Weekly Market Update – 23 August 2021

Global equities weaker as the virus impacts sentiment and data

Global equity markets were weaker last week with economic activity out of China missing estimates whilst US GDP forecasts were also cut as the impact of the Delta variant continues to weigh on sentiment.

The MSCI World Index actually rallied +2% in AUD but all of this performance can be attributed to a weaker AUD (-3% last week) which magnifies returns when US denominated assets are converted back into AUD.

Stripping out currency movements and global equities were lower last week with the MSCI World Index falling -2%. 

Key drivers for markets last week was the release of China’s economic data for July which showed slower-than-expected growth amid a resurgence of COVID-19 cases and heavy rainfalls and floods in the north eastern province of Zhengzhou.

Consumer spending bore the brunt of the weakness with retail sales climbing +8.5% significantly below forecasts of +11.5%.

Manufacturing also rose but again at a level below expectations with industrial production rising +6.4% compared with expectations of +7.8%.

Whilst the data at a headline level appears surprisingly positive, this serves as a reminder that economic data should always be interpreted against expectations because equity markets are forward looking and have ultimately already priced in these expectations.

Further driving equities lower was the release of the minutes from the most recent Federal Reserve meeting.

The minutes showed the general consensus amongst members was that the committee could begin to reduce the pace of its bond purchasing program later this year because inflationary targets were being met whilst unemployment was falling in line with its target.

Given the Federal Reserve has allowed inflation (+5.4%) to overshoot believing the factors that are driving inflation higher will prove to be transitory, we think the Federal Reserve will act more cautiously than the minutes suggest.

The minutes showed that the “transitory nature of this year’s rise in inflation, as well as the recent declines in longer-term yields” cast doubt on the degree of progress so we question whether the Federal Reserve will begin to taper bond purchases before having clearer insight into the true health of underlying economy.

With US consumer confidence falling in early August to the lowest level in nearly a decade and Delta infections rising, Goldman Sachs last week downgraded its outlook for US growth.

Goldman’s cut Q3 GDP forecasts to an annualised +5.5% having previously forecasted a +9% annualised figure in Q3 with concerns over inflation and growth driving the downgrade.

US equities were weaker last week falling -0.6%.

Unemployment rate hides the truth

Make no mistake, Australia’s unemployment rate is massaging the truth.

The unemployment rate fell from 4.9% in June to 4.6% in July which exceeded economist forecasts for a slight jump to 5% on the back of COVID-19 lockdowns across NSW and Victoria.

For context, an unemployment rate of 4.6% hasn’t been achieved in over a decade but the real story behind July’s data is the participation rate which fell -0.2% nationally but -1% in NSW alone.

This is staggering and a direct function of lockdowns plaguing the state. As a reference point NSW accounts for approximately 25% of national GDP so the decline is material.

A reminder that the participation rate refers to those who are either currently employed or searching for work, so a falling participation rate simply means people have stopped looking for work.

Hence, when individuals without a job stop actively looking for work, they fall outside of the employment statistics. This ultimately reduces the sample size to which you are measuring the employed against which in reality means the unemployment rate falls.

This is exactly what we witnessed last week and with the state of lockdowns only intensifying it seems clear that this trend is set to continue for in the months to come.

Treasurer Josh Frydenberg also revealed that the government was now expecting the economy to contract by -2% in Q1FY22 which is in keeping with economists who have now built a negative September quarter GDP figure into their assumptions.

Key to the performance of the national economy in the next six months will be the length of time NSW and VIC remain in lockdown with the likelihood of a double-dip recession increasing the longer each lockdown remains in place.

Wage growth slides

June quarter wage growth data showed wage growth remains benign.

National wage growth fell to 0.4% in Q4FY21 which is in direct contrast with an improving labour force.

What was most surprising about the data was that labour shortages in certain parts of the economy were leading to significant wage pressures.

Essentially this tells us that a tightening labour market is having little impact in driving wage growth which is the RBAs critical measure for driving inflation upwards.

