Weekly Market Update – 28 June 2021

Interest rate hikes remain some time away.

The last week of the financial year always presents one final opportunity for fund managers and investors to rebalance portfolios.

Typically, we see a little more volatility with investors looking to book some ‘tax losses’ whilst fund managers are keen to exit some of the poorer performers within portfolios to hit the reset button and begin July 1 with a clean slate.

We also tend to see some of the more harshly treated stocks that have been sold for tax purposes rebound strongly in July once all this selling is done so we remain cautious of a slight uptick in volatility over the next few weeks.

The PRIME Australian Equity Growth SMA continues to favour quality stocks at a reasonable price and remains predominantly fully invested, however, there is scope to add to any existing portfolio holdings should market valuations provide an opportunity to increase exposures.

Post Federal Reserve Meeting views

Global equity markets were stronger (+0.8%) as worries about higher interest rates eased somewhat. In reality, it seems that investors and markets are accepting that higher rates are on the horizon rather than ignoring the obvious truth.

The question obviously remains as to the when not if.

Federal Reserve chairman Jerome Powell doubled down on his comments this week that inflation would subside having recorded an annualised figure of 5% in May.

Speaking to the House last week Powell referred to strong increases in the price of oil and a rebound in spending on the back of unprecedented stimulus as an explanation for the strong uptick in inflation.

The key point in his testimony was ‘transitory’. As the economy continues to expand and supply catches up with demand (which has been given a significant boost from fiscal stimulus) prices for goods and services (inflation) are expected to moderate.

Whether or not these recent price increases are indeed transitory only time will tell. However, the fact that 13 out of the 18-person policy board now see rates rising in 2023 compared to only 6 in previous meetings tells us that risks remain for earlier than forecasted rate rises.

Interestingly, one such Federal Reserve member, Raphael Bostic who is the president and CEO of the Federal Reserve Bank of Atlanta and who was traditionally a staunch advocate for loose monetary policy settings has done a complete volte face.

According to Bostic “the upside surprises in recent data points [has] pulled forward projections for [the] first move to late 2022 [with] two moves in 2023.”

What we do know is that the process of shifting from accommodative monetary policy to tighter monetary policy settings will begin with an easing of the QE program which currently sees the Fed purchasing $US120b of bonds each month.

Depending on data points the annual Jackson Hole economic summit in August could emerge as a strong scenario for the Fed to announce the tapering of its QE program.

US GDP data last week showed the US economy grew by +6.4% in Q1 leading economists to believe 2021 may be the strongest year for the US economy in seventy years.

US equities rallied +2.7% for the week.

Manufacturing PMI

Australia’s manufacturing sector continued to expand in June despite climbing at a slower pace than the month prior.

The manufacturing PMI (Purchasing Managers’ Index) slowed slightly from 60.4 in May to record a score of 58.4 in June.

The overall score is based on data obtained from questionnaires sent to purchasing managers in a panel of around 400 manufacturers with the survey responses collected used to indicate the direction of change compared to the previous month.

A diffusion index is calculated for each survey variable with a final score above 50 indicating expansion and sub 50 indicating contraction.

Private sector output continued to expand alongside new orders in June, but growth slowed as a result of the heightened COVID-19 restrictions in Victoria and supply bottlenecks.

Notwithstanding the slowing pace, the manufacturing sector continues to strengthen as the economy transitions itself away from that of a ‘recovering’ economy post COVID-19 to that of an ‘expanding’ economy.

ASX Weekly Wrap

The ASX200 underperformed last week posting its first weekly decline for June last week falling -0.8%.

Much of this weakness stemmed from Monday’s brutal selloff (-1.8%) which ultimately took its direction from a very weak lead the previous Friday in European and North American equity markets.

Healthcare was the weakest sector falling -4.3% ahead of financials which fell -2.7% and energy stocks which rounded out the top 3 declining -2.2%

Interestingly, energy stocks declined despite oil prices rallying +4%. Expectations for further supply cuts coupled with a weaker US dollar drove oil prices higher.

On the flip side, best performers were IT stocks which advanced +3% after concerns about rising interest rates tempered somewhat. The IT sector has climbed +17% month to date making it the strongest month of returns for the sector since April 2020.

