Weekly Market Update – 05 July 2021

Strong economic data underpinning equity markets.

Given the focus on rising inflation and the expectation that recent inflation spikes in the US are temporary or transitory it was certainly interesting to see a shift in this rhetoric over the past week.

Speaking to the House Subcommittee, Federal Reserve Chairman Jerome Powell stated that inflation “effects have been larger than expected and may turn out to be more persistent than expected.”

If this proves to be true and if the Federal Reserve’s interpretation that these inflationary pressures are indeed likely to be more persistent, then it is safe to say that the likelihood of interest rate rises are only going to be sooner than flagged.

We already have some confirmation of this with the most recent Federal Reserve meeting indicating a growing chorus of voting members are swinging towards a 2023 rate rise ahead of what was previously 2024.

However, we would present the view that a 2022 first rate rise remains a distinct possibility.

With the Federal Reserve on record stating that employment and inflation are the primary determinants of when interest rates will rise and with US unemployment data continuing to bounce back from the COVID-19 induced recession we think the outlook remains strong.

Further confirmation of the strength in the US economy can be seen from June’s non-farm payroll data released on Friday.

The US economy posted its sixth consecutive month of job gains in June with 850,000 jobs added compared to expectations of 700,000.

The unemployment rate increased slightly from 5.8% in May to 5.9% in June although much of this increase was reflective of an increasing number of job seekers.

The June non-farm payrolls reversed course from the two previous months which disappointed as worker supply shortages restricted the pace of the recovery in some industries.

Importantly, June’s payroll gains also contributed to higher wages with average hourly earnings increasing +0.3% compared to May.

US equities rallied +1.7% for the week on the back of this data.

Despite the negative ramifications rising interest rates may have on equity market valuations there is a positive. The rebound we have witnessed economically and in equity markets over the past year has led regulators in the US to ease dividend payout restrictions.

The Federal Reserve’s recent stress tests found the banks’ balance sheets were healthy enough to navigate any sudden economic shocks and have therefore withdrawn dividend restrictions. This is undeniably positive for shareholders with Morgan Stanley announcing it would double its quarterly dividend.

OPEC+

Crude oil prices rose to their highest levels since 2018 (US$75/barrel) and have the potential to rise further in the near term after the OPEC+ meeting saw the United Arab Emirates reject a deal to boost output by 400,000 barrel a day from August through to December.

The UAE argued that under the current terms of the OPEC+ deal it was making greater cuts to production than other members of the committee and therefore was unwilling to accept the terms of the revised deal.

Whilst negotiations are expected to continue to resolve the dispute, a standoff would mean that production does not increase which would ultimately squeeze an alright tight supply market sending oil prices even higher.

Private Sector Credit

Private sector credit in Australia rose +0.4% in May following on from a +0.2% gain in April as the local economy continues to strengthen.

In spite of unpredictable state-wide lockdowns housing credit continues to pick up (0.6% in May) whilst personal credit also ticked higher rising to +0.2% from 0% the month before.

Importantly, business credit rebounded in May to +0.2% having fallen -0.3% in April.

Private sector credit details the extent and capacity to which businesses, consumers and homeowners can afford to borrow which ultimately fuels economic growth.

Growth in private sector credit (+1.9% annualised in May) indicated strong business conditions and sentiment in Australia which is another positive as we move away from the weak economic conditions of 2020 which saw Australia enter its first recession in nearly thirty years.

EOFY

Australian equities closed out the financial year strongly with the ASX200 rallying +24% in FY21 – its best return since the index was launched in 2000.

Whilst the ASX200 did rally off a lower base given the COVID-19 selloff saw markets fall significantly, strong upgrades to earnings and business fundamentals drove not only markets higher in FY21 but also economic fundamentals.

Looking ahead to the upcoming full year reporting season in August, the market is expecting earnings growth of around +25% which if achieved would validate the 24% recovery we have seen in the ASX200.

