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Infrastructure plan and steady inflation driving global equities.

Global equity markets were stronger last week as represented by the MSCI World Index which rallied +0.6% in AUD terms.

A key driver of performance was the US Senate passing a US$1trillion bipartisan infrastructure plan which will undoubtedly provide more jobs, whilst improving and updating the country’s physical infrastructure.

The plan proposes approximately $US550b in new spending over five years with funds set aside to rebuild roads and bridges, upgrade cyber security systems, tackle climate change issues along major coastlines and importantly upgrade airports, freight rail lines and replace old lead-based water drinking pipes.

This is clearly a major win for the Biden Administration and the US and whilst the bill still faces hurdles in needing to be passed through the House, it is a positive outcome for growth and the labour market.

Another factor behind last week’s strength was a moderation in the rate of US consumer inflation.

With a growing chorus of investors becoming more concerned each month that inflationary pressures are climbing to uncomfortable levels, July’s consumer price index (CPI) data rose at a more moderate pace.

July’s CPI increased +0.5% month-on-month and climbed +5.4% on an annual basis. Whilst the CPI figure remains elevated, July’s data release showed inflation was steadier than in prior months with June’s figure rising +0.9% from the month prior. 

Pent up demand for travel and restaurants underpinned July’s CPI with the figure ultimately jumping in line with analyst expectations.

Core inflation, which excludes volatile items such as energy and food, rose by +0.3% which was slightly below expectations in another sign inflation is rising gradually but not too quickly.

Like many, we are cautious of the impact a faster-than-expected inflationary rebound can have on markets. Rising bond yields are typically a reflection or indication that interest rates may need to rise to combat excess demand and inflationary pressures.

We saw yields on 10-year Treasury notes climb higher for much of last year and the first few months of this year peaking at over 1.70%, however, we have since seen yields tighten falling to a low of 1.20% and more recently to 1.37%.

The impact of the Delta variant and the Federal Reserve’s commitment to maintaining its accommodative monetary policy stance has provided investors with further reassurance that interest rates are unlikely to change in the near term.

We believe this is the most sensible approach in the interim with the main focus for global economies to remain ‘open’ whilst managing the spread of the Delta variant.

US equities rose +0.7% for the week.

Confidence impacted by lockdowns

It was a case of when the lockdowns would flow through to confidence levels, not if.

The shut-down in NSW, VIC, QLD, SA and more recently the ACT can only carry on for so long restricting movement and forcing non-essential businesses to close before confidence levels start to crater.

And that is exactly what we saw in the latest NAB Business Confidence numbers which showed business confidence decline sharply.

The decline in confidence was evident across all states with all industries except for mining and construction falling back in negative territory. By state, NSW as to be expected is now weakest and well into negative territory.

Business conditions also fell on the back of declines in trading (-20pts), profitability (-19pts) and employment (-8pts) sub-indexes.

Forward looking indicators weakened further and point to ongoing weakness in conditions in the near-term. Forward orders fell sharply and are back in negative territory while capacity utilisation softened further. Lower capacity utilisation and a fading pipeline has the potential to see a fall in hiring and investment.

Whilst the near-term negatives are abundantly clear with expectations for GDP to be negative in Q3 and perhaps even Q4, the positive is that once restrictions are removed, the economy tends to bounce back quickly.  

Reporting season update

Reporting season continues to gather momentum with another big week of company reports due to be released in the coming days.

So far, we have seen the strength that has driven the ASX +11% higher in the 2H21 and +24% for the FY translate through company earnings with EPS and revenues tending to be quite strong.

Some of the major companies in our portfolios which reported last week included:

• Telstra (TLS) rose +4.2% after reporting FY21 underlying EBITDA of $6.7b. Importantly, TLS provided guidance for the coming financial years, which the market liked. One concern was that the current lockdowns may have caused companies to defer on providing guidance, so this was a positive.
  
  TLS’s figures showed it was starting to return to operational growth with the announcement of a $1.35b on-market buyback another positive. TLS plans to fund the buyback from the monetisation of its InfraCo Towers business which sold above expectations on an EV/EBITDA multiple of 28x.
  
