Weekly Market Update – 26 October 2020

The ASX200 ended last week marginally lower falling -0.2% as stimulus uncertainty in the US continues to weigh on global investor sentiment.

Rising COVID-19 case numbers as the northern hemisphere battles its ‘second wave’ along with the pending US election continue to drive markets. Interestingly, despite the potential for a spike in volatility due to these unknowns, markets have been quite stable to this point.

The volatility index (VIX) has traded within a 5-point range for much of the past 6 months and with the exception of one minor break-out in the first week of September the VIX appears to be ‘looking through’ the upcoming election.

Locally, the banks did much of the heavy lifting last week despite the wider benchmark falling. ANZ, CBA and NAB all rose between 1%-2.5% whilst WBC posted more modest gains of +0.6%.

We have remained underexposed to the bank sector over the past three to four years believing falling interest rates, increased regulation, capital adequacy requirements and subdued growth were likely to stunt growth.

However, following the government’s expansive fiscal policy and record low interest rates we are beginning to view the sector more positively.

We added Commonwealth Bank (CBA) to portfolios last Friday with a modest starting weight. We believe the improving quality of its loan book (repayment deferrals fell to 129,000 in September, down from 174,000 in August and 210,000 in June) along with its robust balance sheet should ensure shareholders continue to be rewarded through attractive dividends.  

Investors will get more clarity on the position and outlook for banks this Thursday when ANZ releases its full year results to the market.

Whilst we remain underweight the sector, we are slowly starting to reduce the level of this underweight with the four major banks currently making up close to 17% of the index.

Local Data

RBA minutes released last week reiterated the need to maintain highly accommodative policy settings as the Board’s monetary policy rhetoric continues to become more dovish.

RBA Governor Lowe signalled that the central bank board is willing to consider further easing, including purchases of longer-dated bonds, to support employment, incomes and businesses.

The minutes also discussed the possibility of further easing in the cash rate and the purchasing of government bonds further out along the yield curve which we flagged as a distinct possibility in last week’s update.

Helping the economic outlook somewhat was the release of Westpac’s Leading Index data with increased momentum indicating the economy is moving out of recession.

The leading index data which indicates the likely pace of economic activity relative to trend three to nine months into the future rose to -0.48% in September from -2.28% in August. The leading index growth rate has now jumped +5.11% since April.

Driving much of this improvement has been US industrial production, aggregate monthly hours worked, consumer expectations and the performance of the ASX200.

Whilst still negative, momentum is improving. 

Global markets – the 2020 story

In light of a global pandemic that has impacted the world in so many ways as we know it, one might question how anyone can start to look more favourably on markets?  

Because central banks and governments have injected an unprecedented and unparalleled amount of monetary and fiscal stimulus into economies in 2020

And because central banks have become a little more transparent throughout this downturn.

The phrase “Don’t fight the Fed” means investors should align their investment philosophy with the Federal Reserve.

Federal Reserve Chairman Jerome Powell recently said, “we’re not thinking about raising rates, we’re not even thinking about thinking about raising rates” – thus the lower for longer interest rate theory remains well and truly ‘in play.’

With Republicans and Democrats in the US closer to settling on a stimulus package rumoured to be $2.2 trillion and the Bank of England exploring QE options and negative interest rate policy to stimulate growth the 2020 story is clearly ‘fight the downturn with stimulus’.

It is for this reason we are beginning to feel more comfortable. Central banks are guiding us to feel this way.

US election campaign trail draws to a close

The final presidential debate between Donald Trump and Joe Biden took place last Thursday providing us with far more substance than the first debate.

Key to the debate was Biden’s criticism of Trump’s inaction on climate change and what another 4-year term would mean for the United States and its increasingly hostile relationship with China.

Trump’s demeanour was in stark contrast to the first debate strategically refraining from interrupting Biden and acting far less belligerently although much of his debate continued to focus on Biden’s drawbacks and less so on policy specifics.

With time running out before election day, polls continue to show Biden with a comfortable lead over Trump both on the national level and in the six key swing states of Florida, Michigan, Wisconsin, Arizona, North Carolina and Pennsylvania.

For both candidates, this final debate was less about winning over the other side than it was about rallying up the supporter base.

Bookmakers have posted Biden the $1.45 favourite ahead of Trump at $2.90.

Time will tell.

What outperformed last week?

BlueScope Steel (BSL) rallied +9% over the week after providing the market with earnings guidance for FY21. BSL expects to report underlying EBIT of $340m in 1H21 which if delivered will represent a +30% increase on 2H20 and a +12% increase on the prior corresponding period.

Challenger Limited (CGF) continued its recent momentum rising +8% last week and extending its October monthly gains to +26%. There was no material news flow last week to suggest the strength was anything but a continuation of the previous week’s Q1 update which reaffirmed FY21 guidance and normalised Net profit before tax (NPBT) of between $390m-$440m.

A few other stocks on our radar are also due a mention.

Santos (STO) climbed +3% afterposting Q3 production figures which showed output surged +22% compared to the previous quarter. Sales rose +2% to US$797m despite weaker oil prices and STO generated US$143m in free cash flow (FCF) for the quarter bringing total FCF for the calendar year to US$574m.

Healthcare company Healius Limited (HSL) which provides services to medical and health professionals through its network of medical and pathology centres climbed +6% after reporting strong momentum in its pathology division in Q1. Total revenues have risen +17% compared to the prior corresponding period.

Finally, Afterpay (APT) rallied for the sixth consecutive week rising +6% following news it had entered into an agreement with Westpac (WBC) to offer consumer a new savings account which will allow users to control their budget and manage their spending.

This week Coles (COL) posts a Q1 sales update to the market on Wednesday with forecasts for same store sales growth of +7% and Fortescue (FMG) provides its Q1 production update on Thursday. 

Looking ahead

Monday 26th October – Friday 30th October

  • Monday: N/A
  • Tuesday: US New Home Sales (SEP), Durable Goods orders (SEP), House Price Index (AUG)
  • Wednesday: AU Q3 Inflation Rate, US Goods Trade Balance (SEP)
  • Friday: AU Private Sector Credit (SEP), US Pending Home Sales (SEP), Personal Consumption Expenditure (SEP)

Friday 23rd October, 5pm values

All Ordinaries 6374-11-0.2%
S&P / ASX 2006167-10-0.2%
Property Trust Index1333-11-0.8%
Utilities Index7015-152-2.1%
Financials Index4925+32+0.7%
Materials Index14047-95-0.7%

Friday 23rd October, closing values

U.S. S&P 5003465-18-0.5%
London’s FTSE5860-60-1.0%
Japan’s Nikkei23517+106+0.5%
Hang Seng24919+532+2.2%
China’s Shanghai3278-58-1.7%

Key dividends

Monday 26th October – Friday 30th October

  • Monday: Div Pay-Date – Vanguard US Total Market (VTS)
  • Tuesday: Div Pay-Date – Australian Unity Office (AOF), Nick Scali Limited (NCK)
  • Wednesday: Div Pay-Date – Reece Limited (REH)
  • Thursday: Div Ex-Date – BOQPE (BOQPE), NABHA (NABHA)
  • Friday: Div Pay-Date – Aventus Group (AVN), Centuria Industrial REIT (CIP), G8 Education Limited (GEM)


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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