (GMG, +7.9%) benefited from strong momentum in its industrial property. Management upgraded full-year earnings outlook by 11%. At this point, investors – and momentum-chasing quant strategies – are ignoring the fact that 15% to 20% of its portfolio is exposed to China and Hong Kong.

Commonwealth Bank’s (CBA, +7.3%) margin held up better-than-expected due to its market business, which made good returns in anticipating a shift in rate expectations. However, management pointed out that margins remain under pressure due to rate cuts and ongoing competition in the mortgage market. National Australia Bank (NAB, +5.5%) also saw trading activity support margins.  CBA continues to trade at a large premium to the sector, as investors look for the safest exposure among the banks.

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