Corporate earnings driving markets but lockdown continues to weigh on sentiment.

Global equity markets were broadly flat last week in AUD terms.

Despite an increasing number of COVID-19 cases, investment markets were more focused on corporate earnings season in the US and Australia than rising case numbers.

Whilst infections are climbing, investment markets are taking some comfort from the number of COVID related deaths which are lower than they were a year ago. Nevertheless, fears over the rampant spread of the Delta variant continues to see a steady uptick in volatility.

The VIX (volatility index) rose +6% last week and more interestingly climbed +15% in July – its first monthly gain since January.

The Federal Reserve predictably kept interest rates on hold at its policy meeting and provided some clarity on the future direction of its bond purchasing program. Chairman, Jerome Powell stated that a reduction of monthly bond purchases (US$120b) would commence if the economic rebound continues at current levels.

Fundamentally, a growing economy will drive further gains in employment and when ‘full’ employment is reached the Fed will likely begin the tapering of its stimulus.

Whilst current employment data is undeniably positive and shows the labour force is continuing to grow, we do believe the true unemployment figure to be slightly higher with a number of those on lay-off still classified as ‘employed’ when in reality they should not be.

With the US unemployment rate at a 50-year low of 3.5% prior to the pandemic there still needs to be a further tightening in the labour market to reach what the Fed would consider ‘full’ employment.

Non-farm payrolls for July are released this Friday in the US with forecasts for unemployment to fall from 5.9% to 5.8%. 

At a stock level we saw some of the major tech stocks report last week in the US.

The FAANGs ex Netflix (NFLX) represented by Facebook (FB), Apple (AAPL), Amazon (AMZN), and Google (GOOG) all reported Q2 and Q3 earnings number last week.

FB fell -3.7% after announcing it expected revenue growth to slow in Q3 and Q4 whilst AAPL shares fell -1.8% despite quarterly sales and profits beating expectations with 5G iPhones and AAPL’s subscription services driving much of this outperformance. 

Microsoft (MSFT) and GOOG also reported strong operating margins but were both ultimately caught up in the overall weakness that plagued the tech sector. The NASDAQ fell -1% for the week.

Inflation spikes

Australia’s annual inflation spiked to 3.8% with headline inflation rising +0.8% over the quarter.

The main reasons behind this inflationary spike were a resurgence in global demand for oil which saw fuel prices rebound to above pre-COVID levels, the unprecedented level of fiscal stimulus provided and the government subsidising childcare throughout the heights of the pandemic.

Stripping out some of the more volatile items embedded in the headline inflation figure, core inflation remains soft coming in at 1.6% for the financial year. This continues to run well below the target band of the RBA who have set a 2-3% inflationary target.

Whilst we had formed a view that inflationary pressures were likely to persist with education, transport and household equipment and services driving much of this increase, the impact of the NSW lockdown on the broader economy is likely to prevent inflation from rising in the coming quarters.

Inflation will ultimately be driven by wages growth which continues to run below the RBA expectations of 3% and with the economy set to contract in the September quarter as result of lengthy lockdowns in various states the near-term inflationary pressures appear to have subsided.

Rate hike expectations delayed as lockdown continues

The prolonged Greater Sydney lockdown has seen a very quick turnaround from Commonwealth Bank analysts who only a fortnight ago called for a November 2022 rate rise.

However, the ongoing nature of COVID cases in NSW which are hovering around 200 cases per day has led to analysts revising their initial estimates with the COVID outbreak pushing out CBA’s rate hike prediction to May 2023.

In addition to the rate delay, economists are now forecasting that unemployment will peak at 5.6% in October (currently 4.9%) and that the RBA will delay its plans to begin tapering QE.

Fundamentally, the NSW lockdown is going to be a major drag on national economic output in September and leading into the December quarter.

We make no changes to our initial forecasts for rates to begin rising in 2H 2023, however, we acknowledge there is great uncertainty over the impact the current NSW lockdown will have on the economy.

If the current lockdown extends well into the backend of 2021 we expect interest rate talk may be replaced with recession talk.

ASX Weekly Wrap

The ASX200 performed in line with peers last week closing broadly flat.

Best performing sectors were miners which rose +2.8% followed by REITs which climbed +0.4% whilst the worst performers were tech stocks and utilities falling -3.6% and -3.3% respectively.

The AUD weakened against the USD falling -0.3% for the week – its fifth straight week of declines. A stronger than expected CPI print insulated the AUD from further weakness, however, the AUD ultimately fell -2% vs the USD in July as lockdowns across NSW, Victoria and SA weighed on sentiment.

Earnings season kicked off this week with a host of company’s reporting full-year and half-year earnings numbers.

Rio Tinto (RIO) rallied +5% after reporting underlying earnings of US$12b for 1H21 and announcing it will return a US$9b dividend to shareholders comprising a US$3.76 interim dividend and a US$1.85 special dividend. The result was well ahead of expectations and was ultimately driven by strong prices in iron ore.

Spark Infrastructure (SKI) received an improved takeover offer from KKR and a consortium of investors valuing SKI shares at $2.95 per share. This is the third adjustment upwards to the takeover price having initially lodged a $2.6375 bid before a second offer of 2.7375 was put forward.

As a result, SKI’s board has decided to grant the KKR and its investors the opportunity to conducts due diligence on a non-exclusive basis.

We flagged this a few weeks back but record low interest rates are providing fertile ground for takeover bids, particularly in the infrastructure space. We have now seen Sydney Airports (SYD) reject a takeover offer from IFM whilst Seven Group recently took control of construction supplier Boral (BLD). 

SKI’s high quality assets and the long term nature of its contracts which ultimately mean steady and predictable cash flows make it an attractive takeover proposition. We recommend SKI shareholder do nothing for the time being.

Following on from ANZ’s $1.5b buyback announced a fortnight ago, NAB announced last week that it was intending to purchase up to $2.5b worth of its shares back on-market.

NAB’s CET1 ratio (the amount of money the bank is required to hold on reserve by APRA) was 12.3% at its half-year results, exceeding the top end of APRA’s unquestionably strong benchmark. As a result, NAB has decided to return capital to shareholders through an on-market buyback.