We anticipate reporting season to be a strong one but with valuations undeniably looking fuller at current levels we continue to concentrate the Prime Australian Equity Growth Portfolio with a quality bias.

We see the most upside and opportunity for shareholder returns in companies that are driving these earnings upgrades (the banking sector, resources, and particular segments of the healthcare industry).

With demand in owner occupied lending growing at a healthy 7% we continue to be weighted to the mortgage banks, mainly CBA and WBC which are seeing growth whilst generating 4-5% dividend yields and a strong earnings recovery.

ASX Weekly Wrap

The ASX200 underperformed its global peers rounding out the week flat as rising COVID-19 infections across the country saw several states and territories announce the now all too familiar term ‘snap lockdowns.’

The best performing sectors were telcos adding +3.2% ahead of consumer discretionary stocks which climbed +1% higher.

Weighing on performance attribution were tech stocks which slid -3%, whilst real estate investment trusts (REITs) fell -2% with many stocks trading ex-dividend running into the end of the financial year.

Iron ore was largely unchanged having recently reclaimed the US$220/tonne level on the back of rising demand.

At a stock level education provider IDP Education (IEL) was the best performer last week rising +18% after announcing it had acquired 100% of the British Council’s Indian International English Language Testing System. The deal now places IEL as the sole distributor in the Indian market.

AGL Energy (AGL) was one of the worst performers last week falling -10% after announcing it was planning to demerge its retailing business from its coal fleet in a move that aims to accelerate its clean energy shift. AGL also announced it would terminate its special dividend program and warned of weaker FY22 earnings.

Telstra (TLS) was the best performing stock in the Prime Australian Equity Growth Portfolio rising +5.5% to trade at an 18-month high around $3.80 per share.

The move in TLS shares came on the back of TLS selling a 49% stake in its InfraCo Tower business to a consortium including the Future Fund and Commonwealth Superannuation Corporation.

Net proceeds from the sale are expected to be $2.8b with about half of those funds expected to be returned to TLS shareholders in FY22.

Looking ahead

Monday 05th July 2021 – Friday 09th July 2021

  • Monday: AU Retail Sales (MAY), ANZ Job Advertisements (JUN), CN Caixin Services PMI (JUN)
  • Tuesday: AU RBA Interest Rate Decision
  • Wednesday: US Markit Services PMI (JUN), ISM Non-Manufacturing PMI (JUN)
  • Thursday: US FOMC Minutes, Weekly Jobless Claims
  • Friday: CN Inflation Rate (JUN), UK Balance of Trade (MAY)

Friday 2nd July, 5pm values

 IndexChange%
All Ordinaries 7587+8+0.1%
S&P / ASX 2007309+10.0%
Property Trust Index1551-34-2.1%
Utilities Index5894-238-3.9%
Financials Index649700.0%
Materials Index17217+104+0.6%

Friday 2nd July, closing values

 IndexChange%
U.S. S&P 5004352+71+1.7%
London’s FTSE7123-13-0.2%
Japan’s Nikkei28783-283-1.0%
Hang Seng28310-978-3.3%
China’s Shanghai3519-89-2.5%

Key dividends

Monday 28th June 2021 – Friday 09th July 2021

  • Monday: Div Pay-Date – ALS Limited (ALS), Cimic Group (CIM)
  • Tuesday: N/A
  • Wednesday: Div Ex-Date – Collins Foods Ltd (CKF), GrainCorp Ltd (GNC), Spark Infrastructure (SKI)
    Div Pay-Date – NABPD (NABPD)
  • Thursday: Div Pay-Date – ANZPD (ANZPD), Metrics Income Opportunities Trust (MOT), Metrics Master Income Trust (MXT)
  • Friday: Div Pay-Date – Orica Ltd (ORI)

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.

SPEAK WITH US TODAY

A unique and personal service approach and support for all your business advisory and personal wealth management needs

Request a consultation

A unique and personal service approach to support all your business advisory and personal wealth management needs.

Request a consultation