Weekly Market Update – 21 September 2020

The week that was

Finally, the ASX snapped a four-week losing streak driven by strong gains in the resources and energy sectors.

Having spoken at length about the volatility impacting tech stocks both globally and locally in the past fortnight it was some sector rotation back into miners (+2.5%) and oil stocks (+1.2%) that led the market higher.

BHP (BHP) +3.4% was the major contributor with RIO (RIO) also advancing +0.7%, however Fortescue (FMG) and Mineral Resources (MIN) both saw -5% declines following a broker downgrade to ‘underweight’ on the back of concerns over the implied long-term spot price for iron ore.

With both FMG and MIN rising +50% so far in 2020 and the iron ore price +35%, this feels more like a call to book some profits than it does anything else, particularly given the same broker retains a ‘neutral’ view for the iron ore market in general.

Central bank policy was a key focus for markets with the Federal Reserve, Bank of England and Bank of Japan all sitting and the RBA minutes reiterated the need for ongoing fiscal and monetary support to assist the economic recovery.

Interest rates

With global interest rates already at record lows and the impacts of COVID-19 lockdowns continuing to stunt global growth it was more a case of what central banks would ‘say’ rather than what they would ‘do’ when they met last week.

The Federal Reserve left interest rates near zero and signalled it would hold them there through at least 2023 to help the US economy recover from the coronavirus pandemic.

The Federal Reserve confirmed its intention to maintain an accommodative stance of monetary policy until it achieves 2% inflation over time with the 2023 forecast an indication of when it thinks inflation (currently 1.3%) might be back closer to its target.

The Bank of England (BoE) opened the door to negative interest rates in 2021 as it seeks to stimulate growth.

With the current cash rate set at 0.1% any cut would certainly see the base rate turn negative.

However, there is little likelihood of a cut this year given formal talks between the BoE and the Prudential Regulators on how to implement potential negative rates are only set to occur late in Q4.

Meanwhile Japan’s central bank stated it would maintain its ultra-loose monetary policy with the official interest rate kept on hold at -0.1% as new Prime Minister Yoshihide Suga confirmed his commitment to continue fiscal spending and monetary easing.

RBA + Employment

Closer to home and the RBA was a little less directive when it released its minutes last Tuesday.

The Board stated the cash rate target would not be increased until progress is made towards full employment and inflation and that highly accommodative settings would be implemented for as long as required given wage and price pressures are likely to remain subdued.

Unlike the BoE, the RBA remains committed to stimulating growth without going down the path of negative rates with the Board stating this was an “extraordinarily unlikely” option for Australia.

On the positive front the RBA said the downturn had not been as severe as had been expected with the Organisation for Economic Co-operation and Development (OECD) updating its forecasts which would see Australia’s economic output contract -4.1% this year ahead of its -5% forecast in June.

The unemployment rate was a surprise ‘beat’ with the official rate falling to 6.8% from 7.5%, well ahead of forecasts which had August unemployment climbing to 7.7%.

With 111,000 jobs being created during the month Treasury forecasts for 10% unemployment by year’s end look less likely which is positive. But the negative is the total number of hours worked only rose 0.1% and remains down -5.1% on this time twelve month’s ago. So, the underemployment rate (people looking for more hours of work) remained steady at 11.2%.

We expect the unemployment rate to increase in the coming months as the number of JobKeeper recipients shift to JobSeeker when reductions to fortnightly payments commence next Tuesday September 29.

Stocks in focus

Notable movers in the Australian equity piece last week were Seek Limited (SEK), Challenger Limited (CGF) and CSL (CSL).

SEK gained +5% after confirming its Chinese jobs platform Zhaopin was engaging in conversations with various investment firms with a view to better supporting Zhaopin’s long term growth aspirations.

Further boosting SEKs market move was a report speculating e-commerce giant Alibaba was considering investing in Zhaopin.

Elsewhere, CGF closed the week flat after a broker upgrade to outperform which saw the stock rally +4% on Wednesday. Central to the upgrade thesis is the view that CGF is trading at a discount to book value after falling -10% since releasing its results in August.

Pleasingly the same broker also reiterated its outperform rating on CSL with a $333 target price believing the covid-19 pandemic will promote a sustained increase in flu vaccination rates over the next few years.

We hold a modest position in CSL in the Australian Equity Growth SMA given its market weight in the ASX200 Index now exceeds 7% and we would look to add to this on any short-term weakness.  

Soft demand for oil

Oil prices advanced +9% to more than reverse last week’s declines. It was also the best performing week for oil stocks in three months on the back of OPEC and non-OPEC allies meeting to review market conditions.