Finally, this morning APT announced it has entered into an agreement with Square Incorporated which sees Square acquire all of APT shares with an implied value of $39b or $129 per APT share – a 30% premium to the last closing price.

And in further M&A developments Santos (STO) and Oil Search (OSH) today agreed to terms on a merger.

OSH shareholders will receive 0.6275 new STO shares for each OSH share held via a scheme of arrangement which will see OSH shareholders own approximately 39% of the new merged company and STO shareholders 61%.

The merged company will create a diversified portfolio of high quality, long life, low-cost assets across Australia, Timor-Leste, Papua New Guinea and North America whilst its pro-forma market capitalisation of $21b will place the merged entity in the ASX top-20.

This week we see ResMed (RMD) and REA Group (REA) report on Thursday and Friday before reporting season really ramps up in the following week.

Looking ahead

Monday 2nd August 2021 – Friday 6th August 2021

• Monday: AU Job Advertisements (JUL), CN Caixin Manufacturing PMI (JUL)
• Tuesday: AU RBA Interest Rate Decision, Home Loans (JUN), US Construction Spending (JUN)
• Wednesday: AU Markit Services PMI Final (JUL)
• Thursday: AU Balance of Trade (JUN), UK BoE Interest Rate Decision, US Balance of Trade (JUN)
• Friday: US Non Farm Payrolls (JUL), Unemployment Rate (JUL)

Friday 30th July, 5pm values

Friday 30th July, closing values

Key dividends

Monday 2nd August 2021 – Friday 6th August 2021

• Monday: N/A
• Tuesday: N/A
• Wednesday: N/A
• Thursday: Div Ex-Date – Djerriwarrh Investments Limited (DWJ)
  Div Pay-Date – Arena REIT (ARF)
• Friday: Div Ex-Date – BKI Investment Company Limited (BKI)

Contact

If you would like to discuss your situation, please speak to your adviser or email clientservices@primefinancial.com.au

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (www.primefinancial.com.au/fsg) for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.

The rapid economic recovery from the pandemic has supported continued momentum in equity prices with the ASX 200 rising 2.3% in June.

Earnings have continued to rebound strongly with central bank and fiscal stimulus sustaining elevated multiples. For the present, the current phase of earnings expansion coupled with the ongoing liquidity boost by policymakers is enough to justify the ASX 200 trading at a ~20% premium to its long-term average.

The portfolio has benefited from its holdings in Commonwealth Bank, Goodman Group, Wesfarmers, and Woolworths all are which are trading near record highs, reflective of their strengthening market positions and ability to deliver earnings growth through the cycle. Indeed, a key feature of the portfolio has been its preference to hold companies that have delivered resilient earnings throughout the pandemic, namely in consumer staples and healthcare sectors. 

Policymakers’ efforts to successfully inoculate the global economy have helped to deliver a V-shape recovery in corporate earnings. The ASX 200 is poised to deliver 20% gains in earnings for the upcoming FY21 earnings season and double-digit earnings gains for the 12 months following, based on consensus forecasts.

Against a backdrop of rising earnings, the 12-month forward dividend yield for the ASX 200 is now ~3.9%, supported by strong dividend momentum in Bank and Material stocks.

Whilst we remain positive on the outlook for earnings and dividends for the ASX 200, much of the good news is now captured in market valuations. A period of consolidation in the near term is warranted particularly given the two-steps-forward-one-step-back process of dealing with the pandemic.

Portfolio Performance Figures

Risk Profile Portfolio Performance Figures as at 30 June 2021

Post-Franking Credits

Prime SMA – Model Portfolio Performance Figures as at 30 June 2021

Post-Franking Credits

About the Portfolio

Portfolio Objective
To achieve capital growth with moderate tax-effective income via franked dividends through investment in listed Australian securities.

Model Portfolio
The Model Portfolio is managed by selecting primarily those securities with moderate growth potential but robust cash-generating capacity. These securities are expected to deliver an above-market average income yield, together with a relatively moderate level of capital growth. The portfolio benchmark is the S&P/ASX200 Accumulation Index.

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.

Lockdowns across three states weighing on performance.

Global equity markets were stronger last week with the MSCI World Index rallying +2.3% in AUD terms.

A sharp increase in the number of COVID cases saw Victoria’s lockdown extended for another week whilst South Australia also entered a 1-week lockdown in order to curb the spread of the highly contagious delta variant.

It is also becoming increasingly clearer that the New South Wales lockdown will extend beyond the initial deadline of July 30 given daily case numbers are upwards of 100.

With the ASX now trading +3% above its pre-COVID highs and reporting season looming we think valuations are look fuller. The unpredictable nature of this virus and the undeniably slow vaccine rollout in Australia is likely to see the rate of economic growth in Australia stall in the medium term.

The recent spike in COVID cases has already started to impact the data with consumer confidence and retail sales with both falling heavily in June.

With half the country currently in lockdown the impact to economic growth could be upwards of $10b in Q3 which could easily translate to negative growth for the quarter.

Whilst we do not believe we are on the precipice of another selloff we do believe much of the upside has now been captured. Ensuring portfolios are well positioned to outperform in the coming months has led us to favour quality stocks.

Consumer staples, healthcare and other resilient earners generating free cash flows with strong balance sheets are likely going to drive outperformance in the medium term and these areas continue to be a key focus of ours in the PRIME Australian Growth SMA.

Did the RBA announce the QE taper too soon?

It was only a fortnight ago that the RBA announced it would seek to start tapering its QE program come September flagging a reduction in weekly government bond purchases from $5b to $4b.

As we know a lot can happen in two weeks.

The RBA’s assessment of the strength of the broader economy was very much intact when the Board left rates on hold at its July 6 meeting.

However, the RBA minutes from the policy meeting released last week signal a reversal or at the very least raise further questions about the underlying strength of the Australian economy.

Despite acknowledging that risks to the economic outlook had become more balanced and that policy settings remain highly accommodative, the RBA cited ongoing virus outbreaks as a major risk which continues to contribute to risks in global supply chains.

Particularly of concern to the RBA is wage pressures which despite picking up from the historically low levels recorded following the onset of the pandemic to be around 2%-2.5% still fall short of the RBA’s expectations.

Wage growth in excess of 3% is required in order to drive inflation higher and the RBA’s current central scenario is one where wages growth and underlying inflation are expected to increase only gradually in the next two years.

