Weekly Market Update – 31 May 2021

Economic data improves but interest rate hikes still a way off.

Despite the growing consensus that interest rate hikes are becoming more likely over the course of the next two years, global equity markets continued their climb higher last week.

The MSCI World Index rallied +1.6% in AUD terms which was a welcome surprise given higher interest rates implies a greater discount to equity market valuations.

Nevertheless, equity markets continue to look at current economic data which is fuelling the recovery trade.

A recent surge in US manufacturing and services in May was undeniably well received with the output index rising further in May, whilst the US services Purchasing Managers Index (PMI) hit a record through 70.

As a reminder a data print above 50 indicates expansion whilst below 50 implies contraction or compression. So, given April’s PMIs were around 65 on the index, May’s data is unquestionably strong.

Demand for goods and services continues to trend higher whilst production and output are accordingly increasing to meet capacity.

No doubt part of this increased demand is driven by the widespread issue of US stimulus cheques to combat COVID-19. Certainly, the Federal Reserve’s hopes and expectations were for these stimulus cheques to be spent further bolstering the economy, which is indeed how this appears to be playing out.

However, as is the case with any recovery in an economic cycle, once you move past the initial phase of low rates and or fiscal support, demand starts to pick up due to low prices and supply begins to increase.

This is where we are now. Unemployment is falling, inflation is rising and the global economy is expanding.

But in order to keep things from ‘overheating’ it is important to look forward. The Fed are on record stating that full employment and sustainable inflation are required before any adjustments to monetary policy are made and similarly the Fed has stated that interest rates are unlikely to move prior to 2023/2024.

The economic data we are seeing along with recent spikes in US inflation and positive movements in the unemployment rate suggest this is unlikely.

Futures markets a fortnight ago were pricing in an 80% chance the Fed funds rate was likely to move in 2022 and this view continues to gather steam. Morgan Stanley’s CEO this week announced he expects the Fed will taper its bond purchases toward the end of this year and commence rate rises in early 2022. 

He also reminded us all that “the Federal Reserve will be driven by whatever [the] numbers tell them” so whilst it pays to listen to the Fed in terms of guidance it also pays to scrutinise the economic data and adjust expectations accordingly as the Fed will inevitably be doing this in due course.

Westpac Leading Index

The Westpac Leading Index released last week continued to show broad, above trend momentum in April.

The index, which looks three to nine months into the future to predict economic growth, fell slightly from March down to 2.85% in April but ultimately continues to show an expectation that momentum is likely to carry through to 2H21 and into early 2022.

It is important to note that whilst the pace of the gains moderated somewhat, the previous data points were exceptionally strong having recovered from last year’s COVID-19 lows to hit record highs late in 2020.

To put April’s leading index release of 2.85% into perspective, it remains well above other growth rates recorded dating back four decades.

Underpinning the strength in the leading index data has been the big lift in commodity prices, particularly iron ore which has risen +22% this calendar year whilst other components have also seen positive contributions such as dwelling approvals and unemployment expectations.

As it currently stands all components are contributing to above trend headline growth and further supporting forecasts for the Australian economy to report 2021 GDP of around 4% – 4.5%.  

Weekly Wrap

The ASX200 rose steadily last week, climbing four out of the five trading days to post a +2.1% gain for the week.

Sector gains were broad based with telcos adding +3.6% whilst consumer discretionary stocks were not far off climbing +3.2%. Major constituents in the consumer discretionary index Wesfarmers (WES) and Aristocrat Leisure (ALL) rose +2.4% and +3.1% respectively.

WES rose on little news but ALL surged higher after 1H21 results reported normalised sales, EBITDA and NPAT in line with expectations whilst growth in its digital business was the highlight outpacing most forecasts with further scope to grow.

Rounding out the top three were tech stocks which climbed +3%, led by accounting software provider Xero (XRO) which rose +2.6%. Following a weak result which showed EBITDA and free cashflow was suffering from higher-than-expected operating costs, XRO has recovered to climb +16% in the past fortnight.

The worst performing stock on the ASX last week was fruit and vegetable grower Costa Group (CGC) which saw a host of brokers cut their target prices on the stock following its AGM and a weak trading update.

CGC shares fell -23.7% after announcing it expected 1H earnings to be only marginally ahead of the prior corresponding period driven by weakness in domestic operations and currency headwinds. 

The best performing stock in the PRIME Australian Equity Growth SMA last week was Santos (STO) which rallied +4% ahead of Healius (HLS) +3.8% and Westpac Bank (WBC) +3.1%.

Weighing on attribution was Ramsay Healthcare (RHC) which fell -1% over the course of the week after announcing it made an all-cash offer to acquire 100% of UK-based and London Stock Exchange listed Spire Healthcare Group for $1.8b.

Spire is an independent hospital group focused on the private patient market and is a leading provider of high acuity care.

The acquisition appeals to us given it is set to transform RHC’s UK business by creating a leading private health care services provider in the UK whilst also diversifying RHC’s case mix, expanding the geographic reach of its capabilities and improving capacity utilisation.

The acquisition if approved will deliver scale to further invest in clinical research and development and provide the foundation for further growth, in line with RHC’s strategic vision of creating a leading ecosystem for patient centric and integrated care. 

The acquisition looks set to deliver RHC shareholders with future value with the acquisition set to be earnings per share (EPS) accretive by FY24.

Additionally, the deal has received the unanimous approval from Spire’s Board who have subsequently recommended Spire shareholders likewise support the deal.

Looking ahead

Monday 31st May 2021 – Friday 4th June 2021

  • Monday: AU Private Sector Credit (APR), CN Non-Manufacturing PMI (MAY)
  • Tuesday: AU RBA Interest Rate, Business Inventories (Q1), CN Manufacturing PMI (MAY)
  • Wednesday: AU GDP Growth Rate (Q1), US Manufacturing PMI (MAY), UK Mortgage Approvals (APR)
  • Thursday: AU Balance of Trade (APR), Retail Sales (APR), US Weekly Jobless Claims
  • Friday: AU Home Loans (APR), US Non-Farm Payrolls (MAY)

Friday 28th May, 5pm values

 IndexChange%
All Ordinaries 7424+159+2.2%
S&P / ASX 2007180+150+2.1%
Property Trust Index1492+27+1.8%
Utilities Index5748-56-1.0%
Financials Index6554+178+2.8%
Materials Index17097+232+1.4%

Friday 28th May, closing values

 IndexChange%
U.S. S&P 5004202+46+1.1%
London’s FTSE7023+5+0.1%
Japan’s Nikkei29149+831+2.9%
Hang Seng29124+666+2.3%
China’s Shanghai3601+114+3.3%

Key dividends

Monday 31st May 2021 – Friday 4th June 2021

  • Monday: Div Ex-Date – Metrics Master Income Trust (MST), Metrics Income Opportunities Trust (MOT), Orica Limited (ORI), Incitec Pivot (IPL)
    Div Pay-Date – Kogan.com (KGN), Plato Income Maximiser Limited (PL8)
  • Tuesday: Div Ex-Date – BENPF (BENPF), BENPG (BENPG), SUNPF (SUNPF), SUNPG (SUNPG)
  • Wednesday: Div Ex-Date – MBLPC (MBLPC)
  • Thursday: Div Ex-Date – MQGPC (MQGPC)
  • Friday: Div Ex-Date – CBAPD (CBAPD), CBAPE (CBAPE), CBAPF (CBAPF), CBAPI (CBAPI), CBAPJ (CBAPJ)

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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