Booming start to 2020 for Australian equity investors
The ASX200 is up almost +7% YTD making it the best performing developed market
Optimism around the U.S / China trade deal and a liberal addition of monetary stimulus by the U.S Federal Reserve have fueled returns into the new year
Australian reporting season commences in a fortnight and we expect markets to get a wake-up call as corporate earnings further disappoint
Already we have seen profit warnings from Downer (DOW), CIMIC (CIM), Insurance Australia (IAG), NIB (NHF), Kogan.com (KGN) and Nufarm (NUF)
Federal Reserve Repo boosting liquidity boosts animal spirits
In endeavoring to bolster interbank liquidity last September, the US central bank have surprised many and boosted liquidity in the financial system by a staggering US $400m
Equity investors are calling this ‘Quantitative Easing 4’ (QE4) and have rushed out of cash
Next week’s US Federal Reserve meeting will provide a crucial update from the Fed as to their future intentions and is likely a binary outcome for markets. This is an important event.
Economic data released
Australian Employment not that good
Australian December Employment figures looked sound at the headline level with 28,900 new jobs created, but all of them were part time
The headline unemployment rate dipped to 5.1% and for all intents and purposes the market tried to take the number well, however we would note that Australia’s economy has barely added any full-time jobs (1,300 only) in the 5 months since July – not unlike 2016
We have flagged the erosion in job advertisement figures during 2019 (-19% annually) and find I difficult to see the unemployment rate going anywhere but up in 2020
Australian Consumer Confidence near a 4-year low
Australian Consumer Confidence for January fell again to be just off of a 4-year low which ought be unsurprising given the bush fires the country has experienced this summer
Incredibly respondents answered that they felt current conditions were virtually as bad as at any point since the GFC
Company News
Downer (DOW) profit warning
DOW disappointed the market
with its second profit downgrade this year, causing the shares to fall -20% on
the news
Once again the groups
Engineering division was the source of the angst with a surprise deterioration
in fixed price contract profitability and a subsequent need to provision for
slower activity and restructuring of the division
Though the headline downgrade
was -20%, the core operational downgrade looks to be more like -10% on an
ongoing basis
The likely sale of Mining
Services and Laundries in the coming 6 months will leave the group nearly
net-cash and with the potential to commence a small buyback
Having trimmed some of our
holdings in the high $8’s, we will look more closely at adding to positions
under $7 in the coming months
Webjet (WEB) takeover rumors continue to percolate
The press this week suggested that the company had set up an independent committee to handle interaction with advisers and potential suitors who have been granted access to WEB’s financial statements
The stock remains well bid on account of the bid speculation despite the business most definitely being impacted by the Australian bush fires
We feel like there is very real potential in a bid emerging for the company in the coming months and advise holding positions
Boral (BLD) takeover rumors continue
The press this week speculated that Irish construction giant CRH could be interested in acquiring BLD
BLD has been a major disappointment to investors in recent years, but we think much of that is priced into the shares and would not be surprised to see the company bought or broken up.
Observations for the past week
Australian Non-residential construction activity deteriorating
So
much has been written about the residential housing slowdown and the ongoing
infrastructure stimulus that we probably just assume that it’s only housing
that has witnessed a significant slowdown in activity in recent months.
The
major metropolitan transport projects along the eastern seaboard further
perpetuate this belief, but as the chart below shows, new order activity in
both the civil construction and engineering sector has collapsed to its worst
monthly momentum in over 6 years.
Given
these two sectors overwhelmingly dwarf housing construction it has the
potential to be a major headache for the Australian economy in 2020 and beyond.
Slowing
capacity addition in the resource and energy sectors are a major factor.
The
Australian construction industry employs over 1.2m people and it is the third
largest employer by sector, behind only healthcare and social services and
retail. Job advertisements
are down -19% annually as of December already, and the signs on future capital
formation from this valuable sector look rather concerning as we launch into
2020.
Commercial & Engineering New Order momentum deteriorating
Australian Industry Group New Orders – Commercial (red), Engineering (white)
Contact
Jonathan Bayes
(03)
8825 4744
Guy Silbert
(03)
8825 4750
Jordan Lisle
(03)
8825 4749
Email
clientservices@primefinancial.com.au
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