Weekly Market Update – 19 July 2021

Data strong but is growth moderating?

Once again, we find ourselves back in lockdown. Victoria’s snap 5-day lockdown which follows the ongoing lockdown in Greater Sydney saw the ASX seesaw back and forth last week.

Employment data continues to trend in the right direction with June’s data improving once again. However, we have to expect some short to medium term reversal here in the coming months with Australia’s two most populous cities locked down simultaneously.

Additionally, recent RBA forecasts for Australia’s GDP to grow by 4.75% in 2021 are more than likely going to need to be revised downwards.  Preliminary estimates indicate a possible contraction of up to -1.4% from national economic output in the September quarter.

Whilst income and employment will remain supported somewhat through Federal and State government assistance the rosy outlook has been somewhat tempered by the recent spate of lockdowns with the health of the economy in 2H21 now at greater risk.

Is global growth moderating?

Perhaps the risk to the Australian economy is simply mirroring that of other major markets.

China’s central bank recently cut capital adequacy requirements for banks meaning less cash is required to be held on reserve. The reduction in the reserve requirement ratio by 0.5% aims to release additional liquidity into the economy in a move that aims to further fuel growth.

This pivot to easing signals heightened growth risks and will see $206b of Chinese Yuan equivalent released into the economy commencing last Thursday.

The move comes as Chinese GDP growth halved in Q2 growing by +7.9% compared to +18.3% in Q1. On an annual basis Chinese GDP remains strong at 12.7% but the slowing in Q2 suggests some of the rapid expansion we have become used to following the COVID selloff may be moderating somewhat.

Further supporting the notion that growth may be easing was Federal Reserve Chairman Jerome Powell’s comments around inflation and the US economy.

Inflationary data released last week showed headline inflation climbed to 5.4% in June from 5% in May – its fastest rate of growth in consumer prices in 13 years.

Powell continues to view inflation as transitory believing it will “remain elevated in coming months before moderating” but importantly said that the recovery had not progressed enough to being paring back the central bank’s monthly asset purchases.

This tells us that the central banks from two of the world’s largest economies are cognisant of a possible slowdown in growth and remain committed to stimulating their economies.

Our view on US inflation extends beyond transitory. We believe there are persistent price pressures that will ultimately cause the Federal Reserve to reposition its thinking. For instance, the food price index which measures increases to the cost of food doubled in June, whilst housing costs also climbed the most in six months in June.

The continued reopening of the US economy, supply chain bottlenecks and record stimulus cheques are all contributing to an increase in prices and we believe the willingness of the Federal Reserve to allow inflation to overshoot can only carry on for so long before the economy risks overheating.

Australia Unemployment and Business Survey

Who would have thought last June when unemployment was 7.4% and climbing that 12 months later we would be recording a jobless figure of 4.9%.

The Australian economy created 29,100 new jobs in June with the labour force adding over 51,000 full time jobs which was partially offset by a fall in part time work of around 22,000.

As previously mentioned, this data does not take into account the impact Sydney’s lockdown restrictions will have had on the labour force which is likely to see a significant number of Sydney workers stood down for some period of time.

If the impact of the Sydney lockdown (and the possibility of an extended lockdown in Victoria depending on the data) saw unemployment increase by around 50,000 as per current analyst estimates, then we may be looking at around a 0.5% increase to the unemployment figure in the coming months.

But let us not take the shine off what was a positive set of numbers with the participation rate remaining steady and youth unemployment declining. The only negative was a slight increase in the underemployment rate which climbed +0.5% to 7.9%.

The NAB Business survey unsurprisingly showed business confidence had taken a hit through June with rising COVID cases in NSW driving these declines.

Recreation and personal services which remains one of the most negatively impacted segments of social distancing and lockdowns was understandably weaker in June.

Meanwhile business conditions fell by 12pts after reaching a new high last month. The decline in conditions was driven by falls across the trading, profitability and employment sub-indexes whilst business confidence likewise declined with the threats of border closures weighing on confidence.

Forward looking indicators were softer in the month with both forward orders and capacity utilisation pulling back but both continue to remain high. Capital expenditure and employment variables remain in positive territory.

ASX Weekly Wrap

The ASX200 outperformed the global benchmark (+0.1% in AUD terms) last week rising +1%.

