Weekly Market Update – 26 July 2021

Lockdowns across three states weighing on performance.

Global equity markets were stronger last week with the MSCI World Index rallying +2.3% in AUD terms.

A sharp increase in the number of COVID cases saw Victoria’s lockdown extended for another week whilst South Australia also entered a 1-week lockdown in order to curb the spread of the highly contagious delta variant.

It is also becoming increasingly clearer that the New South Wales lockdown will extend beyond the initial deadline of July 30 given daily case numbers are upwards of 100.

With the ASX now trading +3% above its pre-COVID highs and reporting season looming we think valuations are look fuller. The unpredictable nature of this virus and the undeniably slow vaccine rollout in Australia is likely to see the rate of economic growth in Australia stall in the medium term.

The recent spike in COVID cases has already started to impact the data with consumer confidence and retail sales with both falling heavily in June.

With half the country currently in lockdown the impact to economic growth could be upwards of $10b in Q3 which could easily translate to negative growth for the quarter.

Whilst we do not believe we are on the precipice of another selloff we do believe much of the upside has now been captured. Ensuring portfolios are well positioned to outperform in the coming months has led us to favour quality stocks.

Consumer staples, healthcare and other resilient earners generating free cash flows with strong balance sheets are likely going to drive outperformance in the medium term and these areas continue to be a key focus of ours in the PRIME Australian Growth SMA.

Did the RBA announce the QE taper too soon?

It was only a fortnight ago that the RBA announced it would seek to start tapering its QE program come September flagging a reduction in weekly government bond purchases from $5b to $4b.

As we know a lot can happen in two weeks.

The RBA’s assessment of the strength of the broader economy was very much intact when the Board left rates on hold at its July 6 meeting.

However, the RBA minutes from the policy meeting released last week signal a reversal or at the very least raise further questions about the underlying strength of the Australian economy.

Despite acknowledging that risks to the economic outlook had become more balanced and that policy settings remain highly accommodative, the RBA cited ongoing virus outbreaks as a major risk which continues to contribute to risks in global supply chains.

Particularly of concern to the RBA is wage pressures which despite picking up from the historically low levels recorded following the onset of the pandemic to be around 2%-2.5% still fall short of the RBA’s expectations.

Wage growth in excess of 3% is required in order to drive inflation higher and the RBA’s current central scenario is one where wages growth and underlying inflation are expected to increase only gradually in the next two years.

Fortunately, the RBA has the flexibility to backtrack on its proposed QE tapering if it feels the economy needs further stimulus.

The Board sit once again next Tuesday and depending on the state of lockdowns across Australia it is highly likely the RBA will pause or delay its proposed QE tapering to allow the economy more time to recover from the current shutdowns.

Lockdowns driving weaker data

The impact of lockdowns on not just the economy but also sentiment is starting to flow through with consumer confidence suffering its biggest weekly decline since the beginning of the pandemic in March 2020.

Consumer confidence fell -5.2% according to the latest report as spending intentions were weaker compared to the prior corresponding period.

Four out of the five subindices all fell significantly with ‘current financial conditions’ the only component to register a gain of +1.2%. Interestingly, ‘future financial conditions’ fell -3.4% and ‘future economic conditions’ fell -4.5% highlighting renewed caution amongst households.

It was no surprise to see retail sales data for June similarly weak falling -1.8% for the month.

Victoria led the declines falling -3.5% ahead of NSW which was -2% weaker as both states endured some form of stay-at-home order for part of the month.

The only segment of the market to benefit from these snap lockdowns was food retailing which climbed +1.5% as snap lockdowns tend to see increased consumption and expenditure on food and delivery services.

It is worth noting that despite the impact of restrictions yearly sales remain positive, up +2.9% compared to June 2020.

We anticipate consumer confidence and retail sales data to remain weak in the coming month’s with NSW almost certain to be under lockdown orders well into August.

ASX Weekly Wrap

The ASX200 underperformed its global peers rising +0.6% last week.