Whilst no further production cuts were agreed to, there was consensus amongst members that future cuts would be necessary which in turn provided some support to the oil price.

We believe this only a temporary solution. The main concern with oil prices at present is not supply. If the issue was supply-side related OPECs task would be far more straightforward because OPEC can control supply. To that end production cuts would go a long way to stabilising the market.

But the problem with oil is and remains demand. Forward projections for demand are continuing to deteriorate with current forecasts not expecting global demand for oil to recover until Q2 next year.

With airlines grounded and the automobile industry not operating anywhere near capacity demand remains soft.

We do not forecast a quick turnaround here and as such have no exposure to oil stocks in our portfolios.

Interesting observation in NASDAQ

Had it not been for Friday’s -1% fall in the US the NASDAQ was on target to post its first week of positive returns in three weeks.

What is even more interesting is that Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX) and Alphabet (GOOG) were already all set to post heavy losses for the week.

The last time all FAANG stocks posted weekly declines and the NASDAQ rallied was 11 November 2016 which coincidentally happens to be the same week Donald Trump was elected President.

Add to the above five securities Microsoft Corporation (MSFT) which also fell -1.8% last week and just under 53% of the NASDAQ total return was negative from only 6 securities despite the index comprising 103 securities.

This highlights the concentrated nature of the index and goes a long way to show how dominant the top five or six companies have become. As these top end companies continue to grow, exposure to tech through this index is indeed becoming a more and more concentrated bet on a handful of stocks.

Looking ahead

Monday 21st – Friday 25th September

  • Monday: US Fed National Activity Index (AUG)
  • Tuesday: N/A
  • Wednesday: AU Commbank Manufacturing PMI (SEP), US House Price Index (JUL), Existing Home Sales (AUG), Manufacturing PMI (SEP)
  • Thursday: US Weekly Jobless Claims (SEP)
  • Friday: US New home Sales (AUG)

Friday 18th September, 5pm values

 IndexChange%
All Ordinaries 6058+19+0.3%
S&P / ASX 2005865+7+0.1%
Property Trust Index1300+23+1.8%
Utilities Index7005-54-0.8%
Financials Index4482-81-1.8%
Materials Index14240+332+2.4%

Friday 18th September, closing values

 IndexChange%
U.S. S&P 5003319-22-0.7%
London’s FTSE6007-25-0.4%
Japan’s Nikkei23360-46-0.2%
Hang Seng24455-48-0.2%
China’s Shanghai3338+78+2.4%

Key dividends

Monday 21st – Friday 25th September

  • Monday: Div Ex-Date – Adbri Limited (ABC) WBCPG (WBCPG); Div Pay-Date – ANZPG (ANZPG), ANZPH (ANZPH), NABPE (NABPE)
  • Tuesday: Div Ex-Date – Carsales.com (CAR); Div Pay-Date – BHP Group Limited (BHP), IOOF (IFL), Platinum Asset Management Limited (PTM), Sonic Healthcare (SHL), WBCPF (WBCPF), WBCPH (WBCPH)
  • Wednesday: Div Pay-Date – Amcor (AMC), VG1 (VG1), WBCPE (WBCPE)
  • Thursday: Div Pay-Date – Altium Limited (ALU), ANZPE (ANZPE), ANZPF (ANZPF), Accent Group (AX1), IDP Education (IEL), Medibank Private Limited (MPL), Netwealth Group Limited (NWL), Resmed (RMD), Santos Limited (STO), Telstra (TLS)
  • Friday: Div Ex-Date – Regis Resources Limited (RRL); Div-Pay Date – AGL Energy (AGL), Alumina Limited (AWC), Downer EDI Limited (DOW), Evolution Mining (EVN), Link Administration Holdings Limited (LNK), Newcrest Mining Limited (NCM), QBE Insurance (QBE)

Contact

Mark Johnson – Chairman of Investment Committee(03) 8825 4738
Guy Silbert – Investment Manager(03) 8825 4750
Jordan Lisle – Dealer & Research Assistant(03) 8825 4749

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

Mark JohnsonT: (03) 8825 4738Cameron MorcherT: (03) 8825 4737
Livio Caiolfa T: (03) 8825 4748Michelle BromleyT: (03) 8825 4751
Marcus AingerT: (02) 9134 6292Nicole LewisT: (03) 8825 4734
Dylan CresswellT: (03) 8825 4707Garry FrizzoT: (07) 4019 2410
Michael CooperT: (07) 3010 8597Nicholas MillerT: (03) 8825 4722
Jarrod RoddaT: (03) 8825 4729

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