Annual wage growth came in at 1.7% which is well shy of the RBA target of 3% whilst real wage growth which takes into account inflation actually fell -2.1% (inflation for the 12 months to June was 3.8%).

Fundamentally, this means the RBA is unlikely to hike interest rates any time soon with 2024 now looking the most likely scenario.

ASX Weekly Wrap

The ASX200 was weaker last week falling -2.2% on the back of disappointing employment data and soft wage growth.

Best performing sectors were the more traditional defensives – consumer staples (+3%), telcos (+2.8%) and healthcare (+2.2%).

The PRIME Australian Equity Growth SMA has significant representation across these sectors and has consciously moved to ensure the portfolio is adequately positioned to withstand any near-term spikes in volatility

Worst performers in what many would call a bloodbath were materials (-9.6%) and the energy sector which fell -7.8%.

Given these two sectors account for 22% of the ASX200 index it is not hard to reconcile last week’s negative market returns.

The spot price of iron ore tumbled another -12% and has now fallen a staggering -36% from its highs just last month. Demand for iron ore continues to dwindle with the Chinese imposing caps on steel production whilst simultaneously supply is edging higher placing further pressure on the iron ore price.

Oil prices were also weaker with Brent oil down -7% and WTI -9% as investor sentiment saw risk-on equities sold in favour of those with perceived less risky characteristics.

BHP shares were caught up in the mining sector weakness falling -16% after reporting a $US17b full-year underlying profit.

BHP stated it was seeking to refocus the business on global ‘mega trends’ which relate to decarbonisation and food security and as such announced it was seeking to merge its petroleum division with Woodside (WPL), remove its dual-listed structure from the UK market and invest $US5.7b on a new potash mine.

Potash (potassium-bearing minerals or compounds) is used in agriculture to improve crop yields and essentially represents a new market for BHP.

Elsewhere, CSL rallied +3% to trade at a 2-month high after reporting a +13% increase to revenue ($US10.3b) and net profit ($US2.4b).

Whilst demand for CSL’s core plasma products remains robust, plasma collections continue to be negatively impacted by the spread of the Delta variant. Increased costs are expected to drive margins lower which CSL expects will carry through to FY22.

Looking ahead

Monday 23rd August 2021 – Friday 27th August 2021

  • Monday: AU Markit Manufacturing PMI (AUG)
  • Tuesday: US Existing Home Sales (JUL)
  • Wednesday: AU Completed Construction Work (Q2), US New Home Sales (JUL), Durable Goods Orders (JUL) 
  • Thursday: AU Private Capital Expenditure (Q2), US Weekly Jobless Claims
  • Friday: US Personal Spending (JUL)

Friday 20th August, 5pm values

 IndexChange%
All Ordinaries 7725-173-2.2%
S&P / ASX 2007461-168-2.2%
Property Trust Index1606+20+1.3%
Utilities Index6177-8-0.1%
Financials Index6640-175-2.6%
Materials Index16343-1732-9.6%

Friday 20th August, closing values

 IndexChange%
U.S. S&P 5004442-26-0.6%
London’s FTSE7088-131-1.8%
Japan’s Nikkei27013-964-3.4%
Hang Seng24850-1542-5.8%
China’s Shanghai3427-89-2.5%

Key dividends

Monday 23rd August 2021 – Friday 27th August 2021

  • Monday: Div Ex-Date – ANZPD (ANZPD), Aurizon Holdings Limited (AZJ)
    Div Pay-Date – CGFPB (CGFPB), Transurban Group (TCL)
  • Tuesday: Div Ex-Date – Reckon Limited (RKN)
  • Wednesday: Div Ex-Date – AGL Energy Limited (AGL), Downer EDI Limited (DOW), Telstra Corporation (TLS)
    Div Pay-Date – CGFPA (CGFPA), Janus Henderson (JHG)
  • Thursday: Div Ex-Date – Baby Bunting Group (BBN), JB Hi-Fi Limited (JBH) REA Group (REA)
    Div Pay-Date – Goodman Group (GMG)
  • Friday: Div Pay-Date – Djerriwarrh Investments Limited (DJW)

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.

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