The positive returns were built off the back of a positive lead from North American and European equity markets which rallied as investor concerns about rising interest rates moderated somewhat.

Miners were the strongest sector rallying +4.5% ahead of utilities which climbed +4.2%.

Weighing on performance were tech stocks which fell -3% ahead of energy stocks which were -1.2% weaker following -3% declines in the price of oil.

At a stock level we saw significant movement in the Buy Now Pay Later (BNPL) space.

News last week that PayPal (PYPL) was removing late payment fees altogether from its “pay in four” option saw investors sell down the likes of Afterpay (APT) and Zip (Z1P) and other BNPL providers. For context APT made approximately $70m in late fees in 2020 so the PYPL move is key for the industry.  

APT and Z1P fell -12% and -14% for the week and respectively.

In other news Apple (AAPL) announced it was working on a new service to compete with APT allowing consumers to use Apple Pay and make purchases in instalments. The announcement of this new service “Apple Pay Later” saw Nasdaq-listed BNPL company Affirm (AFRM) fall -15% in the US.

It appears as if record low interest rates are currently driving a number of potential takeover offers.

One of our preferred income stocks Spark Infrastructure (SKI) rallied +17% last week after announcing it received and subsequently rejected two takeover offers from a consortium of investors led by private equity firm KKR.

The initial non-binding proposal from KKR valuing SKI at $2.70 per share was subsequently revised upward to $2.80 per share with SKI’s rejection signalling the board’s view that the offer still undervalued SKI’s infrastructure. 

We have long believed the quality of SKI’s infrastructure assets and the nature of SKI’s long term contracts and predictable cash flows meant this was an attractive income paying stock with some capital growth upside, so we are pleased to see Spark the subject of a takeover target.

Still in the infrastructure space, Sydney Airport (SYD) last week rejected a $22b takeover bid from a consortium of investors led by IFM. SYD’s long-term concession lease and high quality infrastructure assets were deemed superior to the $8.25 per share bid. SYD shares climbed +2.3% last week.

Finally, Wesfarmers (WES) launched a takeover bid for Australian Pharmaceutical Industries (API) at $1.38 per share – a 20% premium to the last closing price. API’s major shareholder Washington H. Soul Pattinson (SOL) (19.3%) has agreed to vote in favour in the absence of any higher bid.

The best performing stock in the PRIME Australian Equity Growth SMA last week was Northern Star Resources (NST) which climbed +6.2% ahead of BHP which similarly rallied +5%. Both stocks appear to have been caught up in the commodities rally given there was no major news flow released on either stock.

Looking ahead

Monday 19th July 2021 – Friday 22nd July 2021

  • Monday: N/A
  • Tuesday: AU RBA Meeting Minutes, US Building Permits (JUN)
  • Wednesday: AU Westpac Leading Index (JUN)
  • Thursday: US Weekly Jobless Claims
  • Friday: AU Markit Composite PMI (JUL), US Existing Home Sales (JUN), UK Consumer Confidence (JUL)

Friday 16th July, 5pm values

 IndexChange%
All Ordinaries 7631+86+1.1%
S&P / ASX 2007348+75+1.0%
Property Trust Index1540-5-0.3%
Utilities Index6169+248+4.2%
Financials Index6394-24-0.4%
Materials Index18098+774+4.5%

Friday 16th July, closing values

 IndexChange%
U.S. S&P 5004327-42-1.0%
London’s FTSE7008-113-1.6%
Japan’s Nikkei28003+63+0.2%
Hang Seng28005+661+2.4%
China’s Shanghai3539+15+0.4%

Key dividends

Monday 19th July 2021 – Friday 22nd July 2021

  • Monday: Div Ex-Date – Plato Income Maximiser Limited (PL8)
  • Tuesday: Div Pay-Date – Ardea Real Bond Fund (XARO), Vanguard All World Ex-US ETF (VEU)
  • Wednesday: Div Pay-Date – Magellan Global Fund Closed Class Unit (MGF), Magellan Global Fund Open Class Units (MGOC)
  • Thursday: Div Pay-Date – Collins Foods Limited (CKF), GrainCorp Limited (GNC)
  • Friday: Div Pay-Date – Vanguard US Total Market (VTS)

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 4707Nicholas Miller T: (03) 8825 4722
Jarrod Rodda T: (03) 8825 4729Gina McIntosh T: (07) 3557 2557

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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