Miners also contributed positively to performance last week rallying +2.3% to offset some of the previous week’s weakness. Iron ore was largely flat and continues to trade around $US217/tonne.

At a stock level Afterpay (APT) was the best performing stock on the ASX200 climbing +13% after it announced it was making its service available to select app customers at some of the largest merchants in the United States including the likes of Amazon and Nike.

Select APT Customers can now shop at merchants by simply choosing their favourite brand in the Afterpay Shop Directory and paying with Afterpay.

Kogan.com (KGN) shares rallied +11% after the latest COVID-19 snap lockdown announcement in Sydney was seen to be beneficial for its business model. The lockdown restrictions set to last a fortnight are expected to drive more consumers online.

The worst performing stock on the ASX200 last week was Woolworths (WOW) falling -14%. However, this was caused by the demerger of its drinks and hotels business Endeavour Group Limited (EDV) which was spun out of WOW shares last week.

All WOW shareholders have received 1 EDV share which is a new listing on the ASX for each WOW share held in portfolios. So, whilst WOW shares actually declined $5.89 for the week there was an overall benefit to shareholders with EDV shares trading at $6.10 implying 21c of additional value for shareholders.

We remain confident both businesses can continue to deliver strong returns for shareholders. 

Post Demerger WOW remains the largest supermarket across Australia and New Zealand with $53 billion of revenue and an even more robust balance sheet with net cash of ~$75m. The demerger provides the catalyst for WOW to deliver a capital return of $1.6-$2b to shareholders.

Meanwhile, EDV will become the largest Australian pure play exposure to both retail drinks & hotels with a portfolio of 250 Dan Murphy’s stores, 1392 BWS outlets and 293 hotels.

Meanwhile CSL (CSL) shares fell -6.7% after 7 consecutive weeks of positive returns. The major reason for the decline was a broker downgrade from what was previously a ‘buy’ to ‘neutral’. The downgrade was purely valuation based given CSL’s strong outperformance since March.

CSL represents a major part of the PRIME Australian Equity Growth SMA and we continue to hold the stock. Our thesis is predicated on expectations for a strong uptick is plasma collections in 2021 following a weaker 2020 because of the COVID-19 impact on blood donors. 

Looking ahead

Monday 28th June 2021 – Friday 2nd July 2021

  • Monday: N/A
  • Tuesday: UK BoE Consumer Credit (MAY), Mortgage Approvals (MAY)
  • Wednesday: AU Private Sector Credit (MAY), CN NBS Manufacturing PMI (JUN), UK GDP Growth Rate Q1
  • Thursday: AU Balance of Trade (MAY), CN Caixin Manufacturing PMI (JUN), US Weekly Jobless Claims
  • Friday: US Non Farm Payrolls (JUN), Balance of Trade (MAY)  

Friday 25th June, 5pm values

 IndexChange%
All Ordinaries 7579-45-0.6%
S&P / ASX 2007308-61-0.8%
Property Trust Index1585+21+1.3%
Utilities Index6132-126-2.0%
Financials Index6497-177-2.7%
Materials Index17113+376+2.2%

Friday 25th June, closing values

 IndexChange%
U.S. S&P 5004281+114+2.7%
London’s FTSE7136+118+1.7%
Japan’s Nikkei29066+101+0.3%
Hang Seng29288+486+1.7%
China’s Shanghai3608+82+2.3%

Key dividends

Monday 28th June 2021 – Friday 2nd July 2021

  • Monday: Div Ex-Date – NABPD (NABPD)
  • Tuesday: Div Ex-Date – ANZPD (ANZPD), Charter Hall Long Wale REIT (CLW), Cromwell Property Group (CMW), Transurban Group (TCL)
  • Wednesday: Div Pay-Date – WBCPG (WBCPG)
  • Thursday: Div Ex-Date – Ardea Real Outcome Bond Fund (XARO)
    Div Pay-Date – ANZ Bank (ANZ)
  • Friday: Div Pay-Date – Macquarie Group (MQG), National Australia Bank (NAB)

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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