Traditional defensives such as healthcare outperformed the market rising +4.7% as the continuing climb of delta variant cases led investors to more predictable cash generative businesses.

The next best performing sector was consumer staples (+2.2%) which, like healthcare, is considered to be a more stable and resilient earner in times of heightened volatility.

Energy stocks fared worst falling -1.7% as OPECs agreement to increase oil supply by 400,000 barrels per day beginning in August drove a sell-off in crude oil which then rallied later in the back half week.

Miners were also weaker falling -1.2% as iron ore prices fell -6% from $US222/tonne to US$209/tonne.

At a stock level ANZ Bank (ANZ) climbed +1% after announcing a $1.5b buyback. Given the strength and health of ANZ’s balance sheet, management decided the most prudent use of this capital was to buy back shares on market.

Whilst we have no exposure to ANZ in the PRIME Australian Growth SMA we do have a meaningful position in the PRIME Diversified Income SMA.

The ANZ buyback may in fact be a precursor of things to come with CBA set to release its full year results in August. CBA is the best capitalised of the major banks with a strong capital position and CET1 ratio of 12.7% so we consider the likelihood of a capital management initiative announcement to be high.

Elsewhere, Santos (STO) shares fell -6% after announcing it had submitted an all-scrip merger proposal to Oil Search (OSH) in what would have created a $22b energy company with large scale synergy benefits had the merger progressed.

OSH ultimately rejected the STO merger proposal on the basis that the proposed merger did not offer appropriate value for OSH shareholders. However, the fact that STO continues to engage with OSH suggests there is further developments to play out here.

A possible merger would make strategic sense creating a diversified portfolio of high quality, long-life assets across Australia and Papua New Guinea with a robust balance sheet that could self-fund future growth.

Finally, Ramsay Healthcare (RHC) announced that its $3.9b acquisition of UK-based Spite Healthcare had been rejected.

It is disappointing given the acquisition was set to expand RHC’s footprint in the UK market by creating a leading private health care services provider and given it was unanimously recommended by the Spire board.

However, it is always in the best interests of shareholders that management exercise financial discipline with regards to acquisitions. Despite the failed acquisition we continue to see a strong long term value proposition for RHC shareholders given RHC’s healthy balance sheet and strong cash flow position.

Looking ahead

Monday 26th July 2021 – Friday 30th July 2021

  • Monday: N/A
  • Tuesday: US New Home Sales (JUN), Durable Goods Orders (JUN)
  • Wednesday: AU Inflation Rate (Q2)
  • Thursday: AU Import/Export Prices (Q2), US Federal Reserve Interest Rate Decision, GDP Growth Rate (Q2)
  • Friday: AU Private Sector Credit (JUN), US Personal Consumption Expenditure Index (JUN)

Friday 23rd July, 5pm values

 IndexChange%
All Ordinaries 7671+40+0.5%
S&P / ASX 2007394+46+0.6%
Property Trust Index1552+12+0.8%
Utilities Index6144-25-0.4%
Financials Index6424+30+0.5%
Materials Index17890-208-1.1%

Friday 23rd July, closing values

 IndexChange%
U.S. S&P 5004412+85+2.0%
London’s FTSE7028+20+0.3%
Japan’s Nikkei27548-455-1.6%
Hang Seng27322-683-2.4%
China’s Shanghai3550+11+0.3%

Key dividends

Monday 26th July 2021 – Friday 30th July 2021

  • Monday: N/A
  • Tuesday: Div Ex-Date – BOQPE (BOQPE), BOQPF (BOQPF)
  • Wednesday: Div Ex-Date – Mirrabooka Investments Limited (MIR)
    Div Pay-Date – Bingo Industries Limited (BIN)
  • Thursday: Div Pay-Date – Australian Unity Office Fund (AOF), Premier Investments Limited (PMV)
  • Friday: Div Pay-Date – Plato Income Maximiser Limited (PL8)

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 McIntoshT: (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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