Weekly Market Update – 19 October 2020

Not wanting to sound like a broken record but tech-stocks once again drove our market higher last week rising +4.4% followed by financials +2.4% as the ASX200 climbed +1.2%.

Investors are continuing to price longer term growth assumptions into markets which since the GFC has seen ‘growth’ stocks outpace ‘value’ stocks by a considerable margin.

Further driving and adding to this strength and investor optimism is the resounding message shared by central banks globally that interest rates are either at record lows, going lower or entering negative territory.

From an investor standpoint the lower rates move, the lower the discount rate applied to future cash flows meaning investors are discounting future earnings by a lower figure. Ultimately this means corporate earnings are higher, hence the optimism.

You only have to look at the US equity market to illustrate this point given its size compared to our local market. The NASDAQ which is a heavily-weighted tech index is +30% for the 2020 calendar year compared to the S&P 500 +8% and the Dow Jones Industrial Average which is virtually flat.

Equity markets thrive on optimism and investor sentiment and the idea that interest rates are likely to remain low for years to come is part of the reason we are becoming slightly more positive in our outlook.

Melbourne Cup & Interest rates

It’s unlikely to steal too much attention away from the Melbourne Cup but the RBAs meeting on Cup day is likely to support the above theory, with rates anticipated to contract a further 15bps.

We will get some better context this week with the RBA minutes released tomorrow and a speech from deputy governor Guy Debelle on Thursday.

But it is looking increasingly likely we will get a rate cut in two weeks’ time with the RBA seeking to further stimulate the economy in light of the coronavirus impact on the economy.

RBA Governor Philip Lowe indicated the prospect of easier monetary policy last Thursday stating “the RBA board is considering what more it can do to support jobs, incomes and businesses as Australia gets on the road to economic recovery in the wake of the coronavirus pandemic.”

Markets have virtually factored  in with the 3-year Commonwealth Government bond currently yielding 0.12%. If this proves to be accurate then rates are likely to be cut from 0.25% to 0.10%.

Yields on longer dated bonds such as the 10-year Commonwealth Government bond fell to 0.72% last week as speculation mounts the RBA will broaden its Yield Curve Control policy to also target the longer end of the market which are now trading back near their March/April lows.

Economic data

Unemployment climbed slightly higher in September as anticipated rising from 6.8% to 6.9% but came in ahead of forecasts of 7.0%.

Despite the ‘beat’ there remains ongoing concerns over the coming month’s data given the strict lockdown in Victoria and the reality that those on JobKeeper are not included in the data. If and when individuals on JobKeeper move to JobSeeker the unemployment rate will undoubtedly rise

Also disappointing was the increase in underemployment (those with work looking for more hours) which rose to 11.4% and the participating rate decreased to 64.8%.

The Federal Budget handed down a fortnight ago projected that unemployment will reach 7.25% in 2020-2021, so whilst this looks on track given the above figures the diminishing JobKeeper stimulus payments and the pace of our economic recovery will determine this.

Stock specific

Unibail Rodamco Westfield (URW) was the best performer on the ASX last week rising +23% after it entered into an agreement with a consortium of French institutional investors to sell its SHiFT office building for 620m euros which represented a premium to its June 30 book value.

Meanwhile Link Administration Holdings (LNK) rose +22% after receiving a conditional non-binding indicative proposal from Pacific Equity Partners, Carlyle Group and their affiliates to acquire all the outstanding shares in LNK.  

Of the key stocks we are continuing to look at Telstra (TLS), Challenger (CGF) and CSL (CSL) all had positive news flow last week.

TLS had its biggest weekly gain since July rising +2.5% on the back of its AGM reiterating FY21 underlying EBITDA guidance of $6.5-$7.0b. As a general rule TLS pays a dividend of 70%-90% of its underlying earnings and whilst not a guarantee the board said it was committed to exceeding this threshold if necessary to maintain its current 16c per share dividend.

CGF reported stronger Q1 figures driven by record quarterly annuity sales and strong funds management net flows during the September quarter. Assets under management rose +4% to $89 billion during the quarter while life investments assets also rose +4%.

And CSL raised the lower end of its full year profit guidance to reflect growth expectations of 3% – 8% having previously guided to growth of between 0%-8%. Expectations for strong demand for its plasma and recombinant therapies over FY21 driven by strong demand for flu vaccines were the primary reason for the slight upgrade. 

International markets

Looking offshore China reported a strong increase in exports in September despite the figures falling slightly short of analyst expectations.

Exports rose +9.9% year-on-year in September versus expectations of a +10% increase whilst iron ore imports climbed +8.2% month-on-month to 108.5 million tons and crude oil imports rose +2.1% to 48.5 million tons.

The major theme to emerge last week was reports that China has suspended purchases of Australian coal amid ongoing political tensions between the two nations. Initial reports indicate that Chinese power stations have been told to stop using Australian coal which would add to recent bans and tariffs imposed on Australian barley, wine, wheat and beef.

BHPs chairman confirmed at its AGM that some Chinese customers had asked for deferrals of their coal orders with some Chinese ports not accepting incoming Australian coal.

US equities were broadly flat last week with the S&P 500 +0.2%. Major catalysts for US equities in the next few weeks will be the upcoming election and Q3 earnings season which kicked off last Tuesday with JPMorgan (JPM) and Citigroup (C) reporting. Netflix (NFLX), Tesla (TSLA) and American Express (AXP) are all due later this week whilst Amazon’s (AMZN) Prime Day and Apple’s (AAPL) unveiling of the new iPhone 12 model created a buzz last week.

Looking ahead

Monday 19th October – Friday 23rd October

  • Monday: AU RBA Meeting Minutes, CN Retail Sales (SEP)
  • Tuesday: US Building Permits (SEP)
  • Wednesday: AU Westpac Leading Index (SEP), UK Inflation Rate (SEP)
  • Thursday: US Weekly Jobless Claims (OCT)
  • Friday: AU Manufacturing PMI (OCT), JP Inflation Rate (SEP), UK Retail Sales (SEP), US Existing Home Sales (SEP)

Friday 16th October, 5pm values

All Ordinaries 6385+72+1.1%
S&P / ASX 2006177+75+1.2%
Property Trust Index1344-2-0.1%
Utilities Index7167+135+1.9%
Financials Index4893+116+2.4%
Materials Index14142-76-0.5%

Friday 16th October, closing values

U.S. S&P 5003483+6+0.2%
London’s FTSE5920-97-1.6%
Japan’s Nikkei23411-209-0.9%
Hang Seng24387+268+1.1%
China’s Shanghai3336+64+2.0%

Key dividends

Monday 19th October – Friday 23rd October

  • Monday: Div Pay-Date – Kogan.com (KGN)
  • Tuesday: Div Pay-Date – Nine Entertainment (NEC), XARO (XARO)
  • Wednesday: Div Pay-Date – Charter Hall Social Infrastructure REIT (CQE)
  • Thursday: Div Pay-Date – Austal Limited (ASB)
  • Friday: Div Pay-Date – Capitol Health (CAJ)


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

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