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Weekly market update - 17th of August 2020

Written and accurate as at: Aug 17, 2020 Current Stats & Facts

Improving COVID trends in Australia and the US helped support equity markets last week, despite a continuing stalemate over the next tranche of US fiscal support.  Some signs of improving momentum in the US economy may be helping. But the degree to which this may be affected by the policy situation needs to be watched.  The local market rose 2% with small signs of rotation from value to growth. The gold price came off -2.7% but has held key technical resistance levels so far. US 10-year Treasury yields rose 14bps.



Key short term issues

  • US COVID trends: New case growth rates are holding steady and hospitalisation rates continue to fall.
  • Vaccine research & other therapeutics: No new trial data.
  • US policy: A stalemate continues, posing some risk to market sentiment. Trends in real-time spending and consumption will be critical to watch.
  • NSW and Victoria’s COVID trends: Continued improvement. Case growth rates are declining in both states.
  • Australian Policy: Nothing new
  • Australian earnings season: Mixed, but on a net basis a slightly positive outcome 

Australian outlook

New daily cases are falling in response to Victoria’s lockdown measures. NSW continues to hold the line at about 10 daily cases on a seven-day moving average.  The economic impact is starting to make itself felt in real-time data. Retail foot traffic has declined from about 90% to about 60%of its year-start level. The data suggests this is not just from the Victorian lockdown – there is more cautious behaviour among Sydneysiders as well.

US outlook

The continued decline in hospitalisation data — even as new daily cases hold steady — is positive because it tends to lead mortality rates by about two weeks.  There are also signs of improving economic momentum. ISI sentiment surveys for the retailers and the broader market have ticked up. The latest retail sales and food services data surprised on the upside and has now returned to pre-COVID levels.

Broad consumer sentiment surveys remain soft. However a granular review of specific activities — such as dining out, using public transport, movie-going and gym visits — suggests we are getting more comfortable with certain activities.  This supports a re-acceleration of growth. It may also explain why Republicans have been reluctant to compromise with the Democrats on the size and nature of a new fiscal package. Given Congress is now in recess for conventions, a new package is unlikely before mid-September.  There is a risk this de-rails recent improvement in growth. There are several intertwined factors at play here.

Income support has been skewed to lower-income households with a greater propensity to spend. This has played an important role in driving surprisingly strong retail sales growth. But there is a risk that the return to school may have a negative impact on the rate of COVID case growth, which may also hurt sentiment.

The bulls are confident that the pick-up in activity should be enough to stop a stalled recovery. There has also been an increase in savings rates in the US, which may sustain spending through an air pocket in fiscal support. Nevertheless, this is a key risk in the coming weeks.

US inflation data came in slightly higher than expected and inflationary expectations have now returned to pre-COVID levels. This was a factor in bond yields picking up – although there may also be a measure of indigestion at the large scale of recent issuance in the bond market.

Market review

The S&P/ASX 300 is down about -7% for the calendar year. This is lagging the S&P 500, which is up about +2% YTD in USD terms. However, the difference is driven mainly by the effect of large-cap growth — primarily Facebook, Amazon, Apple, Microsoft and Alphabet (Google). Collectively these stocks are up 37% this year in USD terms.

The question is whether we start to see some rotation towards value. There were some signs of this last week – and there is a possibility this may continue in anticipation of positive results from the large phase 3 vaccine trials due in late October.

Cyclical industrials are most likely to benefit from investors looking to get ahead of a recovery trade. Financials are more of a wild card given questions about their ability to participate in a rally given subdued bond yields and concerns over bad debts.  The key risks to any value rotation is a delay in US fiscal support and a spike in cases as the US returns to school combining to stall economic momentum.

Australian equities review

Consumer Staples (+4.1%) did well last week, helped by an encouraging result from Treasury Wine. Financials (+3.8%) were also strong. Commonwealth Bank’s (CBA, +0.3%) result was better than many had feared, however, this ironically served to boost the rest of the banking sector which does not have CBA’s safety premium. Westpac (WBC) rose +7.6%, National Australia Bank (NAB) +7.4% and ANZ (ANZ) +5.7%.

