Coronavirus Investment Playbook – Part 4

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This week, markets seem to have begun on an optimistic footing and willing to focus on the positive.

Numbers out of Europe definitely point to a flattening of the case curve and a slowing in the daily mortality rate in the worst-affected countries such as Italy and Spain.

In the United States, despite the likely escalation in deaths in New York expected in the coming week, the President and Vice President have declared Sunday night a belief that the situation looks to be peaking more broadly in that country.

Bill Gates and hedge fund manager Bill Ackman both made comments to infer a more optimistic viewpoint.

Markets continue to gyrate wildly simply because the range of outcomes remans highly uncertain and significantly varied, but using Australian equities as a guide, markets are broadly flat on where they were 8-9 days ago.

The optimistic view point centres on the idea that far more of the population has already caught coronavirus in recent months and worked up a collective immunity to it which, if true, would allow the various quarantine and social distancing efforts to be eased sooner than anticipated.

With barely 1% of the Australian population tested and the medical fraternity still scrambling to determine how to determine the relative immunity of those who have acquired the virus, this optimism still remains highly debatable.

For now, we continue to take a cautious view insofar as portfolio’s and in our willingness to expend a lot of the liquidity we have built up in portfolios over the past year.

Observations for the past week

Bank dividend cuts are coming

Australian banks continue to trade under pressure as investors last week fretted over the decision by bank regulators in Europe, the UK and New Zealand to limit bank’s ability to pay dividends in 2020 due to the significant effort being made by governments via their domestic banking systems to provide much-needed liquidity to households and small-business.

Though APRA did remark that it would not be forcing banks to cut dividends in the same manner, it is highly likely that having been extremely extended in the lead up to this liquidity crunch, Australian bank dividend payout ratios will be reset at the next set of results due in a month’s time.

On current broker estimates we have seen, investors should expect absolute dividend per share to be cut between 30% and 50% from their 2017 levels with NAB and Westpac (WBC) seemingly worst hit

Capital raisings coming thick and fast but so far very well received

In the Australian market over the last fortnight we have seen a variety of companies seeking emergency liquidity with the vast majority of issuers fortunate to have received strong support.

Webjet (WEB) last week saw a successful raising that when done will have raised them well over $300m and should now safely provide the beleaguered travel group with enough liquidity to last deep into 2021 even without any revenue.

WEB was and in a normal world remains, an excellent travel business that will likely win market share as global travel networks re-open, however this is a hugely uncertain environment so we would expect that the stock becomes a highly volatile play on the ‘coronavirus crisis’ and will likely bounce around in a range of $2.00 to $4.50 based upon the idea of 40-50c as a potential post-virus 2022 EPS.

Cochlear (COH) surprised the market with a deeply discounted $880m raising at $140 as a means to pay for lost litigation and as a cashflow ballast to a business witnessing an unprecedented drop off in cochlear implant surgeries

NextDC (NXT) was opportunistic in its $670m raising at $7.80, taking advantage of a strong share price and investor affection for all things ‘cloud-related’ in the current environment.

NXT have managed to raise enough money to ensure development of their greenfields Sydney site and to expand capacity in each of Melbourne and Sydney to take advantage of likely additional hyperscale customer wins.

US Weekly Jobless Claims skyrocket

Having seen 3.3m people sign on for unemployment benefits the previous week, last Thursday saw the number double again to 6.6m and take the total to 10m people in a fortnight, or some 6.5% of the entire US workforce now newly seeking unemployment insurance

Looking ahead

  • Monday 6th April 2020: N/A
  • Tuesday 7th April 2020: AU ANZ Weekly Consumer Confidence, AU Private Sector Credit (Feb), US MNI Chicago PMI (Mar), US Consumer Confidence (Mar)
  • Wednesday 8th April 2020: AU AIG Manufacturing Survey (Mar), CBA Manufacturing Survey (Mar), AU Building Approvals (Feb), AU RBA Meeting minutes, US Markit Manufacturing PMI (Mar), US ISM (Mar), US Challenger Job Cuts (Mar), US ADP Employment (Mar)
  • Thursday 9th April 2020: AU Job Vacancies (Feb), US Weekly Jobless Claims, US Weekly Bloomberg Consumer Confidence
  • Friday 10th April 2020: AU AIG Construction Survey (Mar), CBA Services Survey (Mar), US ISM Services PMI (Mar), US Markit Services PMI (Mar), US Employment (Mar)

Friday 3rd April, 5pm values

 IndexChange%
All Ordinaries 5106+232+4.8%
S&P / ASX 2005067+225+4.6%
Property Trust Index1006+47+4.9%
Utilities Index7305+388+5.6%
Financials Index4099+164+4.2%
Materials Index10952+435+4.1%

Friday 3rd April, closing values

 IndexChange%
U.S. S&P 5002488-53-2.1%
London’s FTSE5415-95-1.7%
Japan’s Nikkei17820-1570-9.1%
Hang Seng23236-248-1.1%
China’s Shanghai3713-9-0.3%

Key dividends

  • Monday 6th April 2020: Div Pay Date – Fortescue (FMG)
  • Tuesday 7th April 2020: Div Pay Date – NABPD, QUBE (QUB)
  • Wednesday 8th April 2020: Div Pay Date – Costa (CGC), Metrics (MXT & MOT)
  • Thursday 9th April 2020: Div Pay Date – BWX (BWX), Brambles (BXB), CSL (CSL), QBE (QBE), SEEK (SEK), Woolworths (WOW)
  • Friday 10th April 2020: N/A

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

The information in this recording and 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 recording and article. Please refer to the FSG (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 recording and article. Information in this recording and article is current at the date of this recording and 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.

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