Fortunately, the RBA has the flexibility to backtrack on its proposed QE tapering if it feels the economy needs further stimulus.

The Board sit once again next Tuesday and depending on the state of lockdowns across Australia it is highly likely the RBA will pause or delay its proposed QE tapering to allow the economy more time to recover from the current shutdowns.

Lockdowns driving weaker data

The impact of lockdowns on not just the economy but also sentiment is starting to flow through with consumer confidence suffering its biggest weekly decline since the beginning of the pandemic in March 2020.

Consumer confidence fell -5.2% according to the latest report as spending intentions were weaker compared to the prior corresponding period.

Four out of the five subindices all fell significantly with ‘current financial conditions’ the only component to register a gain of +1.2%. Interestingly, ‘future financial conditions’ fell -3.4% and ‘future economic conditions’ fell -4.5% highlighting renewed caution amongst households.

It was no surprise to see retail sales data for June similarly weak falling -1.8% for the month.

Victoria led the declines falling -3.5% ahead of NSW which was -2% weaker as both states endured some form of stay-at-home order for part of the month.

The only segment of the market to benefit from these snap lockdowns was food retailing which climbed +1.5% as snap lockdowns tend to see increased consumption and expenditure on food and delivery services.

It is worth noting that despite the impact of restrictions yearly sales remain positive, up +2.9% compared to June 2020.

We anticipate consumer confidence and retail sales data to remain weak in the coming month’s with NSW almost certain to be under lockdown orders well into August.

ASX Weekly Wrap

The ASX200 underperformed its global peers rising +0.6% last week.

Traditional defensives such as healthcare outperformed the market rising +4.7% as the continuing climb of delta variant cases led investors to more predictable cash generative businesses.

The next best performing sector was consumer staples (+2.2%) which, like healthcare, is considered to be a more stable and resilient earner in times of heightened volatility.

Energy stocks fared worst falling -1.7% as OPECs agreement to increase oil supply by 400,000 barrels per day beginning in August drove a sell-off in crude oil which then rallied later in the back half week.

Miners were also weaker falling -1.2% as iron ore prices fell -6% from $US222/tonne to US$209/tonne.

At a stock level ANZ Bank (ANZ) climbed +1% after announcing a $1.5b buyback. Given the strength and health of ANZ’s balance sheet, management decided the most prudent use of this capital was to buy back shares on market.

Whilst we have no exposure to ANZ in the PRIME Australian Growth SMA we do have a meaningful position in the PRIME Diversified Income SMA.

The ANZ buyback may in fact be a precursor of things to come with CBA set to release its full year results in August. CBA is the best capitalised of the major banks with a strong capital position and CET1 ratio of 12.7% so we consider the likelihood of a capital management initiative announcement to be high.

Elsewhere, Santos (STO) shares fell -6% after announcing it had submitted an all-scrip merger proposal to Oil Search (OSH) in what would have created a $22b energy company with large scale synergy benefits had the merger progressed.

OSH ultimately rejected the STO merger proposal on the basis that the proposed merger did not offer appropriate value for OSH shareholders. However, the fact that STO continues to engage with OSH suggests there is further developments to play out here.

A possible merger would make strategic sense creating a diversified portfolio of high quality, long-life assets across Australia and Papua New Guinea with a robust balance sheet that could self-fund future growth.

Finally, Ramsay Healthcare (RHC) announced that its $3.9b acquisition of UK-based Spite Healthcare had been rejected.

It is disappointing given the acquisition was set to expand RHC’s footprint in the UK market by creating a leading private health care services provider and given it was unanimously recommended by the Spire board.

However, it is always in the best interests of shareholders that management exercise financial discipline with regards to acquisitions. Despite the failed acquisition we continue to see a strong long term value proposition for RHC shareholders given RHC’s healthy balance sheet and strong cash flow position.

Looking ahead

Monday 26th July 2021 – Friday 30th July 2021

• Monday: N/A
• Tuesday: US New Home Sales (JUN), Durable Goods Orders (JUN)
• Wednesday: AU Inflation Rate (Q2)
• Thursday: AU Import/Export Prices (Q2), US Federal Reserve Interest Rate Decision, GDP Growth Rate (Q2)
• Friday: AU Private Sector Credit (JUN), US Personal Consumption Expenditure Index (JUN)

Friday 23rd July, 5pm values

Friday 23rd July, closing values

Key dividends

Monday 26th July 2021 – Friday 30th July 2021

• Monday: N/A
• Tuesday: Div Ex-Date – BOQPE (BOQPE), BOQPF (BOQPF)
• Wednesday: Div Ex-Date – Mirrabooka Investments Limited (MIR)
  Div Pay-Date – Bingo Industries Limited (BIN)
• Thursday: Div Pay-Date – Australian Unity Office Fund (AOF), Premier Investments Limited (PMV)
• Friday: Div Pay-Date – Plato Income Maximiser Limited (PL8)

Contact

If you would like to discuss your situation, please speak to your adviser or email clientservices@primefinancial.com.au

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (www.primefinancial.com.au/fsg) for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.

Data strong but is growth moderating?

Once again, we find ourselves back in lockdown. Victoria’s snap 5-day lockdown which follows the ongoing lockdown in Greater Sydney saw the ASX seesaw back and forth last week.

Employment data continues to trend in the right direction with June’s data improving once again. However, we have to expect some short to medium term reversal here in the coming months with Australia’s two most populous cities locked down simultaneously.

Additionally, recent RBA forecasts for Australia’s GDP to grow by 4.75% in 2021 are more than likely going to need to be revised downwards.  Preliminary estimates indicate a possible contraction of up to -1.4% from national economic output in the September quarter.

Whilst income and employment will remain supported somewhat through Federal and State government assistance the rosy outlook has been somewhat tempered by the recent spate of lockdowns with the health of the economy in 2H21 now at greater risk.

Is global growth moderating?

Perhaps the risk to the Australian economy is simply mirroring that of other major markets.

China’s central bank recently cut capital adequacy requirements for banks meaning less cash is required to be held on reserve. The reduction in the reserve requirement ratio by 0.5% aims to release additional liquidity into the economy in a move that aims to further fuel growth.

