Despite the numbers for infection continuing to rise and ongoing delays to ‘business as usual’ in China, mainland Chinese investment markets have recouped all of their losses since the Chinese New Year holiday commenced on January 23rd which is quite astounding
Businesses are slowly re-starting outside of Wuhan (however Wuhan has business suspended for another week until February 20th at the earliest), with auto production re-commencing this week in several cities and retail shops re-opening in part around the country
Apple manufacturer Foxconn are yet to re-commence production, but the timing here will be closely watched
This Friday sees the first February global activity report that will include the impact of the virus on the world economy
Australia and the coronavirus impact
Beyond the obvious impact on
tourism and education sectors, the Australian commodity sector looks set to be
negatively impacted
The Bloomberg industrial
commodity price index has fallen -10% since the virus was discovered and
several major Chinese purchasers of Australian LNG and copper exports have
declared force majeure (their intention to not take delivery of contracted
shipments)
Iron ore export volumes out of
Port Hedland plummeted by half in the first week of February and point to
significant lost export volume for the major iron ore companies should the
situation persist
Anecdotal evidence suggests
that nothing is going in or out of Chinese ports at present which suggests that
at present the major miners are facing a 2-3% volume hit already, but that this
will likely rise the longer the inactivity persists
Australia’s trade balance and
fiscal revenue looks set to be impacted and for that reason we continue to
favour the view that the Australian Dollar will make fresh lows in the coming
months
U.S. Politics
Little to add ahead of the Nevada Democrat caucus early next week and then onto the Super Tuesday date for multiple state primaries on Tuesday a fortnight away (March 3rd)
Economic data released
Australian housing market off to the races (again)
As the one bright spark in the domestic Australian economy, housing saw further positive news last week with the monthly rise for home lending in December to the highest since 2016
Australian house price momentum is in a resurgent phase buoyed by competition amongst major banks and rising auction clearance rates (highest national clearance rate ever achieved last weekend according to Corelogic data)
The RP-data Sydney house price index has bounced +10% since its mid-2019 low and is now barely -4% from its previous high achieved in mid-2017
U.S. economic data mixed
A sound bounce in US small-business optimism last month was encouraging, as was the continued rebound in domestic consumer confidence with the February provisional Michigan Consumer Confidence figure just off its highest level since 2003
Potentially more unnerving on a 12-month view was the continued fall in job openings in the U.S
Job openings for December fell to a 2-year low and are now about -18% from their highest point in last 2018.
Job openings tend to lead future employment trends, although clearly there is nothing but strength in the current US jobs market as of today
Company News
Commonwealth Bank (CBA) capital position stronger
CBA results were modestly better than forecast, but markets were particularly encouraged by the strong Tier 1 capital position of the bank which makes it highly likely we see a share buyback announcement at the next results in August
To be fair, much of the net interest margin beat in the last half will be unwound by the impact of interest rate cuts already announced by the RBA, so the +8% jump last week looks overdone
CBA is now on a +40% premium to its Australian banking peer group, its highest premium, and is on 18x forward earnings making it the most expensive major banking group globally right now
CSL (CSL) results were excellent
CSL results were excellent and the company was fortunately in a position to moderately upgrade earnings guidance
Having outmanoeuvred the competition on blood collection centre growth in the US particularly, CSL was in the enviable position of being able to post strong +17% volume growth in IG and, along with price rises, blood products sales growth pf +26%
CSL is a great company, but much like CBA, it now trades on its highest forward earnings multiple and premium to the ASX200
Telstra (TLS) results were
sound
TLS results were fine with mobile subscriber growth good, but average revenues a little light
Fixed line division revenues and profits continue to implode at a faster rate than expected, but encouragingly data and network access services (NAS) are both doing well as an offset
The stock fell last week more so because of the ACCC approval of the TPG/Vodafone merger, but that shouldn’t be a point of concern and we continue to view TLS favourably at current levels
Challenger (CGF) results were
solid
CGF results were a pleasant
surprise and the company was able to point with confidence to a profit for the
full year at the top end of their $500-550m pre-tax profit guidance
Whilst retail annuity sales
remained pressured by low returns and ongoing advice industry disruption, CGF
were successful in selling significant volumes into the Japanese market and in
generating several large scale wholesale contracts for guaranteed returns which
not only has underpinned current results, but augers well for the likely demand
for their investment skillsets as demand increases for guaranteed income
products from June 2021 as part of new government legislation
As happy as we were with the
results, we do think CGF shares are now quite fully valued, having bounced +65%
from their lows and our last entry point
We would consider lightening
holdings in the mid $10’s
AMCOR (AMC) results were uneventful
Though AMC upgraded full year
profit guidance, the upgrade was largely driven by non-operational factors and
hence the shares gave back some recently achieved ground
The flexible division
continues to do well and is benefiting from increased cost synergies born of
the recent BEMIS acquisition however the rigid plastics business remains
stagnant
Though an unexciting stock for
now, we like the defensive nature of AMC’s business, and on a de-rated 15x
earnings and 7%+ free cash flow yield we think the stock remains good value for
patient investors.
