Weekly Market Update – 18 October 2021

US retail sales surprise & inflation climbs. Locally business confidence & conditions rebound

Global equity markets were essentially flat last week for the second consecutive week.

A stronger AUD (+1.5%) ultimately weighed on returns and drove the MSCI World Index to a -0.1% in AUD terms.

US equities outperformed rising +1.8% for the week. Consumer discretionary shares outperformed on the back of Tesla (TSLA) which rallied +7% after a record month of production.

US retail sales positively surprised rising +0.7% in September compared to expectations of a -0.2% fall. Meanwhile August’s retail sales were revised upwards. The strong demand for goods and services continues to stoke inflation fears with the yield on 10-year Treasury notes spiking higher on Friday (1.57%).

US CPI rose +0.4% in September driving annual inflation back up to 5.4%. Strong demand for oil (+3% last week), food prices and housing costs (rental costs rose by the most in 20 years) were the key drivers.

Core CPI (which strips out some of the more volatile items in food and energy) rose +4% over the year and remain well above the Federal Reserve’s long-term 2% target.

Shipping bottlenecks, materials shortages and rising wages are driving up costs for producers which in turn are being passed on to consumers. For context wages per hour in the US have risen from US$12/hour to as much as US$18/hour.

Inflation appears to be moving from transitory to persistent, at least for Q4 and we are becoming more confident that the Federal Reserve will move to taper in November.

Locally, business confidence rebounded albeit off a low base and unemployment data climbed to 4.6% with a further deterioration in the participation rate (64.5%) the major disappointment. The underemployment rate climbed to 13.9% and 138,000 jobs were lost in September.

Pleasingly NSW’s emergence from lockdown and Victoria’s imminent release means business confidence and business conditions should pick up in the coming months but we must ask ourselves how much damage has now been done?

Becoming more cautious

We continue to see a deterioration in the health of the global economy as Delta weighs on both consumer and business confidence.

In the last month we have seen global PMIs (the index that summarises whether market conditions are expanding on contracting) decelerate further culminating in China’s first monthly contraction in more than 18 months.

As the Evergrande crisis unfolds we expect conditions will weaken further particularly with the winter months (November-March) causing increased shutdowns. However, we do see China bottoming out before other major economies and may add exposure to China in the PRIME International Growth SMA soon.

The implication from falling PMIs and rising inflation is a weaker outlook for growth. This is the reason why we are starting to become once again more cautious.

As central banks look to taper their asset purchases (less liquidity) and tighten monetary policy (Reserve Bank of NZ recently hiked rates and the Federal Reserve look set to raise rates in CY22) the outlook for growth weakens.

Markets have continued to rerate higher because post pandemic stimulus programmes have largely remained ‘in play’. However, we know these stimulus measures are due to be wound up imminently meaning the support that financial markets have had from central banks will gradually disappear.

What are we doing to prepare?

From an asset allocation standpoint, we want to ensure defensive assets are adequately represented and growth assets are either reduced or repositioned.

Blue chip stocks generating free cash flows with strong balance sheets such BHP, CSL and CBA are far more likely to outperform mid and small caps who which to struggle in a rising interest rate environment.

This is because rising interest rates imply bigger discounts to their future cash flows.

A weakening global economy implies falling bond yields, commodities and equities compared to defensives and value stocks.

With this in mind we may look to increase our bond exposure in the coming months with bond yields having surged in the last two months.

We continue to favour stocks and sectors with defensive-like characteristics namely healthcare and consumer staples and have also added some ‘value’ to the portfolio with the recent addition Bega (BGA).

Last week we increased our healthcare position adding Integral Diagnostics (IDX) to the portfolio. IDX is a diagnostic imaging service provider in Australia and NZ. IDX derives ~90% of its revenues from Australia where it is the fourth largest diagnostic imaging company with a 5% market share.

With the Australian imaging market growing at an average of 7% p.a over the last 15 years we expect to see strong organic revenue growth from IDX in the medium term.

Positive updates from AGM season

Our highest conviction position in the portfolio (CSL) held its annual general meeting last week and pleasingly reaffirmed guidance.

CSL’s AGM showed a sustained improvement of collections in plasma. Whilst still below FY19 peak levels plasma is moving in right direction which is encouraging.

FY22 will be a year of moderate revenue growth, but flat profits, however, the expectation is for FY23 and FY24 to return to 10%+ earnings per share (EPS) growth.

Telstra (TLS) also reaffirmed EBITDA guidance in the range of $7b-$7.3b with revenues forecasted to land somewhere between $21.6b-$23.6b.

As part of its T25 strategy, TLS reiterated its cost reduction target of around $500m between FY23-FY25.

