Weekly Market Update – 30 August 2021

Markets weaker with QE taper to commence in coming months

Global equity markets were softer last week falling -0.6% in AUD terms with concerns over a sooner than anticipated tapering of the Federal Reserve’s $US120b monthly bond purchasing program weighing on sentiment.

A terrorist attack at Kabul airport also dented investor confidence with defensives outperforming growth.

The major development of the week for global equities came overnight on Thursday when Federal Reserve chairman Jerome Powell fronted the annual Jackson Hole symposium.

Powell’s view is that the economy is growing as anticipated and should this continue, the tapering of asset purchases could commence before year end.

The belief that the test for inflation has been met and that progress towards maximum employment continues to be made were the key themes to emerge from the symposium. Most importantly, Powell highlighted that a reduction in asset purchases does not mean the Fed will be raising rates any time soon. 

Initial thoughts from reporting season

Expectations coming into reporting season were particularly high with the market having priced in earnings growth of between around 25-28%.

Given earnings contracted around -20% in 2020 this is clearly a remarkable recovery underpinned by an uplift in dividends. 

The first week of reporting season was driven by strong results across the banking, insurance and materials sectors with strong earnings growth, a recovery in dividends, earnings upgrades, the initiation of buybacks and the initiation of special dividends driving the market higher.

However, as we moved further through reporting season there has been a far more cautious approach by Australian corporates.

Companies that are particularly exposed to key Australian domestic markets (NSW, VIC) impacted by the state of lockdowns have seen a tightening in operating conditions whilst expectations have also moderated somewhat. This has been evidenced by a reluctance to provide FY22 guidance given the cautious outlook.

The renewed threat of the COVID-19 delta variant on businesses and supply chains has ultimately led investors to ‘look through’ the positive earnings from FY21 with a more circumspect and cautious approach to FY22 taking hold.

Given the nature of lockdowns and the impact these are having on the broader economy we have tilted the portfolio more defensively of late adding to consumer staples and healthcare.

Best performing sectors

Most of the earnings per share (EPS) growth has been delivered by two sectors – namely financials driven by the banks and in the key commodity companies.

Australia’s largest retail bank CBA delivered EPS and dividend per share (DPS) growth of around +17% whilst its balance sheet remains unquestionably strong with a common equity tier 1 ratio (CET1) of 13.1% well above capital adequacy requirements.

CBA’s strong capital position enabled it to announce a $6bn off-market buy-back which exceeded analyst forecasts of $5b.

Importantly, post the buy-back we still forecast CBA to hold around $7.5b of surplus capital which should allow for other capital management initiatives to occur over the course of the next two years.

CBA’s results were undeniably strong with above system growth across its mortgages and business lending operations complimenting its strong deposit book.

Given CBA’s balance sheet strength and system growth across home loans and business loans we think its premium relative to the other major banks is justified. We remain comfortable with CBA’s tilt towards the mortgage market which we view favourably within the banking system.

In the resources sector BHP delivered EBITDA growth of +69% which was in line with expectations, whilst DPS growth of +151% exceeded forecasts.

BHP has been a major beneficiary of stronger iron ore and copper prices which ultimately drove free cash flows higher.

BHP also announced an intended spin-off of its petroleum assets which it plans to sell to Woodside Petroleum (WPL) and the removal of its UK-based dual listing.

Importantly for BHP investors, management provided a glimpse into the future direction of the company with a planned $US5.7b investment in a Canadian potash mine which is a core agricultural component used to improve crop yields.

BHP remains in an exceptionally strong operational position delivering record free cash flows and is well positioned to continue to pay attractive dividends to investors given its extremely strong balance sheet.

Overweight Healthcare  

Australia’s healthcare system is considered one of the best in the world.

The healthcare industry comprises a wide range of subsectors, including public and private hospitals, primary health care services, diagnostic, medical equipment & technology, biopharmaceuticals, health insurance, and pharmacy retailers and wholesalers.

According to the Australian Bureau of Statistics (ABS), Australia’s Healthcare and Social Assistance industry reported EBITDA growth of 23.5% ($6.4b) in 2019-20, following moderate growth of 6.1% ($1.6b) in 2018-19.

The industry was also one of the few divisions that recorded a positive employment movement during 2019-20, with an increase of 54,000 people.

The growing and ageing population, increasing rates of chronic disease, higher income levels and increased awareness have resulted in a stronger demand for better healthcare services, adoption of health insurance and increase in personal health expenditure over the years.

The emergence of COVID-19 has posed great challenges to Australia’s healthcare companies; however, it has also created new opportunities for reconstruction.

The PRIME Australian Equity Growth SMA is currently overweight the healthcare sector as we believe in the long-term growth outlook of the industry. Moreover, the healthcare industry is generally defensive in market downturns and was the best performer during the 2013 ‘taper tantrum’.

