Weekly Market Update – 25 Jan 2021

Unemployment falls and upgrades to economic outlook.

Global equity markets continued their charge higher last week rising +1.3% as represented by the MSCI World Index in AUD terms.

The US equity market outperformed as Joe Biden’s inauguration and commitment to delivering further stimulus led to increased confidence risk assets will continue to outperform in 2021.

Further bolstering sentiment was ex Federal Reserve Chairwoman and looming US Treasury secretary Janet Yellen’s comments supporting more stimulus to help the US economy recovery from the pandemic.

US equity markets continue to ‘look through’ the near-term pain caused by COVID-19 with investors banking on ‘when’ more stimulus is delivered, not ‘if’. With Yellen stating, “more must be done” and “without further action, we risk a longer, more painful recession” it is hard to disagree.

Optimism surrounding further pandemic relief drove the S&P 500 and Nasdaq to record highs during the week with the former closing +1.9% and the Nasdaq rallying +4.2%

Once again, the strongest sector in the US equity market was tech stocks and those leveraged to high growth.

Netflix (NFLX) was the major winner throughout the week with shares rising +13% following its Q4 update which showed new subscribers increased by 37 million in 2020 whilst annual revenue grew to $25b and operating profit to $4.6b.

The result was well above forecasts and provided impetus for the likes of Facebook (FB), Apple (AAPL), Amazon (AMZN) and Google (GOOG) to all bounce 6-10% higher.

Further driving investor confidence and global equities was the release of China’s Q4 GDP figures which showed momentum remains strong due to key rebounds in industrial production, retail sales and fixed asset investment.

Locally, the key piece of data released last week showed the unemployment rate continues to fall with 50,000 new jobs created in December and more importantly the lowest unemployment rate recorded since April last year.

Unemployment Rate falls to 6.6%

It was a good result and came in ahead of expectations.

The unemployment rate fell to 6.6% in December beating economist forecasts of 6.7% whilst the participation rate climbed marginally to 66.2% as expected and now sits above the 65.9% recorded pre-pandemic in March 2020.

All signs continue to point to a recovering economy.

A total of 35,700 full-time positions were created in December, along with 14,300 part-time jobs.

Whilst the headline unemployment rate fell to 6.6% from November’s 6.8% which is undeniably a positive, most of the recovery continues to show part-time employment is outpacing full-time employment.

Part-time employment is now higher than it was in March whilst full-time employment remains down by -1.3%. Importantly, underemployment which refers to people working fewer hours than they would like to, is now back to pre-pandemic levels of 8.5% having peaked at 13.8% last April.

Given the improvement in employment data along with stronger than expected GDP data which showed the Australian economy grew at +3.3% last quarter, there is a distinct possibility that the RBA does not announce an extension of its quantitative easing and yield curve control programs next April.

These programs are in place to reignite the economy and transition the Australian economy out of the COVID-19 induced weakness into a new period of strength and prosperity. With the RBAs main priority being reducing unemployment these figures set the scene for a possible reduction of support come April.

UBS lifts GDP forecast

Interestingly, investment bank UBS upgraded its GDP forecast last week believing the Australian economy has performed stronger than it had anticipated. Given the UBS house view had already been above the consensus views of other investment banks, the upgrade is certainly noteworthy. 

UBS lowered its estimate for Australia’s 2020 economic contraction to 2.7% from its previous forecast of 2.8%. However, the main upgrade appears in 2021 with UBS believing the economy will be materially stronger which is reflected in its growth forecasts rising to 4.2% vs previous guidance of 3.8%.

These revised figures are based on assumptions that GDP reaches its pre-COVID level by the second quarter of 2021, one quarter earlier than had been previously predicted.

The investment bank also expects national house prices to rise by 5-10% in 2021 and sees upside risk of 10%+ given the planned repeal of responsible lending laws. If the economy continues its current rate of recovery UBS believes the consensus view that the RBA extends its bond purchasing program is at risk.

Meanwhile Morgan Stanley last week upgraded its target for the ASX200 to 7100 from 6700.

Due to strong demand for materials and a heavy rerating in the sector, the earnings upgrade cycle has started at a faster pace and it believes interim corporate results due next month offer upside to consensus estimates which bodes well for revision momentum.  

China’s economy +6.5% in Q4

China’s economy rose +6.5% in the final quarter of 2020 with quarter-on-quarter growth of 2.6% driven by a rebound in industrial production, retail sales and fixed asset investment.

Industrial production increased +7.3% in December, retail sales climbed 4.6% and fixed asset investment bounced 2.9%.

Whilst China’s economy grew by +2.3% in 2020 (its lowest rate of growth in more than four decades) it was the only major economy in the world to avoid an economic contraction in 2020.

