Global equity markets were stronger last week with the MSCI World Index rallying +0.3% in AUD terms.
The AUD rallied against the USD for the third consecutive week (+0.6%) which ultimately weighed on the overall market return.
Key drivers for markets last week included the possibility of additional fiscal stimulus in the US with negotiations continuing in the Senate over the amount of the Biden Administration’s proposed social infrastructure bill.
The bill rumoured to be in the vicinity of USD$3.5 trillion seeks to further expand education, health care and child support in addition to further capital expenditure on infrastructure and fighting climate change.
Equity markets also took comfort knowing China’s Evergrande Group narrowly averted a formal default by making a delayed coupon payment to bondholders. The payment (US$83m) was initially due on September 23, but Evergrande were provided a one-month ‘good grace period’ meaning Oct 23 was the new deadline.
Clearly Evergrande needs to restructure its debt in the longer term with debts totalling $400b but at least in the short term it managed to find the liquidity to avoid a default. The next bond payment is required on October 29 (US$47.5m)
Data released last Monday showed China’s GDP climbed +4.9% which was below forecasts of 5% and well down on the Q2 increase of 7.9%. Power shortages ultimately weighed on expansion with the Q3 GDP figure the weakest in one year.
This trend is exceptionally unusual, and certainly not the norm.
Traditionally, once global PMI’s weaken commodity prices should do the same with a short lag, simply because demand softens.
The driver of the commodity complex clearly is China growth, and when the China Credit Impulse (the monthly change of the flow in new credit as a share of GDP) peaked in Jan-Feb we knew that China data would weaken.
After last week’s slowing industrial production (3.1%) and fixed asset investment (7.3%) and given likely weakening in property markets there, we expect that China GDP will slow even further into 2022.
So, the story out of China remains a negative one for commodity demand, but why have commodity prices not reacted?
Well, to an extent they already have during Q3. Iron ore collapsed by more than -50% from US$230/tonne to US$$115/tonne now and oil fell -20% too, but also since rallied from $62bbl to $83bbl now.
Commodities have always followed the China credit impulse cycle over the last 20 years. When it peaks, they fall and vice versa. Sometimes there can be a lag and perhaps this is happening now, but we anticipate commodity prices may retreat or peak during Q4 and into Q1 2022.
Brambles (BXB) provided a Q1 update last week which showed that revenue was up +9% on a constant currency basis. This was rather significant because BXB only recently at its investor day indicated FY22 would be a year of reinvestment back into the business.
At the time BXB downgraded its earnings expectations by around -4% whilst meaning revenue guidance of around +5-7%.
So, the trading update provided last week indicates there is still very strong demand for BXB’s pallets and freight logistics. Given BXB is very susceptible to inflationary pressures (cost of lumber, labour and transport costs can all impact supply chains and drive higher costs) it was certainly a pleasing result.
BXB’s core markets are the US and Europe so we consider the opportunity for the business to be significant and we believe the recent pullback in price which has seen shares fall over -10% has been overdone.
Longer term, BXB appears to be strengthening its core franchise by building its digital capability and creating further automation and we remain very comfortable with the stock in the portfolio.
We believe BXB shares resemble some value at current levels.
CSL also provided a positive update last week at its R&D investor day.
CSL continues to spend around $1b annually researching new products and development which we believe could prove to be quite significant in the next five years. CSL has a strong history of innovation with ‘new products’ (those developed and produced in the last decade) accounting for 20% of CSL’s revenue base.
CSL has obviously been impacted by the ability to collect plasma throughout the COVID enforced lockdowns, but those elements are now starting to improve, and we are now starting to see a recovery in plasma supply.
Whilst FY22 has been well documented as 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.
In our view, the pause in the CSL share price over the last year (underperforming the ASX200 by around
-20%) is likely to turn around and as CSL returns to double EPS growth in the coming years.
HLS released a Q1 trading update which showed strong demand for COVID-19 tests were underpinning performance.
PCR testing in Australia is currently up +217% compared to the prior corresponding period and we expect this to remain elevated through FY23.
Q1 revenue climbed +44% and earnings before interest and tax (EBIT) are up +159%.
Pleasingly, COVID-related testing was not the only source of growth for the business with management advising that non-COVID revenue was stronger than expected during the quarter.
HLS revenues were supported by base business trends and incremental benefits for its sustainable investment program, and we see the potential for medium-term margin improvement.
As lockdowns end, we also see a recovery in diagnostic imaging which is likely to further support the HLS share price.
The ASX200 climbed +0.7% last week with large and small caps (+0.7%) outperforming mid-caps (+0.5%).
Energy stocks were softer (-4.3%) after multiple weeks of driving the market higher. This was despite oil prices rallying a further 1-2% to trade ~$84/barrel. Heavyweights Woodside (WPL), Santos (STO) and Oil Search (OSH) all fell between 4-8%.
On the flip side, financials, IT and consumer discretionary stocks all climbed +2% with CBA (+2.5%), accounting software provider Xero (+3.7%) and Wesfarmers (+4.6%) major contributors.
The PRIME Australian Equity Growth SMA saw performance attribution from Healius (+6%), Cleanaway (+5.2%), Macquarie (+5%) and Goodman Group (+4.8%) whilst Santos (-4%) and BHP (-3%) weighed on performance.
Monday 25th October 2021 – Friday 29th October 2021
Index | Change | % | |
All Ordinaries | 7727 | +53 | +0.7% |
S&P / ASX 200 | 7416 | +54 | +0.7% |
Property Trust Index | 1663 | +48 | +3.0% |
Utilities Index | 6231 | +78 | +1.3% |
Financials Index | 6874 | +136 | +2.0% |
Materials Index | 15143 | +213 | +1.4% |
Index | Change | % | |
U.S. S&P 500 | 4545 | +74 | +1.7% |
London’s FTSE | 7205 | -29 | -0.4% |
Japan’s Nikkei | 28805 | -264 | -0.9% |
Hang Seng | 26127 | +796 | +3.1% |
China’s Shanghai | 3583 | +11 | +0.3% |
Monday 25th October 2021 – Friday 29th October 2021
Mark Johnson – Chairman of Investment Committee | (03) 8825 4738 |
Guy Silbert – Investment Manager | (03) 8825 4750 |
Mark Johnson | T: (03) 8825 4738 | Brent Quinn | T: 1800 064 959 |
Livio Caiolfa | T: (03) 8825 4748 | Michelle Bromley | T: (03) 8825 4751 |
Marcus Ainger | T: (02) 9134 6292 | Nicole Lewis | T: (03) 8825 4734 |
Dylan Cresswell | T: (03) 8825 4707 | Nicholas Miller | T: (03) 8825 4722 |
Jarrod Rodda | T: (03) 8825 4729 | Gina McIntosh | T: (07) 3557 2557 |
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