Downer (DOW) results were disappointing
Cashflows were poor in the
interim result ad consequentially DOW net debt was materially higher than
analyst expectations
That said, DOW expect cashflow
conversion to improve to normal in the second half, and coupled with the likely
asset sales expected imminently, we should expect to see a significantly
de-geared DOW balance sheet by June year end
The simplification of DOW’s
business to transport, utility and facilities management services is a good
thing and will reduce capital intensity of the business and likely see a
re-rating from its current valuation
We expect a successful sale of
both Mining and Spotless Laundries to yield around $1bn in proceeds and for the
stock to rebound back into the mid-high $7’s
In the mid $6’s we think the
stock looks increasingly good value
IOOF (IFL) results are due this
Tuesday
IFL have already largely
pre-announced their interim profit figures, however investors have sold IFL
down -15% from its highs on concerns relating to provisions made against ‘no
advice’ following industry revelations at last year’s Royal Commission
Whilst we wouldn’t rule out a
rise in potential provisions in the order of $100-150m, we would note that the
sell-off has taken some $400m off the market value of IFL, leaving the stock
now back on <12 2021 earnings and with a 6%+ fully-franked dividend yield
We believe that pending
Tuesday’s results, IFL could be looking good value again in the mid-high $6
range
Observations from the past week
Port Hedland Iron Ore Exports
plummet
The chart below shows the weekly iron ore export tonnage from major Pilbara port, Port Hedland in the 7 days up until last Monday.
Source: Bloomberg
The next data release is Tuesday this week for the
previous 7 days.
You can see how export volumes collapsed to half their
typical weekly volumes in early February in clear response to the major
industrial restrictions in China post the outbreak of COVID-19 in late
December.
Port Hedland is the major iron ore export port alongside
Dampier and Cape Lambert and has a capacity of ~500mt – over half of
Australia’s near 900mt of iron ore exported each year.
BHP, Fortescue (FMG) and Hancock Prospecting (Roy Hill
mine) are the major exporters from Port Hedland.
Should the virus impact continue to hamper typical
Chinese construction activity then it is quite apparent that Australia’s iron
ore companies, the country’s trade balance and ultimately, Australia’s long
touted fiscal surplus seem at risk.
Looking ahead
Monday: Earnings from Brambles (BXB), QBE (QBE)
Tuesday: AU RBA Meeting minutes, US Empire Manufacturing (FEB), NAHB Housing Index (FEB), Earnings from BHP (BHP), IOOF (IFL), Coles (COL), APA (APA), Cochlear (COH)
Wednesday: AU Westpac Leading Index (JAN), AU Skilled Vacancies (JAN), Wage Price Index (Q$), US Housing Starts/Building Permits (JAN), Earnings from Stockland (SGP), Crown (CWN), Fortescue (FMG), Dominoes (DMP), Tabcorp (TAH), Webjet (WEB), Vocus (VOC), Wesfarmers (WES)
Thursday: AU Employment (JAN), US FOMC Meeting Minutes, US Philadelphia Fed Business Outlook (FEB), Earnings from Origin (ORG), QANTAS (QAN), Medibank (MPL), Domain (DG), Sydney Airport (SYD), Coca Cola Amatil (CCL), SANTOS (STO)
Friday: AU CBA Manufacturing & Service Sector PMI (FEB), US Markit Manufacturing & Service Sector PMI (FEB), Earnings from Link (LNK), Platinum (PTM), BWX (BWX)
Australian
corporate reporting remains the domestic market focus with BHP leading the
charge in what will again be a busy week.
Markets
are equally looking for signs of a return to business as usual in China, though
as of this weekend there is scant evidence in support of this.
I
would suggest watching major China manufacturing play Foxconn as a good guide
for the progress or not of returning back to business as usual since the
company is the largest non-domestic private employer in China and a major manufacturer
of Apple product.
Also,
the flash February purchasing manager activity to be released globally on
Friday will be the first sign investors get to see from companies as to their
forward purchase intentions in the wake of COVID-19.
Australian
employment numbers on Thursday will be scrutinised also.
Friday 5pm values
Index
Change
%
All Ordinaries
7082
+110
+1.6%
S&P / ASX 200
7130
+108
+1.5%
Property Trust Index
1706
+26
+1.5%
Utilities Index
8345
+257
+3.2%
Financials Index
6487
+227
+3.6%
Materials Index
13830
-111
-0.8%
Friday closing values
Index
Change
%
U.S. S&P 500
3380
+53
+1.6%
London’s FTSE
7409
-57
-0.8%
Japan’s Nikkei
23687
-140
-0.6%
Hang Seng
27815
+411
+1.5%
China’s Shanghai
2917
+42
+1.5%
Key dividends
Monday17th February 2020: Div Pay Date – NABHA, Qualitas Real Income (QRI)
Tuesday 18th February 2020: Div Ex-Date – Computershare (CPU), Insurance Australia (IAG), Magellan (MFG)
Wednesday 19th February 2020: Div Ex-Date – Commonwealth Bank (CBA), Suncorp (SUN)
Thursday 20th February 2020: Div Ex-Date – ANZPD, JB Hi Fi (JBH)
Friday 21st February 2020: N/A
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