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Markets stronger and AUD rallies to 75c

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.

The disconnect between weaker global data and strengthening commodity prices?

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) Q1 Update

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 Research & Development Investor Day

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.

Healius (HLS) Q1 Update

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.

ASX Weekly Wrap

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.

Looking ahead

Monday 25th October 2021 – Friday 29th October 2021

• Monday: N/A
• Tuesday: US House Price Index (AUG)
• Wednesday: AU Inflation Rate (Q3), US Durable Goods Orders (SEP)
• Thursday: US GDP Growth Rate (Q3), Weekly Jobless Claims  
• Friday: AU Private Sector Credit (SEP), PPI (Q3), US Personal Spending  (SEP)

Friday 22nd October, 5pm values

Friday 22nd October, closing values

Key dividends

Monday 25th October 2021 – Friday 29th October 2021

• Monday: Div Ex-Date – Jupiter Mines (JHC), New Hope Corporation (NHC)
  Div Pay-Date – Nick Scali Limited (NCK), Vanguard US Total Market (VTS)
• Tuesday: Div Pay Date – N/A
• Wednesday: Div Ex-Date – BOQPE (BOQPE) Div Pay-Date – Reece Limited (REH)
• Thursday: Div Ex-Date – Bank of Queensland (BOQ) Div Pay-Date – Gold Road Resources Limited (GOR)
• Friday: Div Pay-Date – BWX Limited (BWX), Plato Income Maximiser Limited (PL8)

Contact

If you would like to discuss your situation, please speak to your adviser or email clientservices@primefinancial.com.au

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.