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Weekly market update - 25th of August 2020

Written and accurate as at: Aug 25, 2020 Current Stats & Facts

Reporting season has delivered enough – coupled with improving COVID trends in Australia and the US – to hold equity markets up. Growth has resumed its outperformance overvalue and market breadth in the US has narrowed.

In the next few weeks, we will find out if the return to school in the northern hemisphere prompts another spike in cases – and whether a lack of additional US fiscal support has an impact on recovery momentum.

Until then we think the market is likely to remain in something of a holding pattern – unless we hear news of a vaccine.

The local market was flat last week. Consumer staples (-3.1%) underperformed, driven mainly by Treasury Wines (TWE, -22.8%). Banks (-2.6%) and Resources (-2.2%) were also weak. Technology (+4.8%) did best, along with Consumer Discretionary (+4.2%) and Healthcare (+4.2%).

Key short-term factors

  • US COVID trends: A significant drop in cases is becoming evident; the return-to-school period will be key.
  • Vaccine: Marginal news, nothing material.
  • US policy: No breakthrough in negotiations.
  • US earnings: Big retailers are reporting strong sales; better-than-expected.
  • NSW & Victoria COVID trends: We’re seeing continued improvement in Vic and NSW; the market is looking to a recovery in activity.
  • Australian earnings season: Companies in the eye of the COVID storm generally did better than many feared.

Australian outlook

The Victorian moving, seven-day average for new cases continues to trend down, suggesting the lockdown is taking effect. After holding a seven-day average trend of 10 new cases for several weeks, NSW has also moved lower.

There is a view we have turned a corner. The market is looking towards the timing of restriction easing in Victoria and there’s an expectation NSW will not need to ramp up measures. This was reflected in decent performance from some of the recovery stocks last week.

US outlook

Daily new US cases have fallen to just over 40,000 from a peak of about 70,000 in mid-July. There are real-time indications that activity is picking up.

The return to school will be critical. Very few areas have seen significant second waves. Rising cases are more often linked to the virus moving into new areas. This will be put to the test with the return of schools and universities.

Politically, Trump had his best week in the polls since early June, despite the Democrat National Congress. Biden’s lead in the polls fell from 60% to 55%. At the moment there appears to be a high correlation between COVID case growth and Trump’s chances of re-election. On current trends, the polls are evening out.

Macroeconomic update

The market is split between two divergent outlooks for the economy:

  1. Bear Case: Without another stimulus package, recovery in spending will wane. A pick-up in back-to-school cases and a stronger USD on softer European macro will lead to a sell-off in seasonally weaker September.
  2. Bull Case: A combination of high savings rates in the US (now 19%), clear signalling of sustained loose policy from the Fed, improved confidence from falling cases, vaccine optimism and economic momentum will allow markets to hold and potentially move higher.

At this point, given how hard the market has run, it a tough call to make. The next couple of weeks will be important as data emerges.

Big US retailers reported strong sales. Walmart grew sales +9.3% for the quarter compared to the same period in 2019. Target lifted +24.3%, Home Depot +23.4% and Lowes +35.1%. There are several supportive trends at play including the stimulus, travel restrictions, home development and a shift in preference to bigger companies with a better online proposition. 

In the past year, online sales in the US have grown +44.5% to reach 22% of all sales. While a portion of this may unwind, it has probably accelerated two-to-three years of growth in fewer than six months.

It will be surprising if the withdrawal of stimulus does not impact on spending, because it was driven particularly by lower-income households, which have a higher propensity to consume.

Nevertheless, at this point momentum remains strong. This is reflected in good numbers from the US ISM on new manufacturing orders. US housing demand is also running far stronger than expected. This is flowing through to a surge in lumber prices and house prices.

European PMI data was softer than expected, which saw a weaker the EUR at the end of last week.

Market outlook

While the US market was up last week, breadth deteriorated and the large-cap tech names were doing the heavy lifting. This may reflect concern over the fiscal package deadlock. It is constructive that the market is not relying on a steady stream of positive vaccine news for support.  

Growth did best in the Australian equities market. Technology and healthcare led, while financials lagged. A slightly stronger USD saw resources underperform. Falling cases in Victoria and NSW, plus better-than-expected results among some of the domestic discretionary names saw the recovery stocks generally outperform.


It was a heavy week for results. About 60% of ASX-listed companies have now reported (or 80% by market cap). In aggregate, earnings per share for FY20 are down 15% versus FY19, which is broadly in line with consensus.