This pivot to easing signals heightened growth risks and will see $206b of Chinese Yuan equivalent released into the economy commencing last Thursday.

The move comes as Chinese GDP growth halved in Q2 growing by +7.9% compared to +18.3% in Q1. On an annual basis Chinese GDP remains strong at 12.7% but the slowing in Q2 suggests some of the rapid expansion we have become used to following the COVID selloff may be moderating somewhat.

Further supporting the notion that growth may be easing was Federal Reserve Chairman Jerome Powell’s comments around inflation and the US economy.

Inflationary data released last week showed headline inflation climbed to 5.4% in June from 5% in May – its fastest rate of growth in consumer prices in 13 years.

Powell continues to view inflation as transitory believing it will “remain elevated in coming months before moderating” but importantly said that the recovery had not progressed enough to being paring back the central bank’s monthly asset purchases.

This tells us that the central banks from two of the world’s largest economies are cognisant of a possible slowdown in growth and remain committed to stimulating their economies.

Our view on US inflation extends beyond transitory. We believe there are persistent price pressures that will ultimately cause the Federal Reserve to reposition its thinking. For instance, the food price index which measures increases to the cost of food doubled in June, whilst housing costs also climbed the most in six months in June.

The continued reopening of the US economy, supply chain bottlenecks and record stimulus cheques are all contributing to an increase in prices and we believe the willingness of the Federal Reserve to allow inflation to overshoot can only carry on for so long before the economy risks overheating.

Australia Unemployment and Business Survey

Who would have thought last June when unemployment was 7.4% and climbing that 12 months later we would be recording a jobless figure of 4.9%.

The Australian economy created 29,100 new jobs in June with the labour force adding over 51,000 full time jobs which was partially offset by a fall in part time work of around 22,000.

As previously mentioned, this data does not take into account the impact Sydney’s lockdown restrictions will have had on the labour force which is likely to see a significant number of Sydney workers stood down for some period of time.

If the impact of the Sydney lockdown (and the possibility of an extended lockdown in Victoria depending on the data) saw unemployment increase by around 50,000 as per current analyst estimates, then we may be looking at around a 0.5% increase to the unemployment figure in the coming months.

But let us not take the shine off what was a positive set of numbers with the participation rate remaining steady and youth unemployment declining. The only negative was a slight increase in the underemployment rate which climbed +0.5% to 7.9%.

The NAB Business survey unsurprisingly showed business confidence had taken a hit through June with rising COVID cases in NSW driving these declines.

Recreation and personal services which remains one of the most negatively impacted segments of social distancing and lockdowns was understandably weaker in June.

Meanwhile business conditions fell by 12pts after reaching a new high last month. The decline in conditions was driven by falls across the trading, profitability and employment sub-indexes whilst business confidence likewise declined with the threats of border closures weighing on confidence.

Forward looking indicators were softer in the month with both forward orders and capacity utilisation pulling back but both continue to remain high. Capital expenditure and employment variables remain in positive territory.

ASX Weekly Wrap

The ASX200 outperformed the global benchmark (+0.1% in AUD terms) last week rising +1%.

The positive returns were built off the back of a positive lead from North American and European equity markets which rallied as investor concerns about rising interest rates moderated somewhat.

Miners were the strongest sector rallying +4.5% ahead of utilities which climbed +4.2%.

Weighing on performance were tech stocks which fell -3% ahead of energy stocks which were -1.2% weaker following -3% declines in the price of oil.

At a stock level we saw significant movement in the Buy Now Pay Later (BNPL) space.

News last week that PayPal (PYPL) was removing late payment fees altogether from its “pay in four” option saw investors sell down the likes of Afterpay (APT) and Zip (Z1P) and other BNPL providers. For context APT made approximately $70m in late fees in 2020 so the PYPL move is key for the industry.  

APT and Z1P fell -12% and -14% for the week and respectively.

In other news Apple (AAPL) announced it was working on a new service to compete with APT allowing consumers to use Apple Pay and make purchases in instalments. The announcement of this new service “Apple Pay Later” saw Nasdaq-listed BNPL company Affirm (AFRM) fall -15% in the US.

It appears as if record low interest rates are currently driving a number of potential takeover offers.

One of our preferred income stocks Spark Infrastructure (SKI) rallied +17% last week after announcing it received and subsequently rejected two takeover offers from a consortium of investors led by private equity firm KKR.

The initial non-binding proposal from KKR valuing SKI at $2.70 per share was subsequently revised upward to $2.80 per share with SKI’s rejection signalling the board’s view that the offer still undervalued SKI’s infrastructure. 

We have long believed the quality of SKI’s infrastructure assets and the nature of SKI’s long term contracts and predictable cash flows meant this was an attractive income paying stock with some capital growth upside, so we are pleased to see Spark the subject of a takeover target.

Still in the infrastructure space, Sydney Airport (SYD) last week rejected a $22b takeover bid from a consortium of investors led by IFM. SYD’s long-term concession lease and high quality infrastructure assets were deemed superior to the $8.25 per share bid. SYD shares climbed +2.3% last week.

Finally, Wesfarmers (WES) launched a takeover bid for Australian Pharmaceutical Industries (API) at $1.38 per share – a 20% premium to the last closing price. API’s major shareholder Washington H. Soul Pattinson (SOL) (19.3%) has agreed to vote in favour in the absence of any higher bid.

The best performing stock in the PRIME Australian Equity Growth SMA last week was Northern Star Resources (NST) which climbed +6.2% ahead of BHP which similarly rallied +5%. Both stocks appear to have been caught up in the commodities rally given there was no major news flow released on either stock.

Looking ahead

Monday 19th July 2021 – Friday 22nd July 2021

• Monday: N/A
• Tuesday: AU RBA Meeting Minutes, US Building Permits (JUN)
• Wednesday: AU Westpac Leading Index (JUN)
• Thursday: US Weekly Jobless Claims
• Friday: AU Markit Composite PMI (JUL), US Existing Home Sales (JUN), UK Consumer Confidence (JUL)

Friday 16th July, 5pm values

Friday 16th July, closing values

Key dividends

Monday 19th July 2021 – Friday 22nd July 2021

• Monday: Div Ex-Date – Plato Income Maximiser Limited (PL8)
• Tuesday: Div Pay-Date – Ardea Real Bond Fund (XARO), Vanguard All World Ex-US ETF (VEU)
• Wednesday: Div Pay-Date – Magellan Global Fund Closed Class Unit (MGF), Magellan Global Fund Open Class Units (MGOC)
• Thursday: Div Pay-Date – Collins Foods Limited (CKF), GrainCorp Limited (GNC)
• Friday: Div Pay-Date – Vanguard US Total Market (VTS)

Contact

If you would like to discuss your situation, please speak to your adviser or email clientservices@primefinancial.com.au

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (www.primefinancial.com.au/fsg) for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.

