Equity markets are now down on average -10% to -14% from their highs and year-to-date
The ASX200 is -5% year-to-date, but down -11% inclusive of the Australian Dollar’s fall to a decade low as part of this move
Global bond markets have continued to rally with Australian and US 10-year yields reaching record lows of 0.7% in Australia on Monday morning and 1.14% in the United States on Friday
Chinese February economic data has begun being reported and is demonstrating the huge impact felt on economic activity from the quarantine process (see below)
Globally the virus is spreading to parts of Europe and North and South America which is causing concerns of a wider pandemic
Investors should follow closely the easing or tightening in travel restrictions between countries and intra-country as a real-time guide on the containment or lack thereof, of the virus
We are watching daily Tom-Tom traffic congestion data online in major Chinese cities as our guide on the speed with which workers are returning to their jobs
We would also highlight Google search as a sensible guide to watch the degree of public interest or panic in places like the United States and Europe – type coronavirus into Google Trends to understand the significance of users ‘searching’ for that term
U.S. Politics
The big focus this week will be on the Super Tuesday Democrat primaries in which 14 states (including the likes of California and Texas) will vote for their nominated candidate
After Joe Biden’s success in South Carolina, the feeling is that it is down to these two candidates for the nomination and success in Tuesday’s elections has the potential to catapult successor into frontrunner status
Economic data released
Major week for U.S. and Australian data post the virus impact
With the start of March now upon us, our focus and that of investors will be on the release of March economic figures in each of Australia, China and the United States to ascertain the impact on economic activity from the coronavirus
As the charts on Chinese activity below demonstrate, February was a write-off for Chinese economic activity
In the United States and Australia it will be less easy to predict, but we will be focused on both the manufacturing and service sector sentiment indices due in each country as well as US employment figures in the United States
Company News
Afterpay (APT) results were exceptional
Whilst APT shares certainly were heavily sold off last week post Thursday results, there is no denying the franchise strength in the figures released
Heavier cost investment by the company in expanding its footprint caused analysts to downgrade near term profitability, but raise long term assumptions on turnover, customer numbers and ultimately, group profitability – so this is a timing thing
It didn’t help that one of its major brokerage supporters, Goldman Sachs, downgraded the stock from BUY to HOLD and removed it from its Conviction Buy list
the results themselves were incredibly strong in terms of customer metrics and I would suggest that APT be considered in the same vein as Amazon (AMZN) in its willingness to reinvest growth cashflows in building out its global footprint and competitive moat against a growing group of pretenders to the buy-no pay-later crown
Customer numbers beat expectations in each of its existing markets (3.1m in Australia, 3.6m in the United States and already 600k in the UK) and in total by 10% (7.3m subs vs 6.6m forecast) and sales turnover also beat expectations by 10%
Frequency of turnover is also increasing, which is a major positive for future sales and comes at significantly higher incremental margins – as a guide
The company furthermore announced it would roll-out ‘in-store’ in the United States in June and launch in Canada later in 2020
Having trimmed some of our position at $40, we are well-placed to add to holdings at or near $30 if give the opportunity
Reliance Worldwide (RWC) shares were clubbed -25% after downgrading 2020 profit expectations
RWC surprised some of us with a downgrade to 2020 cashflow assumptions to $265m-280m in EBITDA (from $280-305m) after having delivered only a small miss for 1H figures
The group blamed a poor sell-through of new products which failed to cover increased R&D expenses born in new product development
Group cash flow conversion was excellent and cost synergies from the John Guest acquisition are well on track
Importantly despite the softness in European end-markets, the European division managed to meet expectations
Brokers chose to lower earnings numbers by around -10% which is significantly less than the sell-off last week, however investors sold the stock heavily given it had materially outperformed the index in the lead-up and had room to give up
RWC is now back at our recommended buying levels and now at a modest discount to the ASX200 on 2021 earnings which we think is too low
Observations from the past week
Chinese Manufacturing Sentiment collapses in February
The first economic data out
from China for February came out over the weekend, being the government’s
official measure of manufacturing activity.
As the chart below shows, the
industrial economy stopped in its tracks in February on account of the spread
of the coronavirus and measures taken to quarantine its multiplication.
Sentiment last month was worse
than at the peak of the GFC.
Even more interesting was that
the Chinese government were willing to share a number this negative as its
widely taken that this official data measure is smoothed out by the
administration – perhaps its seen as an important benchmark to demonstrate to
the population the significance of the decline as a means for gauging the
hoped-for success in their recovery efforts as 2020 progresses.
Source: Bloomberg
Chinese Small-Medium Enterprise Confidence also collapses in February
Similar to
the official manufacturing data, the chart below shows the privately compiled
Standard Chartered Small Medium Enterprise Confidence Index for February, and
it too has collapsed in a hole.
Notably the production, profitability and new order indices bore the brunt of the economic impact, with overall confidence falling significantly into negative (which is <50), but still at a level that suggests respondents feel hopeful that the impact of the virus will be short term in nature (confidence only fell to 40.3).
Source: Bloomberg
Looking ahead
Monday: US Markit Manufacturing PMI (FEB), ISM Manufacturing (FEB), AU AIG Manufacturing Index (FEB), CBA Manufacturing Index (FEB), ANZ Job Advertisements (FEB)
Tuesday: AU Building Approvals (JAN), RBA Meeting
Wednesday: US ADP Employment (FEB), Markit Services PMI (FEB), ISM Services PMI (FEB), AU AIG Construction Index (FEB), CBA Services Index (FEB), GDP (Q4)
Thursday: US Challenger Job Cuts (FEB), Bloomberg Weekly Consumer Confidence (MAR), AU Trade Balance (JAN)
Friday: US Employment Report (FEB), AU Retail Sales (JAN), AIG Services Index (FEB)
Beyond the day-to-day news-flow on corona-virus infections, markets will pay close attention to the outcome of Super Tuesday’s (March 3rd) Democratic primaries in which 14 states (including California and Texas) will vote for their favoured Democrat challenger and virtually 1/3rd of all the delegates to the Democratic National Congress will be decided.
Friday 5pm values
Index
Change
%
All Ordinaries
6511
-719
-9.9%
S&P / ASX 200
6441
-698
-9.8%
Property Trust Index
1579
-139
-8.1%
Utilities Index
7832
-545
-6.5%
Financials Index
5904
-590
-9.1%
Materials Index
12390
-1485
-10.7%
Friday closing values
Index
Change
%
U.S. S&P 500
2954
-419
-12.4%
London’s FTSE
6580
-856
-11.5%
Japan’s Nikkei
21142
-2337
-10.0%
Hang Seng
26129
-1480
-5.4%
China’s Shanghai
2880
-150
-5.0%
Key dividends
Monday2nd March 2020: Div Ex-Date – Fortescue (FMG), Platinum (PTM), QANTAS (QAN), VGI Partners (VG1); Div Pay Date – ANZPD
Tuesday 3rd March 2020: Div Ex-Date – AMCOR (AMC), Medibank (MPL), Oil Search (OSH)
Wednesday 4th March 2020: Div Ex-Date – Woolworths (WOW), Treasury Wine (TWE) Perpetual (PPT), Bingo (BIN)
Thursday 5th March 2020: Div Ex-Date – ASX (ASX), BHP (BHP), CBAPE/CBAPF, CBAPD, CBAPG, CBAPH, CBAPI, Pinnacle (PNI), QBE (QBE), Rio Tinto (RIO)
Friday 6th March 2020: Div Ex-Date – Bendigo Bank (BEN), Flexigroup (FXL), NABPF, Wisetech (WTC); Div Pay Date – JB Hi Fi (JBH)
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