Weekly Market Update – 01 Mar 2021

Bond yields rise and reporting season comes to an end.

It is somewhat ironic that markets are now starting to take fright at the prospect of inflation.

Central banks globally have been trying to reignite growth through accommodative monetary policy, whilst fiscal stimulus has been delivered to counter the negative impacts of COVID-19 and increase the purchasing power of individuals thereby driving the reflation trade.

But now that we are moving in the direction that central banks have been hoping for, the market is starting to price in the distinct possibility that these stimulus measures slow or end, and interest rate hikes are on the cards – albeit still some time away.

It is this fear amongst investors that continues to drive bond yields higher and weighed on equity markets last week.

The MSCI World Index fell for the second consecutive week down -1.3% in AUD terms with most of these losses incurred on Thursday when yields on US 10 Year Treasury notes spiked to 1.53% – a level not seen since pre-COVID.

Despite Federal Reserve chair Jerome Powell assuring investors that the Fed remains committed to its asset purchasing program, that interest rates will remain at historic lows and that inflation (currently 1.4% year-on-year to January) poses little short term threat, equity markets remain spooked.

The primary reason for this concern is that equity market valuations are challenged when yields on risk free assets such as 10-year bonds rise. A rise in the risk free rate implies a bigger discount on future cash flows which in turn leads to a bigger discount on future earnings.

Essentially, investors mark down valuations on equities to compensate for the risk that future earnings may not increase.   

The Fed are on record stating that “inflation dynamics evolve over time [not] overnight” and that there is still a “great deal of slack” in the economy. Importantly, the Fed have stated that a short-term inflationary spike is different from sustained higher inflation.

It is for this reason we are not predicting a sharp sell-off in equity markets. We view the risk of the Federal Reserve stepping away from supporting markets as low.

The reality is inflation and employment are tracking well below the Federal Reserve’s desired targets and significantly below the levels that prevailed at the business cycle peak reached last February. For this reason, we remain comfortably invested until these targets are not only met but “sustained”.

Tech stocks & US update

As you may expect, stocks and sectors leveraged to high growth such as IT saw substantial profit taking in the back half of the week.

The tech heavy NASDAQ fell -3.5% on Thursday – its largest daily percentage fall in four months and rounded out the week posting negative returns of -5%.

The FAANG stocks were all lower last week falling roughly between 2-6% with the exception of Netflix (NFLX) which fell -0.3.% after announcing it intends to spend $500m this year producing films in South Korea which will surely see its 3.8m paid up subscriber base in South Korea increase.

Meanwhile Tesla (TLSA) fell -14% for the week after announcing it would temporarily halt some production at its assembly plant for two weeks to combat supply-chain issues which has seen ports backlogged and ground transport negatively impacted by recent snow storms.

The S&P500 fell -2.5% for the week with financial and energy stocks outperforming tech and consumer discretionary.

Whilst we continue to think risk assets (equities) will outperform, we believe cyclical and value stocks offer better risk-adjusted returns in the medium term with value likely to outperform growth given where we are at in the economic cycle.

On a positive note, weekly US jobless claims decreased by 111,000 last week to its lowest level since late November indicating job cuts are starting to decline as positive COVID-19 infections fall and vaccinations pick up. 

AUD strength and Wage Growth

The AUD/USD traded through 80c this week – a three-year high.

Key to the AUD strength has been a strong run in commodity prices, particularly iron ore which has rallied +10% in February and now trades at decade highs of US$173/tonne.

Other contributors include a methodical COVID-19 vaccine rollout plan, increases in consumer and business confidence levels and an underlying improvement in the Australian economy which has seen the unemployment rate fall, job creation and very few COVID-19 cases by global standards. 

The main data release this week showed annual wage growth remained steady at 1.4%.

Whilst wage growth remains soft, pleasingly it is not getting any weaker.

Wage growth in Q4 of 0.6% was ahead of expectations for a 0.3% increase and a function of businesses cutting back on short term wage reductions which were passed on to employees during COVID uncertainty.

ASX Weekly Wrap

For the second week in a row Friday ended on a sour note with the ASX suffering following weak leads from the US.

The ASX200 shed -2.4% on Friday and fell -1.8% for the week.

Had it not been for the strength of energy stocks (+2.5%) and the miners (+1.7%) the market would have fallen significantly more.

IT stocks were the worst performing sector falling -13% whilst telcos and consumer discretionary stocks fell close to -7%.

Reporting Season

And that’s a wrap!

Reporting season always throws up its fair share of curve balls.

Fortunately, this season was predominantly a success with most brokers and analysts stating earnings across the board were “above expectations.”