Equities mixed but data remains strong.

Global equity markets climbed higher for a third consecutive week with the MSCI World Index rising +0.30% in AUD terms.

Major US equity markets were mixed throughout the week but posted a strong session on Friday which saw growth stocks further extend their recent run of outperformance versus their value counterparts.

Once again, record all-time highs were recorded within the S&P 500 and Nasdaq indexes.

U.S treasury yields fell sharply across the board last week, with the 10-year yield falling to 1.25% in intraday trading on Thursday – the lowest yield seen since February. Though, the losses were ultimately recovered the following trading day.

RBA leaves rates on hold, reduces bond purchasing program

The Reserve Bank of Australia once again left the cash rate untouched at 0.10%, marking the seventh consecutive meeting the rate was left unchanged. Moreover, the RBA stated that the 3-year bond yield would also remain at 0.10%. 

It also announced that it would start the slight tapering off of its quantitative easing (QE) program, with the bank reducing the number of government bonds being purchased from $5b to $4b per week after September and then continuing there on out until mid-November at the earliest. 

The bank restated that it remains committed to maintaining highly supportive monetary conditions and does not intend to increase the cash rate until actual inflation is sustainably within the 2-3% range, asserting that it is not enough for inflation to be simply forecasted within this range.  

Though, the RBA commented that the economic recovery from Australia had been stronger than originally anticipated and expects the positive outlook for the investment and labour market to now continue. 

Governor Phillip Lowe had a surprising change of tone when forecasting the conditions for interest rates to rise. The RBA had previously stated that ‘’rates will be on hold until 2024 at the earliest, however, now it is ‘until 2024’ hinting that an increase in rates may come sooner than once thought.  

The RBA also stated that the board would closely monitor trends in housing borrowing to ensure lending standards are maintained in the current environment of rising house prices and low interest rates. 

Second Quarter results kick-off next week in the US

An important week to come as investors prep themselves for the big US banks to kick off reporting season with the likes of Bank of America, JP Morgan Chase and Wells Fargo alongside other major financial companies all due to report their quarterly earnings next week. 

Analysts expect yet another strong quarter on Wall Street as the US’s economy progressively recovers with fewer Americans now defaulting on loans compared to earlier in the pandemic. 

Forecasted earnings by analysts expect an increase in earnings of 65.8% from Q2 of 2020, keeping in mind the low base given the shutdown in the US last spring. 

This reporting season marks a crucial time for investors as upcoming earnings must validate and justify how a market can continue to post record highs. 

ASX Weekly Wrap

Locally, investors were discouraged towards the tail-end of the week as additional lockdown restrictions were imposed in NSW after COVID-19 case numbers worsened, with the state recording 44 new locally acquired cases. A figure of this nature has not recorded for 14 months. 

As a result, the local market sold off on Friday as investors rotated out of risk assets. Concerns surrounding Australia’s path to recovery from the new COVID-19 cases linked to the infectious delta strain were a primary driver. 

The S&P/ASX 200 Index ended the week -0.5% lower with Friday’s -0/9% fall weighing heavily on the index return. 

The consumer discretionary sector led losses on the ASX last week, contracting -2.7% throughout the week. Poorly received updates from Tabcorp Holdings (TAH) about the demerging of its Lotteries & Keno business can be pointed to for blame.  

In contrast, the best performing sector for the week was the Industrials sector which gained +3.3% for the week. 

This strong gain posted in the Industrial sector was led by Sydney Airports (SYD) which was a standout for the week after it received an unsolicited takeover bid by a consortium of institutional investors at an offer price of $8.25 per share or $22 billion in total.

The bid represented a 42% premium to Sydney Airport’s previous close and resulted in SYD shares surging from $5.80 to an intraday high of $8.04 on Monday. 

Meanwhile, the best performing stock within the Prime Australian Equities Growth SMA last week was Ampol Ltd (ALD) which climbed +3.8% following a positive update on court proceedings against the company. 

Looking ahead

Monday 12th July 2021 – Friday 16th July 2021

• Monday: AU Retail Sales (MAY), ANZ Job Advertisements (JUN), CN Caixin Services PMI (JUN)
• Tuesday: AU RBA Interest Rate Decision
• Wednesday: US Markit Services PMI (JUN), ISM Non-Manufacturing PMI (JUN)
• Thursday: US FOMC Minutes, Weekly Jobless Claims
• Friday: CN Inflation Rate (JUN), UK Balance of Trade (MAY)

Friday 9th July, 5pm values

Friday 9th July, closing values

Key dividends

Monday 12th July 2021 – Friday 16th July 2021

• Monday: N/A
• Tuesday: Div Pay-Date –  iShares Asia 50 ETF (IAA), iShares MSCI Emerging Markets ETF (IEM), iShares Global 100 ETF (IOO), iShares S&P 500 ETF (IVV)
• Wednesday: N/A
• Thursday: Div Pay-Date – ETFS FANG+ ETF (FANG), Platinum Asia Fund (PAXX), Platinum International Fund (PIXX), Qualitas Real Estate Income Fund (QRI)
• Friday: Div Pay-Date – Betashares Legg Mason Australian Bond (BNDS), BetaShares Gold Bullion ETF-Currency Hedged (QAU), Vanguard Australian Shares Index ETF (VAS)

Contact

If you would like to discuss your situation, please speak to your adviser or email clientservices@primefinancial.com.au

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (www.primefinancial.com.au/fsg) for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.

Strong economic data underpinning equity markets.

Given the focus on rising inflation and the expectation that recent inflation spikes in the US are temporary or transitory it was certainly interesting to see a shift in this rhetoric over the past week.