Economists had forecast year-on-year GDP growth of +6.2% whilst quarterly growth consensus estimates were +2.7%. Despite the narrow ‘miss’ in quarterly growth the annual figure was impressive and received a boost from an upwards revision to the Q3 growth number which was raised from +2.7% to +3.0%.

Central to the recovery has been a surge in exports (+18.1% year-on-year) which has seen increased demand for personal protection equipment (PPE) as a result of coronavirus.

Analysts expect economic growth to rebound to +8.4% in 2021, before slowing to +5.5% in 2022.

ASX Key Themes

The ASX200 rose +1.3% last week with much of its gains being driven by the prospect of additional stimulus in the US.

IT and consumer discretionary stocks led the mark higher rising +5% and +4.8% respectively. Most of the gains in the consumer discretionary sector came from Wesfarmers (WES) which rose +6% on limited news. Recent strength in the AUD is certainly a positive for WES with its predominantly AUD earnings base.

WES is set to report its half year results to the market on Thursday February 18.

Elsewhere, Bingo Industries (BIN) was one of the best performing stocks on the exchange last week rallying +20% following a takeover bid from private equity firm CPE Capital, which along with a consortium that includes Macquarie Infrastructure, has lobbed a $3.50 per share cash offer to the BIN board.

Independent directors of BIN have agreed to discuss the proposal with the consortium allowing due diligence to take place. Meanwhile Soul Pattinson (SOL) last week withdrew its $1.85 per share offer for aged care provider Regis healthcare after the REG board decided the offer undervalued the business.

Payment solution and EFTPOS provider Tyro Payments (TYR) exited its trading halt and managed to regain some of last week’s heavy losses following a long-lasting outage that has seen terminals switch off impacting around 15% of TYRs merchants.

With the stock down -30% a fortnight ago following a report from activist short seller Viceroy who claimed the outage impacting clients was closer to 50%, TYR entered a trading halt which it emerged from last week with shares rallying +9%. It is likely TYR will need to discount merchant fees to win back client trust. 

Whilst disappointing to see the CEO of Cleanaway (CWY) announce his departure last week we believe the stock remains well placed to deliver both earnings and dividend growth. CWYs balance sheet is strong in terms of infrastructure assets and low gearing and remains Australia’s premier waste management firm.

The Chairman, Mark Chellew, will assume executive responsibilities while a replacement is found. We are comfortable with the short-term appointment of Mark Chellew as Executive Chairman given his in depth experience as the CEO of Adelaide Brighton for many years.

Whilst the stock fell -5% last week our investment thesis for CWY remains very much intact with CWYs history of execution, long term contracts and exposure to waste infrastructure investments of the highest quality.

Looking ahead

Monday 25th January – Friday 29th January 2021

  • Monday: N/A
  • Tuesday: UK Unemployment Rate (NOV)  
  • Wednesday: AU Inflation Rate Q4, NAB Business Confidence (DEC), Westpac Leading Index (DEC), US House Price Index (NOV)
  • Thursday: US Federal Reserve Interest Rate Decision, Durable Goods Orders (DEC)
  • Friday: AU Private Sector Credit (DEC), US GDP Growth Rate Q4, Weekly Jobless Claims

Friday 22th January, 5pm values

 IndexChange%
All Ordinaries 7079+92+1.3%
S&P / ASX 2006800+85+1.3%
Property Trust Index1407+10+0.7%
Utilities Index6314-67-1.0%
Financials Index5717+18+0.3%
Materials Index16467-25-0.2%

Friday 22th January, closing values

 IndexChange%
U.S. S&P 5003841+73+1.9%
London’s FTSE6696-40-0.6%
Japan’s Nikkei28631+112+0.4%
Hang Seng28448+874+3.1%
China’s Shanghai3607+41+1.1%

Key dividends

Monday 25th January – Friday 29th January 2021

  • Monday: Div Pay-Date – Evans & Partners Global Flagship Fund (EGF)
  • Tuesday: N/A
  • Wednesday: Div Pay-Date – 360 Capital Group (TGP), 360 Capital REIT (TOT)
  • Thursday: Div Ex-Date – BOQPF (BOQPF), NABHA (NABHA); Div Pay-Date – Centuria Industrial REIT (CIP), Premier Investments Limited (PMV), Vanguard US Total Market Shares Index (VTS)
  • Friday: Div Ex-Date – Djerriwarrh Investments Limited (DJW); Div Pay-Date – Australian Unity Office Fund (AOF), Michael Hill International (MHJ), Metcash Limited (MTS), Plato Income Maximiser (PL8)

Contact

Mark Johnson – Chairman of Investment Committee(03) 8825 4738
Guy Silbert – Investment Manager(03) 8825 4750

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 4707 Nicholas Miller T: (03) 8825 4722
Jarrod Rodda T: (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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