However the market is focusing more on the strength of balance sheets and cash flow – and in this instance, it is a case of so far, so good.

There was strong performance among stocks that fared better than expected after a period of significant concern:

  • CSL (CSL, +5.8%) — Provided FY21 guidance of 0% to 5% earnings growth. The “0%” relates to a scenario where the current run rate of plasma collection would persist – which has been the market’s key concern. Management did enough to allay market concerns about the potential downside of this issue. 
  • Qantas (QAN, +6.0%) — Provided little new information in the result, but it did provide more detail about the rate of cash burn. A material proportion relates to the shift in working capital (which should reverse as conditions normalise) while restructuring charges should also yield medium-term benefits. The rate of cash burn from the operational business – particularly in the dormant international division – was better than the market expected. 
  • Cochlear (COH, +3.2%) — Provided some evidence of patients returning as restrictions on elective surgery ease. 
  • Suncorp (SUN, +9.5%) — A decent result, driven mainly by one-off issues such as a rebound in investment income. It was an improvement on very low market expectations. 
  • Monadelphous (MND, +29.6%)— Reported a reasonable result. Very strong cash flow in the second half confounded some of the pessimistic predictions, prompting a short squeeze.
  • Coca Cola Amatil (CCL, +8.3%) — Lost cafe and restaurant sales hit as customers bought in bulk from supermarkets, rather than in higher-margin channels. However, there were signs of improving volumes and good cost discipline.
  • BlueScope Steel (BSL, +3.2%) — US steel demand was recovering with Australia very resilient
    Some stocks managed to deliver on already-high expectations. The key risk here is that they are delivering strong numbers and a base effect which will be hard to cycle:
  • Afterpay (APT, +4.2%) — Upgraded EBITDA; expenses continue to rise materially.
  • JB Hi-Fi (JBH, +7.6%) — Grew earnings 33% in FY20; July was sales running at 40% growth versus the prior comparable period as online sales offset the effect of Victorian restrictions.
  • Domino’s Pizza (DMP, +11.4%) — Pizza sales surged through the COVID period with same-store sales growth running at 10%.
  • Wesfarmers (WES, +2.4%) — Bunnings and Officeworks saw strong sales growth; WES’s overall operating leverage was held back by drag from Target and industrial businesses.

Results that disappointed the market:

  • Origin Energy (ORG, -6.2%) — Like AGL, continues to suffer from weak power prices with no let-up in sight
  • Bendigo Bank (BEN, -8.3%) — Margin pressures remain evident; a restructuring program means BEN continues to chew through capital.
  • Westpac (WBC, -4.5%) — A degree of kitchen-sinking under new management left WBC’s update probably the weakest of the big four banks. Like WBC, ANZ (ANZ, -1.6%) is feeling more margin pressure than consensus indications, although its capital position was better than expected.
  • A2 Milk (A2M -3.7%) — A decision to invest in dairy manufacturing capability (rather than rely on third-party supply) will see capital intensity pick up. There is also uncertainty over the size of stock levels in China.

Other notable results:

  • Wisetech (WTC, +40%) — A strange outcome; management downgraded FY21 revenue, but no major new bad disclosures led to a short squeeze.
  • Treasury Wine (TWE, -22.8%) — A decent result overshadowed by the politically-motivated dumping review announced by China.
  • Domain Group (DHG, -2.0%) — A solid result but cautious on near-term listings. Victoria can’t do open houses but pre-listing activity looks strong, suggesting a high degree of pent-up demand.
  • Santos (STO, -0.5%) —The result was fine although management prudence in an uncertain environment meant a lower dividend than some expected. There was also some focus on the potential CAPEX spend. However, STO’s potential projects are all bite-sized and discretionary, providing considerable flexibility. 
  • Amcor (AMC, -1.7%) — A solid result with good cash flow. Proving its defensive credentials.
  • BHP (BHP, -4.1%) — Largely in line with expectations, although a touch lighter on the dividend than many expected. Management flagged an intention to divest coal within two years, but also the potential for new acquisitions in other areas.
  • Coles (COL, -2.6%) —Delivered strong sales growth, offset by higher costs.
  • Tabcorp (TAH, +2.2%) — A result in line with consensus, accompanied by a large, expected capital raising. Lotteries continue to do well. Digital wagering growth helped offset some of the impacts on physical stores.

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