It is a recovery play post-COVID, and we favour high-quality companies who have lagged the market. We are already seeing performance returns for defensive companies outpace cyclicals over the last quarter months as the market cycle has shown signs of slowing down.

Our preferred exposures in the space currently consist of CSL Limited (CSL), Healius Limited (HLS) and Ramsay Healthcare (RHC).

ASX Weekly Wrap

The ASX200 was stronger last week rising +0.4% driven predominantly by gains in energy stocks (+2.2%) which were fuelled by a recovery in the oil price (+11%) after the previous week’s heavy selloff.

Miners advanced +0.9% with iron ore adding +9% to offset some of the recent weakness, however, given China’s intention to cap steel production and fundamentally drive down the cost of iron one, we believe the highs have passed us for now.

Travel stocks were back in vogue last week with the likes of Qantas (QAN) (+21%), Flight Centre (FLT) (+23%), Webjet (WEB) (+16%), Corporate Travel (CTD) (+11%).

The US government gave ‘full approval’ to the Pfizer COVID-19 vaccine providing hope that normal travel might resume soon. Coupled with our national progress towards a 70-80% vaccination target which would allow us to reopen despite infections, travel stocks were well bid.

QAN reported better than expected for FY21 with revenue of $5.9b ahead of forecasts and importantly flagged its intention to resume international flights by Christmas. FLT’s FY21 results were impacted by subdued travel and the reduction and subsequent cessation of JobKeeper.

Importantly, trading conditions and the travel outlook are improving as vaccination rates pick up.

Woolworths (WOW) fell -2.5% but continued the trend of rewarding shareholders through capital returns by hiking the final dividend to 55c per share and importantly announcing a $2b off-market buy-back which we recommend clients in pension phase participate in.

The spin-out of WOW’s Endeavour (EDV) drinks and hotel assets provided WOW with sufficient capital on the balance sheet to announce a return of capital to shareholders which we view favourably. 

Finally, in the M&A space last week saw Ampol (ALD) make a $2.5b bid for New Zealand’s biggest fuel retailer Z Energy which management believes is a highly strategic bolt-on acquisition and pleasingly for our Spark Infrastructure (SKI) investors, private equity KKR’s takeover has been accepted by the SKI board.

The takeover offer price is $2.95 less any distributions paid prior to the takeover with the board unanimously recommending shareholders vote in favour.

Whilst the deal is subject to approval from SKI shareholders at an upcoming meeting in Q4 and approval from the Foreign Investment Review Board we feel it is likely to succeed and in the best interests of shareholders.

Looking ahead

Monday 30th August 2021 – Friday 3rd September 2021

  • Monday: AU Business Inventories (Q2)
  • Tuesday: AU Private Sector Credit (JUL), CN Non-Manufacturing PMI (AUG), US House Price Index (JUN)
  • Wednesday: AU GDP Growth Rate (Q2), Manufacturing PMI (AUG)
  • Thursday: AU Balance of Trade (JUL), US Balance of Trade (JUL), Weekly Jobless Claims
  • Friday: AU Retail Sales (JUL), US Non-Farm Payrolls (AUG)

Friday 27th August, 5pm values

 IndexChange%
All Ordinaries 7760+35+0.5%
S&P / ASX 2007488+27+0.4%
Property Trust Index1623+17+1.1%
Utilities Index6080-97-1.6%
Financials Index6710+70+1.1%
Materials Index16484+141+0.9%

Friday 27th August, closing values

 IndexChange%
U.S. S&P 5004509+67+1.5%
London’s FTSE7148+60+0.8%
Japan’s Nikkei27641+628+2.3%
Hang Seng25408+558+2.2%
China’s Shanghai3522+95+2.8%

Key dividends

Monday 30th August 2021 – Friday 3rd September 2021

  • Monday: Div Ex-Date – Ansell Limited (ANN), Oil Search Limited (OSH). Qualitas Real Estate Income Fund (QRI) VGI Partners Limited (VGI), Woodside Petroleum Limited (WPL)
  • Tuesday: Div Ex-Date – Link Administration Holdings Limited (LNK), Metrics Master Income Trust (MST), Metrics Income Opportunities Trust (MOT)
    Div Pay-Date – Australian Foundation Investment Company (AFI), Charter Hall Group (CHC), Vicinity Centres (VCX)
  • Wednesday: Div Ex-Date – Nickel Mines Limited (NIC), Southern Cross Media Group Limited (SXL), Treasury Wine Estates Limited (TWE)
    Div Pay-Date – ANZPD (ANZPD)
  • Thursday: Div Ex-Date – BHP Group Limited (BHP), CSL Limited (CSL), Platinum Asset Management Limited (PTM), Woolworths Group Limited (WOW)
  • Friday: Div Ex-Date – Bendigo and Adelaide Bank Limited (BEN)

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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