The banking sector outperformed with a sizable fall in bad debts across the major banks, whilst revenue growth was pleasing on account of lower funding costs and higher deposit margins.

Certainly, one of the most interesting aspects of reporting season has been those companies that delivered strong earnings and dividend uplifts but still underperformed in the market.

AMC fell -1% in February despite net income increasing to $417m which is a +65% increase on the prior corresponding period. Earnings per share (EPS) climbed +71% and the quarterly dividend was slightly higher. On top of this AMC raised its outlook for adjusted EPS growth to 10-14%.

BXB was down -6% during the month despite group revenues climbing +7% as COVID-19 and Brexit uncertainties led to increased demand for its pallets, crates and containers. Underlying profit rose +7% and would have climbed even higher had it not been for higher input costs which led to higher operating costs.

CWY was -2% lower during February despite delivering a record result to the market. 1H21 net profit climbed to $79m on the back of a +3% increase in EBITDA. CWYs main segment Solid Waste Services benefited from the commencement of Melbourne’s City of Casey contract.

We see opportunities in quality stocks such as these given their absolute and relative underperformance and continue to monitor them.

Two core holdings in the PRIME Australian Equities Growth SMA which reported last week were Ramsay Healthcare (RHC) which rose +6% and Qube Holdings (QUB) which climbed +0.3%.

RHC remains deeply affected by the impact the pandemic is having on elective surgeries. COVID lockdowns in both the UK and Europe led to a -6.6% fall in operation revenue during 1H21 whilst lower demand for non-surgical services weighed on the result.

The reinstatement of the dividend was a positive and we think investors will see lower financing costs going forward. In the medium to long term, we are incredibly constructive around a rebound in elective surgery given the ballooning of public hospital waiting lists.

QUB was a beat for us on both the profit line and the dividend. The underlying strength of its logistics and stevedoring franchise was a highlight and we are starting to see volumes increase.

The announced sale of logistics park Moorebank through Logos is also an encouraging sign of further monetisation for the group.

Looking ahead

Monday 1st March 2021 – Friday 5th March 2021

  • Monday: AU Business Inventories Q4, CN Caixin Manufacturing PMI (FEB)
  • Tuesday: AU RBA Interest Rate Decision, Current Account Q4, ANZ Job Advertisements (FEB)
  • Wednesday: AU GDP Growth Rate Q4, Markit Services PMI (FEB)
  • Thursday: AU Balance of Trade (JAN), Retail Sales (JAN)
  • Friday: US Non Farm Payrolls (FEB), Balance of Trade (JAN)  

Friday 26th February, 5pm values

 IndexChange%
All Ordinaries 6941-123-1.7%
S&P / ASX 2006673-121-1.8%
Property Trust Index134000.0%
Utilities Index5835-117-2.0%
Financials Index5810-52-0.9%
Materials Index16607+279+1.7%

Friday 26th February, closing values

 IndexChange%
U.S. S&P 5003811-96-2.5%
London’s FTSE6483-141-2.1%
Japan’s Nikkei28966-1052-3.5%
Hang Seng28980-1665-5.4%
China’s Shanghai3509-187-5.1%

Key dividends

Monday 1st March 2021 – Friday 5th March 2021

  • Monday: Div Ex-Date – Betashares Legg Mason Australian Bond Fund (BNDS), L1 Long Short Fund (LSF), VGI Partners Limited (VGI), Worley Limited (WOR)
    Div Pay-Date – ANZPD (ANZPD), Mirvac Group (MGR)
  • Tuesday: Div Ex-Date – Cleanaway (CWY), Oil Search (OSH), Platinum Asset Management (PTM)
    Div Pay-Date – BENHB (BENHB) Vicinity Centres (VCX)
  • Wednesday: Div Ex-Date – Australian Ethical Investments (AEF), IOOF Holdings (IFL), InvoCare Limited (IVC), Link Administration Holdings (LNK), Medibank Private (MPL), Origin Energy (ORG), Treasury Wine (TWE)
    Div Pay-Date – Janus Henderson (JHC), Moelis (MOE)
  • Thursday: Div Ex-Date – ASX Limited (ASX), BENPH (BENPH), BHP (BHP), CBAPD (CBAPD), CBAPE (CBAPE), CBAPF (CBAPF), CBAPH (CBAPH), CBAPI (CBAPI), CSL (CSL), NIB Holdings (NHF), RIO (RIO)
    Div Pay-Date – Milton Corporation (MLT)
  • Friday: Div Pay-Date – Milton Corporation (MLT)

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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