Using a sum of the parts (SOTP) valuation which values each segment of Telstra’s business individually (Mobile, Fixed-consumer and small business, Fixed-enterprise, Fixed-wholesale, Global and Recurring NBN definitive agreement revenues) we have upgraded our target price for TLS to $4.41.

ASX Weekly Wrap

The ASX200 climbed +0.6% last week with small caps (+1.9%) and mid-caps (+1.1%) leading the charge higher.

The top end of the market underperformed with CBA which is the largest weight in several indexes falling -2.1% for the week.

Energy stocks were flat over the course of the week despite Brent and Crude oil both rallying a further 3%.

The Growth SMA is certainly starting to benefit from its exposure to the energy sector and the higher prices we are seeing in natural gas and oil. Santos (STO) continues to build on last month’s +19% share price gain currently +2.4% in October.

Miners were back leading all other sectors last week rising +3% after iron ore briefly topped US$130/tonne before retreating. Having traded at unsustainable levels through May, June and July (above US$200/tonne) which led to record breaking dividends for shareholders we think much of the selloff has now occurred.

Utilities were the weakest sector falling -1.7% last week. AGL and APA Group (APA) both fell -4% on little news, however, APA did receive some positive news.

APA has been battling with private equity firm Brookfield for control of Ausnet Services (AST) having both lodged takeover bids for AST. Brookfield who lodged the first bid (at an inferior price) was initially granted confidentiality, however, this has now been reversed meaning APA will have a response by this Tuesday.

Best performing stocks in the portfolio last week were Marley Spoon +8%, Northern Star +5.3% and Ampol +5%. Ampol shares climbed higher after announcing the acquisition of Z Energy (ZEL).

Z Energy is the market leader in New Zealand with a 40% share of all fuel volumes. The acquisition will create synergy benefits totalling around NZ$70m and further boost ALDs fuel footprint.

WBC disappointed last week falling -2.2% underperforming all other major banks. WBC flagged a $1.3b profit hit to its 2H21 profit figures after writing down close to $1b across its institutional bank.

Coupled with the previously flagged transaction costs related to the sale of its Life Insurance business (~$270m) and ~$170m in litigation provisions and customer refunds, WBC’s profit figures are expected to be negatively impacted by around $1.3b.

Whilst disappointing and a substantial hit to group profit, the item is a one-off and non-recurring. We expect this to have an impact on tier 1 capital (CET1) by around 15bps. More importantly, we expect this to moderate the level of the buyback that WBC will announce.

Expectations were for a buyback of around $4.5b, however, we have now moderated this down to around $4b and we expect an announcement on this in coming weeks.

Looking ahead

Monday 18th October 2021 – Friday 22nd October 2021

  • Monday: CN GDP Growth Rate (Q3), Retail Sales (SEP)
  • Tuesday: AU RBA Meeting Minutes, US Building Permits (SEP)
  • Wednesday: AU Westpac Leading Index (SEP), UK Inflation Rate (SEP)
  • Thursday: N/A
  • Friday: AU Markit Services PMI (OCT), UK Consumer Confidence (OCT), Retail Sales (SEP)

Friday 15th October, 5pm values

 IndexChange%
All Ordinaries 7674 +57 +0.7%
S&P / ASX 200 7362 +42 +0.6%
Property Trust Index 1615 +25 +1.6%
Utilities Index 6153-105 -1.7%
Financials Index 6738 -52 +0.8%
Materials Index 15356 +447 +3.0%

Friday 15th October, closing values

 IndexChange%
U.S. S&P 500 4471 +80 +1.8%
London’s FTSE 7234 +138 +1.9%
Japan’s Nikkei 29069 +1020 +3.6%
Hang Seng 25331 +493 +2.0%
China’s Shanghai 3572 -20 -0.6%

Key dividends

Monday 18th October 2021 – Friday 22nd October 2021

  • Monday: Div Ex-Date – Plato Income Maximiser Limited (PL8)
    Div Pay-Date – Betashares Legg Mason Australian Bond fund (BNDS),
    Carsales.com (CAR), Cochlear Limited (COH), Vanguard Australia Fixed
    Interest (VAF), Vanguard Australia Shares Index (VAS), Vanguard
    Australia Government Bond Index (VGB)
  • Tuesday: Div Pay Date – Vanguard All-World Ex-US Shares Index (VEU)
  • Wednesday: Div Pay-Date – Link Administration Holdings (LNK), Nine Entertainment Holdings (NEC), Sims Limited (SGM
  • Thursday: Div Pay-Date – Lovisa Holdings Limited (LOV), Ardea Real Outcome Bond Fund (XARO)
  • Friday: Div Pay-Date – Qube Holdings Limited (QUB)

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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