Speaking to the House Subcommittee, Federal Reserve Chairman Jerome Powell stated that inflation “effects have been larger than expected and may turn out to be more persistent than expected.”

If this proves to be true and if the Federal Reserve’s interpretation that these inflationary pressures are indeed likely to be more persistent, then it is safe to say that the likelihood of interest rate rises are only going to be sooner than flagged.

We already have some confirmation of this with the most recent Federal Reserve meeting indicating a growing chorus of voting members are swinging towards a 2023 rate rise ahead of what was previously 2024.

However, we would present the view that a 2022 first rate rise remains a distinct possibility.

With the Federal Reserve on record stating that employment and inflation are the primary determinants of when interest rates will rise and with US unemployment data continuing to bounce back from the COVID-19 induced recession we think the outlook remains strong.

Further confirmation of the strength in the US economy can be seen from June’s non-farm payroll data released on Friday.

The US economy posted its sixth consecutive month of job gains in June with 850,000 jobs added compared to expectations of 700,000.

The unemployment rate increased slightly from 5.8% in May to 5.9% in June although much of this increase was reflective of an increasing number of job seekers.

The June non-farm payrolls reversed course from the two previous months which disappointed as worker supply shortages restricted the pace of the recovery in some industries.

Importantly, June’s payroll gains also contributed to higher wages with average hourly earnings increasing +0.3% compared to May.

US equities rallied +1.7% for the week on the back of this data.

Despite the negative ramifications rising interest rates may have on equity market valuations there is a positive. The rebound we have witnessed economically and in equity markets over the past year has led regulators in the US to ease dividend payout restrictions.

The Federal Reserve’s recent stress tests found the banks’ balance sheets were healthy enough to navigate any sudden economic shocks and have therefore withdrawn dividend restrictions. This is undeniably positive for shareholders with Morgan Stanley announcing it would double its quarterly dividend.

OPEC+

Crude oil prices rose to their highest levels since 2018 (US$75/barrel) and have the potential to rise further in the near term after the OPEC+ meeting saw the United Arab Emirates reject a deal to boost output by 400,000 barrel a day from August through to December.

The UAE argued that under the current terms of the OPEC+ deal it was making greater cuts to production than other members of the committee and therefore was unwilling to accept the terms of the revised deal.

Whilst negotiations are expected to continue to resolve the dispute, a standoff would mean that production does not increase which would ultimately squeeze an alright tight supply market sending oil prices even higher.

Private Sector Credit

Private sector credit in Australia rose +0.4% in May following on from a +0.2% gain in April as the local economy continues to strengthen.

In spite of unpredictable state-wide lockdowns housing credit continues to pick up (0.6% in May) whilst personal credit also ticked higher rising to +0.2% from 0% the month before.

Importantly, business credit rebounded in May to +0.2% having fallen -0.3% in April.

Private sector credit details the extent and capacity to which businesses, consumers and homeowners can afford to borrow which ultimately fuels economic growth.

Growth in private sector credit (+1.9% annualised in May) indicated strong business conditions and sentiment in Australia which is another positive as we move away from the weak economic conditions of 2020 which saw Australia enter its first recession in nearly thirty years.

EOFY

Australian equities closed out the financial year strongly with the ASX200 rallying +24% in FY21 – its best return since the index was launched in 2000.

Whilst the ASX200 did rally off a lower base given the COVID-19 selloff saw markets fall significantly, strong upgrades to earnings and business fundamentals drove not only markets higher in FY21 but also economic fundamentals.

Looking ahead to the upcoming full year reporting season in August, the market is expecting earnings growth of around +25% which if achieved would validate the 24% recovery we have seen in the ASX200.

We anticipate reporting season to be a strong one but with valuations undeniably looking fuller at current levels we continue to concentrate the Prime Australian Equity Growth Portfolio with a quality bias.

We see the most upside and opportunity for shareholder returns in companies that are driving these earnings upgrades (the banking sector, resources, and particular segments of the healthcare industry).

With demand in owner occupied lending growing at a healthy 7% we continue to be weighted to the mortgage banks, mainly CBA and WBC which are seeing growth whilst generating 4-5% dividend yields and a strong earnings recovery.

ASX Weekly Wrap

The ASX200 underperformed its global peers rounding out the week flat as rising COVID-19 infections across the country saw several states and territories announce the now all too familiar term ‘snap lockdowns.’

The best performing sectors were telcos adding +3.2% ahead of consumer discretionary stocks which climbed +1% higher.

Weighing on performance attribution were tech stocks which slid -3%, whilst real estate investment trusts (REITs) fell -2% with many stocks trading ex-dividend running into the end of the financial year.

Iron ore was largely unchanged having recently reclaimed the US$220/tonne level on the back of rising demand.

At a stock level education provider IDP Education (IEL) was the best performer last week rising +18% after announcing it had acquired 100% of the British Council’s Indian International English Language Testing System. The deal now places IEL as the sole distributor in the Indian market.

AGL Energy (AGL) was one of the worst performers last week falling -10% after announcing it was planning to demerge its retailing business from its coal fleet in a move that aims to accelerate its clean energy shift. AGL also announced it would terminate its special dividend program and warned of weaker FY22 earnings.

Telstra (TLS) was the best performing stock in the Prime Australian Equity Growth Portfolio rising +5.5% to trade at an 18-month high around $3.80 per share.

The move in TLS shares came on the back of TLS selling a 49% stake in its InfraCo Tower business to a consortium including the Future Fund and Commonwealth Superannuation Corporation.

Net proceeds from the sale are expected to be $2.8b with about half of those funds expected to be returned to TLS shareholders in FY22.

Looking ahead

Monday 05th July 2021 – Friday 09th July 2021

• Monday: AU Retail Sales (MAY), ANZ Job Advertisements (JUN), CN Caixin Services PMI (JUN)
• Tuesday: AU RBA Interest Rate Decision
• Wednesday: US Markit Services PMI (JUN), ISM Non-Manufacturing PMI (JUN)
• Thursday: US FOMC Minutes, Weekly Jobless Claims
• Friday: CN Inflation Rate (JUN), UK Balance of Trade (MAY)

Friday 2nd July, 5pm values

Friday 2nd July, closing values

Key dividends

Monday 28th June 2021 – Friday 09th July 2021

• Monday: Div Pay-Date – ALS Limited (ALS), Cimic Group (CIM)
• Tuesday: N/A
• Wednesday: Div Ex-Date – Collins Foods Ltd (CKF), GrainCorp Ltd (GNC), Spark Infrastructure (SKI)
  Div Pay-Date – NABPD (NABPD)
• Thursday: Div Pay-Date – ANZPD (ANZPD), Metrics Income Opportunities Trust (MOT), Metrics Master Income Trust (MXT)
• Friday: Div Pay-Date – Orica Ltd (ORI)

Contact

If you would like to discuss your situation, please speak to your adviser or email clientservices@primefinancial.com.au

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (www.primefinancial.com.au/fsg) for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.