Communication services (-4.8%) was the weakest sector as Telstra’s (TLS, -7.7%) result disappointed.

The gold miners were soft as the gold price corrected, with Northern Star (NST, 10.4%) the worst performer in the ASX 100. The response from Newcrest (NCM, -5.3%), Saracen (SAR, -4.8%) and Evolution (EVN, -0.3%) was more muted. Most of the gold miners are flagging higher Capex than the market expected. While this is backed by strong cash flow, it’s prompting concerns about the risk of capital wastage. 

Travel-related stocks outperformed as part of a broader trend of better performance from value. Flight Centre (FLT, +15.0%) and Qantas (QAN, +10.8%) both rose. Muted take-up of the retail component of the latter’s placement may also have helped, given it implies less dilution.


On a net basis, there were more positive notes than negative.

There were positive updates from:

  • Treasury Wine (TWE, +17.6%). The best performer in the ASX 100, with the market latching onto signs that Chinese demand is showing signs of recovery.
  • QBE Insurance (QBE, +10.5%). Results had been pre-announced, but management emphasised supportive trends on premium pricing which are underpinning higher insurance margins.
  • Commonwealth Bank (CBA, +0.34%). No deterioration in bad and doubtful debts or net interest margins from the previous quarterly update – and a slightly better position on capital – meant a well-received result which was reflected more in the other bank stock prices.
  • Xero (XRO, +3.4%). Management’s AGM update revealed the latest subscriber trends remain positive. Policy support is staving off a feared surge in insolvencies. Business formation rates are stronger than usual. 
  • AMP (AMP, +10.3%). Announced a special dividend and buy-back, equating to 10% of its market cap. This provided short-term relief for shareholders and went straight onto the share price.
  • Goodman Group (GMG, +4.8%). A stronger-than-expected order book of new developments demonstrates the current bifurcation in the REITs sector. While malls face challenges from foot traffic, soaring online sales are a stiff tailwind for GMG.  
  • James Hardie (JHX, +1.5%). Its quarterly update confirmed that strong trends continue in new US housing. However, it also showed the remaining parts of its business are back to growth as well. Strong cost control means margins are in a sweet spot.

These companies had poorly-received updates:

  • AGL Energy (AGL, -8.8%). The worst performer in the ASX 100 outside of NST. Management downgraded earnings based on weaker forward-pricing trends for electricity. This is likely to be an ongoing issue.
  • Telstra (TLS, -7.7%). Hit its FY20 numbers, but gave a disappointing outlook. There are two issues. First, losses associated with the rump of its fixed-line business, which the market expected to hit in FY22, are now likely to come through earlier, leading to a downgrade in FY21. Second, and more importantly, management has cut the return on capital target for FY23 from 10% to 7%. While consensus had not factored in a 10% return, this shift is seen as a signal that the environment will be tougher than management had previously indicated. Current consensus expects the dividend is unlikely to be cut – and the degree of yield in the current environment should see the stock remain supported. However, it also may mean the implied upside case is now smaller.
  • Seek (SEK, -8.6%). Outlined a potential scenario for FY21 in which, if the environment remains as it is now, it will barely make a profit. This demonstrates the challenge for some of the recovery stocks where, having run hard from the rebound, it may transpire they have run ahead of themselves.

There were mixed updates from:

  • Evolution Mining (EVN, -0.3%). Short-term Capex guidance came in at the higher end of consensus expectations – and production volumes at the lower end. There was some offset as management upgraded the expected size of resource at the new Red Lake mine in Canada.
  • Downer (DOW, +6.9%). The result was in-line with guidance from its recent capital raising. While parts of the business continue to face challenges, management seems focused on a restructure which will see it withdraw from these businesses and focus on its core urban service franchise.
  • Transurban (TCL, +0.7%). While traffic has had a good rebound from the pothole of April, the more recent trends have been softer, leading to some risk around the size of the FY21 distribution. 
  • Sydney Airport (SYD, +2.0%). The $2bn entitlement raising demonstrates the scale of the issues facing SYD. However, it removed an overhang of doubt about when and how much the company would be forced to raise.

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