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Securities mentioned this week

• Boral (BLD)
• Nufarm (NUF)

Key market themes

Update on the coronavirus

• Recent models point to 1 in 20 people out of Wuhan’s 11m population will likely contract the virus, putting the potential death toll in that city alone at 5,000 to 10,000 using the current 1-2% mortality rate
• Over the weekend there were rumours that the government was increasingly adopting lockdown protocol’s in Chengdu, China’s 6^th largest city with 14.4m inhabitants
• The market was optimistic that some of the business interference would begin to clear up this week with investors excited by Apple supplier Hon Hai’s intention to restart production in Shenzhen this week, however Chinese authorities have delayed the restart indefinitely as of Monday morning
• More countries have begun to limit travel to and from China
• For Australia in particular, businesses beyond the tourism sector are now being impacted with notable news in the commodities sector being major Chinese energy group’s endeavouring to enforce force majeure on scheduled cargos of LNG from Australian and global oil majors. BHP (BHP) is trying to provide Chinese buyers of copper with greater flexibility on deliveries as a means to avoid having force majeure declared on these similar copper shipments

U.S. Politics

• The start of the U.S. Presidential Election campaign kicked off with an own-goal by the Democrats after the debacle involving vote-tallying at the Iowa caucus failed to deliver a clear result within hours of polls closing
• Understandably President Trump seized on the disorganisation and his polls strengthened and with that, investment markets similarly took heart, rising +3% on the week in the U.S
• This week we see the New Hampshire primary on Wednesday morning AEST

Economic data released

Australian Business Confidence falls to a 6-year low in December

• Last week saw the release of industry data from the Australian Industry Group for January and there was precious little to get excited by
• Manufacturing sector sentiment for January plumbed to a near 6-year low and new orders worsened in spite of the tailwind offered by Australian Dollar softness
• Construction and service sector activity both weakened again month-on-month with new orders and sales for both residential and commercial construction falling. Service sector activity began to wane after a sound end to 2019.
• From a headline standpoint at least, Building Approvals activity looked OK, rising +2.7% annually for January and making its first annual gain in 18 months. However, the underlying data points to merely a stabilisation in absolute approval numbers on a month-to-month basis and the annual figure benefits from the easy January 2019 comparative. We remain hopeful of an improvement in residential activity in 2020 but it will be a slow burn, particularly with engineering and civil work now showing signs of weakness.

RBA unflinchingly upbeat in statement

• The RBA took a rather glass half full attitude to 2020 growth in their statement accompanying last Tuesday’s interest rate decision
• The RBA remains expectant of a buoyant 2.75% GDP growth in 2020, suggesting that the bushfires were unlikely to impact growth too materially, followed by a jump to 3% growth in 2021
• The 2.75% growth assessment does look very optimistic with several private forecasters suggesting Australian growth to land in the 1.9% to 2.3% range for 2020

U.S. economic momentum rolls into 2020

• January manufacturing data in the United States bounced back to a 6-month high and new order momentum was sound
• Employment again surprised many with a jump of 225,000 new non-farm roles in January and a welcome jump to a 6-year high in the labour force participation rate pointing to continued likely wage gains.
• Annual wage gains for January landed at 3.1%

Company News

Nufarm (NUF) seem set to benefit from east coast downpour

• Recent torrential rain across much of the Australian eastern seaboard will do wonders for replenishing dams and soil moisture after major drought
• NUF has profit-warned on multiple occasion in the past 12 months due to unforeseen local drought, and should benefit to some extent from the large rains seen over NSW and Queensland in recent days and set to continue in the coming week
• A return to 2016-2017 levels of profitability in the NUF Australian business would see a 15% upgrade to broker estimates for 2021
• NUF currently trades on a multiple of approximately 6x EBITDA which is a hefty discount to the 10x multiple on which it sold its Latin American business to major shareholder and manufacturing partner Sumitomo Chemical last year, and this is despite still potential blue sky opportunity in the coming decade o emerge from commercialisation if its Omega-3 infused canola seed technology
• We remain BUYERS of NUF

Boral (BLD) announce more downgrades but CEO to step aside

• BLD announced a comprehensive statement to the market Monday morning, quantifying the ultimate cost of financial misreporting at its U.S. Windows business but also announcing a lowered 2020 profit guidance
• Though the impact on the business from the ‘accounting irregularities’ at U.S. Windows came in at or around initial expectations, the company disappointed investors with a lowering of 2020 guidance by some -10-15% for a variety of reasons spread over multiple divisions
• The company does indeed look to be in disarray from an internal reporting perspective and for that reason it was announced that BLD CEO Mike Kane would stand aside following the release of interim results in a fortnight. This is the one positive to come from todays news and should set the company up for potential restructuring and asset sales.
• We are likely to ADD to holdings in BLD in the coming days/weeks

Looking ahead

• Monday: Earnings from GPT (GPT), JB Hi Fi (JBH), Aurizon (AZJ)
• Tuesday: AU Home Loans (Dec), NAB Business Confidence (Jan), U.S. NFIB Small Business Confidence (Jan), U.S. Job Openings (Dec), Earnings from Challenger (CGF), Transurban (TCL), Suncorp (SUN)
• Wednesday: Earnings from AMCOR (AMC),Commonwealth Bank (CBA), Downer (DOW), Insurance Australia (IAG), CSL (CSL), Computershare (CPU), Carsales.com (CAR), James Hardie (JHX)
• Thursday: U.S. CPI (Jan), Earnings from AMP (AMP), Newcrest (NCM), Magellan Financial (MFG), Woodside (WPL), ASX (ASX), Treasury Wine (TWE), Telstra (TLS)
• Friday: U.S. Retail Sales (Jan), U.S. Michigan Confidence (Feb)

Australian corporate reporting becomes the market feature for the coming month, and as we have highlighted a lot already, we expect it to be one of the more disappointing results periods in some time.

Outside of the corporate front, markets will continue to keep an eye on both the evolution of infection for the coronavirus and its impact on business as well as the Democrat primary in New Hampshire on Tuesday.

Friday 5pm values

Friday closing values

Key dividends

• Monday 10th February 2020: Div Pay Date – MXT & MOT
• Tuesday 11th February 2020: N/A
• Wednesday 12th February 2020: Div Ex-Date – RESMED (RMD)
• Thursday 13th February 2020: N/A
• Friday 14th February 2020: Div Pay Date – Sydney Airport (SYD), Transurban (TCL)

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