  Importantly for shareholders, TLS held the dividend at 8c comprising a 5c final dividend and 3c special dividend implying a FY dividend of 16c which equates to a 4% dividend yield pre-franking.

• Commonwealth Bank (CBA) lagged the other major banks but rose +0.3% for the week after announcing an off-market buyback that exceeded forecasts ($6b vs $5b). Cash earnings climbed +20% to $8.6b and CBA bumped up its final dividend to $2.00 compared to $0.98c a year ago.
  
  It was pleasing to see home loans, business loans, business deposits and deposit growth all performing strongly. CBA trades on a 1-year forward PE of 20x and a dividend yield of 4% which we continue to view attractively.
  
  Post the buyback, CBA will still have another $7.5b in surplus capital on the balance sheet so further buybacks to reduce share count and drive EPS gains are a distinct possibility.
  
  CBA did flag a further compression in net interest margins (NIMs) was to be expected given low interest rates and that expense line growth continues to be elevated but ultimately it was a strong result across all product lines.

One of the interesting aspects to have come out of reporting season so far has been the number of companies returning capital to shareholders through either enlarged dividends or buybacks.

Reducing balance sheets to return capital to shareholders tells us that companies are remaining somewhat bullish on the outlook despite the negative impact the lockdowns are likely to have on the economy and individual businesses so this if for now somewhat pleasing.

ASX Weekly Wrap

The ASX200 outperformed its peers last week rising +1.2% last week closing above 7,600 points on Friday for the first time ever. 

Best performing sectors were financials which climbed +3%, ahead of utilities (+2.3%) and telcos (+2.1%) which were primarily stronger on account of TLS which makes up 39% of the telecommunications index.

Industrials were weakest falling -1%, whilst tech fell -0.2% which was ultimately a reflection of tech stocks falling globally.

Iron ore continues to fall down -5% last week with prices in USD per tonner of iron ore having now fallen from US$220/tonne last month to US$164/tonne last week. Whilst the iron ore price continues to fall as China enforces limits and capacities on steel production, demand is still outpacing supply.

Even at current levels, iron ore producers are still generating significant free cash flows and for as long as demand outgrows supply the iron ore boom is unlikely to stop.

One of the top performers on the ASX last week was Downer (DOW) which climbed +12% after posting full year results that were well received.

DOW reported a +21% increase in underlying NPAT of $261m and most pleasing was DOW’s $35b worth of work in the pipeline, of which 90% comes from government contracts. This compares to just 56% five years ago.

Reporting season continues this week headed by BHP due to report on Tuesday. 

Looking ahead

Monday 16th August 2021 – Friday 20th August 2021

• Monday: CN Unemployment Rate (JUL), Retail Sales (JUL)
• Tuesday: AU RBA Meeting Minutes, UK Unemployment Rate (JUL), US Retail Sales (JUL)
• Wednesday: AU Wage Price Index (Q2), UK Inflation Rate (JUL), US Building Permits (JUL) 
• Thursday: AU Unemployment Rate (JUL), US FOMC Minutes, Weekly Jobless Claims
• Friday: UK Retail Sales (JUL)

Friday 13th August, 5pm values

Friday 13th August, closing values

Key dividends

Monday 16th August 2021 – Friday 20th August 2021

• Monday: Div Ex-Date – CGFPA (CGFPA), Plato Income Maximiser (PL8)
  Div Pay-Date – BOQPF (BOQPF)
• Tuesday: Div Ex-Date – Genworth Mortgage Insurance Australia (GMA)
  Div Pay-Date – Qualitas Real Estate Income Fund (QRI), Betashares Legg Mason Australian Bond Fund (BNDS) 
• Wednesday: Div Ex-Date – ResMed Inc. (RMD)
• Thursday: N/A
• Friday: Div Pay-Date – BWP Trust (BWP), Cromwell Property Group (CMW)

Contact

If you would like to discuss your situation, please speak to your adviser or email clientservices@primefinancial.com.au

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