Weekly Market Update – 4 October 2021

Equities weaker as China’s PMI and Australia’s retail sales disappoint

Global equity markets fell sharply last week as the recent ‘hawkish’ tilt from the Federal Reserve sent bond yields higher.

The MSCI World Index fell -2.7% in AUD terms whilst the currency (72.5c) was flat over the week.

Central banks once again promoted the idea that supply-chain disruptions are driving inflation rather than any strategic increase in buyers’ purchasing power. The Federal Reserve, Bank of England and Bank of Japan all expect inflation to fall once supply bottlenecks ease.

China’s manufacturing Purchasing Managers Index (PMI) contracted for the first time since February 2020 further dampening confidence in equity markets. High-energy consumption sectors (petroleum, coal and other fuels) drove the reading lower following weaker demand and higher prices for raw materials.

The PMI is an index of the prevailing direction of economic trends in the manufacturing and service sectors and is based on five major survey areas: new orders, inventory levels, production, supplier deliveries, and employment. It consists of a diffusion index that summarises whether market conditions, as viewed by purchasing managers, are expanding, staying the same, or contracting.

The purpose of the PMI is to provide information about current and future business conditions to company decision makers, analysts, and investors. A PMI reading above 50 indicates ‘expansion’ whereas below 50 indicates a ‘contraction’.

Given China’s PMI peaked 6 months ago compared to the US and Europe which peaked 3 months ago we believe China may be exhibiting signs of bottoming out sooner and as such may look to increase exposures here in the medium term.

Locally, retail sales fell for the third consecutive month with lockdowns continuing to weigh on retail trade. It is hard to argue with the impact lockdown restrictions are having on retail sales – one only needs to look at states not in lockdown being South Australia and Western Australia which saw retail sales rise in August.

Weekly consumer confidence rose for the third straight week, but inflation expectations also crept higher. The concern here is that rising inflation expectations at a time of weak wage growth could drag on overall consumer confidence if people start to worry about the cost of living.  

Outlook for Equities

Record low interest rates and unprecedented fiscal stimulus has driven earnings at the company level in the past 18 months. Consequently, equity markets have re-rated.

Remember, equity markets follow earnings – not the other way around.

However, momentum in earnings appears to have stalled and our expectation is that earnings will grow at a much slower rate in FY22 (~10%) compared to FY21.

Whilst we still see some gains for corporate earnings because monetary policy settings remain accommodative, rising household debt levels, ongoing concerns surrounding the spread of the Delta variant and a delayed economic recovery are likely to halt the level and pace of this growth.

As such, we continue to position the portfolio with a defensive bias. Healthcare remains overweight and we think this is a space that is well leveraged to a global reopening. Our preferred exposures are Healius, CSL and Ramsay Healthcare.

Consumer staples is another sector we view attractively with Woolworths (WOW), Endeavour (EDV) and more recently Bega Cheese (BGA) all market leaders delivering strong free cash flows.

In the case of BGA, the expansion of its branded food portfolio in recent years sets up what we believe to be plenty of runway for growth.

The recent acquisition of Lion Dairy & Drinks will boost margin growth and deliver long term returns once all synergies have been extracted. With BGA having announced a $36m cost-out synergy target, we expect to see double-digit growth earnings per share accretion in FY22.

BGA is a ‘value play’ trading on <17x FY23 earnings and a stock we recently added to the portfolio albeit at a small starting weight. 

ASX Weekly Wrap

The ASX200, like other major indices, saw increased volatility last week with four out of the five trading days seeing the market swing by more than plus or minus 1%.

The ASX200 fell -2.1% over the course of the week with small caps, mid-caps and large caps all equally bearing the brunt of the selloff.

Energy stocks climbed +5% as oil prices once again rallied to trade at 3-year highs. Brent oil finally broke the $80/barrel level but with rising production levels and a possible release of US strategic reserves oil prices look rather full at these levels.

Iron ore prices have steadied somewhat over the past fortnight having been in freefall in the week’s prior and now trade around US$110/tonne. We still see upside in major iron ore producers BHP which continue to generate attractive free cash flows even at these levels.

Travel stocks were among the market’s best performers as the tourism industry continues to see signs of reopening. Vaccination progress continues to be made and the Federal government has committed to reopening international borders.

Airlines are now re-scheduling international flights so there is more hope now than there has been in the past year and a half about some sense of return to normal.

Flight Centre (FLT), Helloworld Travel (HLO) and Webjet (WEB) all rose between 5-10%. 

Healthcare and tech stocks both lagged falling around -6% each.

The healthcare index was dragged lower by CSL which fell -7%. Whilst much of this weakness was driven by a broad market selloff there were some specific factors at play.

CSL along with other major plasma fractionators on the US/Mexican border have sought an injunction against the Mexican donor ban which US Customs and Border Protection announced in June banning Mexicans crossing the border for paid plasma donations.

The ban essentially rules this type of travel as ‘work’ and therefore violates visa rights.

Final response from the fractionators is due this week but the CSL share price came under pressure last week as a result. If the injunction is granted, we would expect strong support for CSL.

Santos (STO) was the best performing stock in the portfolio last week rising +5% as oil prices rallied higher. We view the strength of STO’s revenue stream and earnings base positively and think it remains well placed to outperform in the medium term.

Looking ahead

Monday 4th October 2021 – Friday 8th October 2021

  • Monday: US Durable Goods Orders (AUG)
  • Tuesday: N/A
  • Wednesday: UK Mortgage Lending (AUG), Mortgage Approvals (AUG)
  • Thursday: AU Private Sector Credit (AUG), US Initial Jobless Claims (SEP), GDP Growth Rate (Q2), UK Current Account (Q2), GDP Growth Rate (Q2)
  • Friday: AU Home Loans (AUG), US Personal Spending (AUG), Personal Income (AUG)

Friday 1st October, 5pm values

 IndexChange%
All Ordinaries 7487-162-2.1%
S&P / ASX 2007186-156-2.1%
Property Trust Index1573-63-3.9%
Utilities Index6081+58+3.8%
Financials Index6574-64-1.0%
Materials Index14617-298-2.7%

Friday 1st October, closing values

 IndexChange%
U.S. S&P 5004357-98-2.2%
London’s FTSE7027-24-0.3%
Japan’s Nikkei28771-1477-4.9%
Hang Seng24576+384+1.6%
China’s Shanghai3568-45-1.2%

Key dividends

Monday 4th October 2021 – Friday 8th October 2021

  • Monday: Div Pay-Date – Ramelius Resources (RMS)
  • Tuesday: Div Ex-Date – BWX Limited (BWX), Sims Limited (SGM)
    Div Pay-Date – Milton Corporation (MLT), Seek Limited (SEK)
  • Wednesday: Div Ex-Date – CBAPE (CBAPE)
    Div Pay-Date – Adbri Limited (ABC), Iluka Resources (ILU), Inghams Group (ING)
  • Thursday: Div Pay-Date – Costa Group Holdings (CGC), InvoCare Limited (IVC), Lifestyle Communities (LIC), NABPD (NABPD), Pact Group Holdings (PGH), South32 Limited (S32), Wesfarmers (WES)
  • Friday: Div Pay-Date – Healius (HLS), Reliance Worldwide (RWC), Woolworths (WOW)

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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