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Weekly market update - 26th of May 2020

Written and accurate as at: May 26, 2020 Current Stats & Facts

The local market gained almost 2% last week and has now been effectively trading sideways since April 13. This is constructive in the sense that it has held onto gains from the March 20 low and has managed to consolidate.  However, there has been a material rotation within the market. Over this period small caps (+13%), resources (+11%) and discretionary (+8%) have all outperformed, reflecting an improvement in sentiment. Defensive names that did well in the early phases of the crisis – such as health care (-6%) and staples (-3%) – have underperformed.  The banks and insurance companies have underperformed right through the crisis as investor sentiment weighs on defaults and pandemic-linked claims.

At a stock level, Unibail-Rodamco-Westfield (URW, -7.9%) remains a persistent underperformer and did not participate in the rebound in domestic retail mall names. This may reflect a divergence between Australia and other parts of the world in terms of the social distancing that remains in place. While the domestic retail and residential listed property market did well, the office-focused names such as Dexus (DXS, -3.6%) underperformed. As movement restrictions lift and stores re-open, concerns seem to have shifted from the retail sector to office. This is driven by narratives around the rise of work-from-home and structural changes in the workforce. 

Otherwise, it was largely the defensives that underperformed as the recovery plays gained greater favour. AusNet (AST, -6.4%) and Spark Infrastructure (SKI, -5.0%) dragged on the utilities. ResMed (RMD, -4.3%) and CSL (CSL, -3.6%) dragged on health care.  For CSL, there are signs that while demand remains robust, plasma collection centres have been disrupted which may lead to a shortage of supply.  Many view this as a temporary factor, however, it may be contributing to the pullback given CSL’s strong run.

Chinese sanctions on Australian beef and barley made investors nervous about A2 Milk (A2M, -2.9%) and Treasury Wine (TWE, -2.9%). The announcements affecting Australian exports can be interpreted as a shot across the bow for Australia’s government.  Somewhat a warning not to engage too heavily in what is likely to be escalating anti-China rhetoric out of the US. Being an election year, President Trump is conscious of a weaker economy and is likely to use an anti-China narrative to mobilise as much of his base to vote as possible. The Democrats are unlikely to take a vastly different line. China’s reaction will be important to watch.

Elsewhere, Telstra (TLS) was down -3.5%, while Westpac (WBC, -1.6%) and Commonwealth Bank (CBA, -1.5%) were the weakest of the Big Four banks.

Engineering contractor Worley (WOR, +14.6%) was the best performer in the ASX 100 on the back of a 7% gain in the price of Brent Crude to $US35.28. Oil Search (OSH, +13.4%), Beach Energy (BPT, +10.5%) and Santos (STO, +10.4%) also did well.

Sentiment around oil has stabilised as people have become more positive on the outlook for demand. However, it is worth noting that if the price gets back towards the high $30s some of the production shut-ins in the US shale market may be reversed. Ironically, the fact that the price did not remain lower for longer may become a headwind for the longer-term price, because it limited the number of permanent shut-ins. 

Improved sentiment around retail and housing saw Stockland (SGP, +13.7%), Vicinity Centres (VCX, +11.9%) and Scentre Group (SCG, +10.3%) outperform.

Other recovery plays such as Seek (SEK, +10.6%) and Flight Centre (FLT, +12.9%) also did well. The latter is interesting given that international travel is one part of the economy unlikely to normalise for some time.

James Hardie (JHX, +9.3%) delivered a result in line with expectations, but with better recent momentum than people were expecting. Volumes in April were only down 3%, implying that new home starts in the US remain strong, contrary to many expectations.

Aristocrat Leisure (ALL, +1.2%) was up for the week but fell after delivering a somewhat disappointing result. The short-term impact on land-based casino closures on new game orders was well understood. However, the operating leverage has proved more than most thought. 

Atlas Arteria (ALX, +9.2%) was also up as French traffic volumes showed signs of recovering faster than people thought.

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