Off the back of the Hayne Royal Commission, changes in the way we manage and administer Financial Disclosure Statements (FDS) and Renewal notices (Opt ins) have been introduced with legislation coming into effect the 1^st July 2021.

What is changing

Where we provide Clients with an ongoing fee arrangement, we will now need to provide:

Annual Renewal (Opt in)

Originally this was every two years and did not include clients that we onboarded prior to 1/7/2013. This has now been changed to include all clients and for an annual opt in.

Enhanced Fee Disclosure Statement (FDS)

While we have been providing these statements for our existing clients, there have been a few amendments. The statement must now include:

• Fees paid by the client over the last 12 months
• Services offered & provided over the last 12 months
• Fees and Services for the next 12 months

Consent to Ongoing Fee Arrangements

Written consent from the client is now required to enable a fee recipient to deduct ongoing fees from a clients account. Fee recipients could include ourselves if we were debiting ongoing fees and/or other institutions such as Macquarie Wrap and BT Panorama.

We understand that there are institutions who are proposing a universal client consent form but this is still a continued discussion.  At this stage we will need to use the institutions own forms in addition to ours to obtain consent.

We have combined all of these into the one statement that the client will now need to sign. These statements will be sent to clients on the anniversary of their Ongoing Service Agreement and they will have 120 days to sign and return the form otherwise we will need to cease fees and services.

To speak to our client services team, please call 1800 064 959 or click here to contact us.

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (www.primefinancial.com.au/fsg) for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.

In May, the ASX 200 rallied to a new record high emboldened by a stimulatory Federal budget and continued accommodative central bank support. 

The highly supportive macroeconomic environment has nurtured an impressive recovery for corporate earnings and dividends further propelling equity valuations to historically high levels.

The portfolio concluded the month of May up 3.51% compared to the ASX 200 Accumulation Index up 2.34%. Positive contribution for the portfolio was driven by Westpac (WBC) Commonwealth Bank (CBA), and CSL Limited (CSL). Whereas Ramsay Health Care (RHC), Cleanaway Waste Management (CWY) and Santos (STO) weighed on attribution.

A key beneficiary of Australia’s economic restoration has been typified by the retail banks which have delivered the strongest earnings and dividend upgrades. At a portfolio level both Commonwealth and Westpac (Australia’s largest mortgage banks) are well placed to benefit from the momentum in housing loan growth. Moreover, CBA is enjoying the dual benefit of being leveraged to stronger housing market and delivering above-system volume growth. Overall, the mortgage led banks (CBA, SUN, WBC) are in an earnings recovery phase that will restore their appeal to deliver an attractive dividend income stream for investors.

The portfolio has a blend of 3 factor exposures with Quality being the strongest style weighting more than 60% in the portfolio. Woolworths being one of the quality stocks in the fund has been demonstrating its ability to consistently deliver superior returns compared to industry peers. The business is highly cash generative, maintains a strong balance sheet and is the largest supermarket business in Australia. We view WOW as best-in-class with a strong supermarket and liquor footprint as well as a superior online offering compared to domestic peers.

WOW’s supermarket business has continued to materially out-trade Coles, and notably its online grocery sales momentum of +90% compared to Coles +49% in 3Q21 highlights the leverage in its operating model. The different strategic priorities and better execution for online compared to its peers lead to topline outperformance for WOW and increase risk for customer stickiness for its competitors. These have inevitably consolidated WOW’s market leading position and our preference on WOW in the Staples space.

Portfolio Performance Figures

Risk Profile Portfolio Performance Figures as at 31 May 2021

Post-Franking Credits

Prime SMA – Model Portfolio Performance Figures as at 31 May 2021

Post-Franking Credits

About the Portfolio

Portfolio Objective
To achieve capital growth with moderate tax-effective income via franked dividends through investment in listed Australian securities.

Model Portfolio
The Model Portfolio is managed by selecting primarily those securities with moderate growth potential but robust cash-generating capacity. These securities are expected to deliver an above-market average income yield, together with a relatively moderate level of capital growth. The portfolio benchmark is the S&P/ASX200 Accumulation Index.

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.

Interest rate hikes remain some time away.

The last week of the financial year always presents one final opportunity for fund managers and investors to rebalance portfolios.

Typically, we see a little more volatility with investors looking to book some ‘tax losses’ whilst fund managers are keen to exit some of the poorer performers within portfolios to hit the reset button and begin July 1 with a clean slate.

We also tend to see some of the more harshly treated stocks that have been sold for tax purposes rebound strongly in July once all this selling is done so we remain cautious of a slight uptick in volatility over the next few weeks.

The PRIME Australian Equity Growth SMA continues to favour quality stocks at a reasonable price and remains predominantly fully invested, however, there is scope to add to any existing portfolio holdings should market valuations provide an opportunity to increase exposures.

Post Federal Reserve Meeting views

Global equity markets were stronger (+0.8%) as worries about higher interest rates eased somewhat. In reality, it seems that investors and markets are accepting that higher rates are on the horizon rather than ignoring the obvious truth.

The question obviously remains as to the when not if.

Federal Reserve chairman Jerome Powell doubled down on his comments this week that inflation would subside having recorded an annualised figure of 5% in May.

Speaking to the House last week Powell referred to strong increases in the price of oil and a rebound in spending on the back of unprecedented stimulus as an explanation for the strong uptick in inflation.

The key point in his testimony was ‘transitory’. As the economy continues to expand and supply catches up with demand (which has been given a significant boost from fiscal stimulus) prices for goods and services (inflation) are expected to moderate.

Whether or not these recent price increases are indeed transitory only time will tell. However, the fact that 13 out of the 18-person policy board now see rates rising in 2023 compared to only 6 in previous meetings tells us that risks remain for earlier than forecasted rate rises.

Interestingly, one such Federal Reserve member, Raphael Bostic who is the president and CEO of the Federal Reserve Bank of Atlanta and who was traditionally a staunch advocate for loose monetary policy settings has done a complete volte face.

According to Bostic “the upside surprises in recent data points [has] pulled forward projections for [the] first move to late 2022 [with] two moves in 2023.”

What we do know is that the process of shifting from accommodative monetary policy to tighter monetary policy settings will begin with an easing of the QE program which currently sees the Fed purchasing $US120b of bonds each month.

Depending on data points the annual Jackson Hole economic summit in August could emerge as a strong scenario for the Fed to announce the tapering of its QE program.

US GDP data last week showed the US economy grew by +6.4% in Q1 leading economists to believe 2021 may be the strongest year for the US economy in seventy years.

US equities rallied +2.7% for the week.

Manufacturing PMI

Australia’s manufacturing sector continued to expand in June despite climbing at a slower pace than the month prior.

The manufacturing PMI (Purchasing Managers’ Index) slowed slightly from 60.4 in May to record a score of 58.4 in June.

The overall score is based on data obtained from questionnaires sent to purchasing managers in a panel of around 400 manufacturers with the survey responses collected used to indicate the direction of change compared to the previous month.

A diffusion index is calculated for each survey variable with a final score above 50 indicating expansion and sub 50 indicating contraction.

Private sector output continued to expand alongside new orders in June, but growth slowed as a result of the heightened COVID-19 restrictions in Victoria and supply bottlenecks.

Notwithstanding the slowing pace, the manufacturing sector continues to strengthen as the economy transitions itself away from that of a ‘recovering’ economy post COVID-19 to that of an ‘expanding’ economy.

ASX Weekly Wrap

The ASX200 underperformed last week posting its first weekly decline for June last week falling -0.8%.

Much of this weakness stemmed from Monday’s brutal selloff (-1.8%) which ultimately took its direction from a very weak lead the previous Friday in European and North American equity markets.

Healthcare was the weakest sector falling -4.3% ahead of financials which fell -2.7% and energy stocks which rounded out the top 3 declining -2.2%

Interestingly, energy stocks declined despite oil prices rallying +4%. Expectations for further supply cuts coupled with a weaker US dollar drove oil prices higher.

On the flip side, best performers were IT stocks which advanced +3% after concerns about rising interest rates tempered somewhat. The IT sector has climbed +17% month to date making it the strongest month of returns for the sector since April 2020.

Miners also contributed positively to performance last week rallying +2.3% to offset some of the previous week’s weakness. Iron ore was largely flat and continues to trade around $US217/tonne.

At a stock level Afterpay (APT) was the best performing stock on the ASX200 climbing +13% after it announced it was making its service available to select app customers at some of the largest merchants in the United States including the likes of Amazon and Nike.

Select APT Customers can now shop at merchants by simply choosing their favourite brand in the Afterpay Shop Directory and paying with Afterpay.

Kogan.com (KGN) shares rallied +11% after the latest COVID-19 snap lockdown announcement in Sydney was seen to be beneficial for its business model. The lockdown restrictions set to last a fortnight are expected to drive more consumers online.

The worst performing stock on the ASX200 last week was Woolworths (WOW) falling -14%. However, this was caused by the demerger of its drinks and hotels business Endeavour Group Limited (EDV) which was spun out of WOW shares last week.

All WOW shareholders have received 1 EDV share which is a new listing on the ASX for each WOW share held in portfolios. So, whilst WOW shares actually declined $5.89 for the week there was an overall benefit to shareholders with EDV shares trading at $6.10 implying 21c of additional value for shareholders.

We remain confident both businesses can continue to deliver strong returns for shareholders. 

Post Demerger WOW remains the largest supermarket across Australia and New Zealand with $53 billion of revenue and an even more robust balance sheet with net cash of ~$75m. The demerger provides the catalyst for WOW to deliver a capital return of $1.6-$2b to shareholders.

Meanwhile, EDV will become the largest Australian pure play exposure to both retail drinks & hotels with a portfolio of 250 Dan Murphy’s stores, 1392 BWS outlets and 293 hotels.

Meanwhile CSL (CSL) shares fell -6.7% after 7 consecutive weeks of positive returns. The major reason for the decline was a broker downgrade from what was previously a ‘buy’ to ‘neutral’. The downgrade was purely valuation based given CSL’s strong outperformance since March.

CSL represents a major part of the PRIME Australian Equity Growth SMA and we continue to hold the stock. Our thesis is predicated on expectations for a strong uptick is plasma collections in 2021 following a weaker 2020 because of the COVID-19 impact on blood donors. 

Looking ahead

Monday 28th June 2021 – Friday 2nd July 2021

• Monday: N/A
• Tuesday: UK BoE Consumer Credit (MAY), Mortgage Approvals (MAY)
• Wednesday: AU Private Sector Credit (MAY), CN NBS Manufacturing PMI (JUN), UK GDP Growth Rate Q1
• Thursday: AU Balance of Trade (MAY), CN Caixin Manufacturing PMI (JUN), US Weekly Jobless Claims
• Friday: US Non Farm Payrolls (JUN), Balance of Trade (MAY)  

Friday 25th June, 5pm values

Friday 25th June, closing values

Key dividends

Monday 28th June 2021 – Friday 2nd July 2021

• Monday: Div Ex-Date – NABPD (NABPD)
• Tuesday: Div Ex-Date – ANZPD (ANZPD), Charter Hall Long Wale REIT (CLW), Cromwell Property Group (CMW), Transurban Group (TCL)
• Wednesday: Div Pay-Date – WBCPG (WBCPG)
• Thursday: Div Ex-Date – Ardea Real Outcome Bond Fund (XARO)
  Div Pay-Date – ANZ Bank (ANZ)
• Friday: Div Pay-Date – Macquarie Group (MQG), National Australia Bank (NAB)

Contact

If you would like to discuss your situation, please speak to your adviser or email clientservices@primefinancial.com.au

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (www.primefinancial.com.au/fsg) for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.