Weekly Market Update – 8 November 2021

Markets bounce as AUD slides

Global equity markets were stronger last week with the MSCI World Index rallying +3.2% in AUD terms.

The AUD weakened against the USD (-1.5%) after four consecutive weeks of gains. Key drivers behind a softer AUD was the RBA meeting on Tuesday and the possibility that Federal Reserve policymakers would commit to a formal rate hike timetable.

Ultimately, the Federal Reserve’s decision to begin winding back its pandemic stimulus saw the AUD trade sub 74c.

A modest Hawkish pivot by the Fed

As expected, the Federal Reserve finally decided to commence tapering its asset purchases to the tune of US$15b per month. The decision to start immediately (before the end of the year) and to scale the size of the taper up or down as required can be interpreted as a hawkish pivot and supports the likelihood that QE will end by June 2022.

The Fed characterised the macro outlook as strong but still Covid impacted and stated that it expects inflation to peak by Q2 or Q3 next year. Inflationary pressures continue to be interpreted by the Fed as transitory driven largely by supply chain issues.

Interestingly it argued that inflation goals of above 2% for a period of time were yet to be achieved, when in fact they’ve now been well and truly exceeded for many quarters. This simply highlights the exceedingly dovish stance the Fed has taken has driven asset prices to where they are now.

Whilst there was no discussion on the timing of rate hikes markets continue to price in a rate rise in the back half of next year.

The reaction within equity sectors was interesting. US bank stocks rose to be nearly the best sectoral performer perhaps due to higher yields closely followed by small caps. This is particularly interesting given a slowing growth environment and reduced stimulus suggests small caps should underperform.

We continue to believe the economic cycle is exhibiting signs of slowing. Peaking PMI cycles imply that earnings estimates and actuals will start to moderate during H2 and our cautious stance favours defensives (consumer staples and health care) over cyclicals and large cap quality over small caps.

RBA abandons YCC with 2023 interest rates ‘plausible’

A host of economists, analysts and investors have called for central banks (not just the RBA) to act as policymakers, not forecasters.

Bond yields and macroeconomics data have told us all for some time now that rates are likely to rise ahead of the RBA timeline. So why has the central bank so stubbornly stuck with its timeline?

We are similarly perplexed considering the underlying data suggested the RBA would need to act addressing inflation and unemployment sooner rather than later.

Confirmation came last week with the RBA deciding to abandon its 3-year bond 0.1% yield curve control target as the effectiveness of this target had diminished. Essentially the RBA’s yield curve control policy was unable to supress rising bond yields (3-year bonds are currently yielding 0.9%) so the policy failed.

Whilst the decision was widely anticipated by markets (and us) what was surprising was the fact that the RBA still argued markets were likely wrong on their rate hike timing despite acknowledging that a 2023 rate hike is now plausible having previously remained hellbent on ‘2024 at the earliest’.

The opportunity to further wind back some of its QE policy (currently purchasing $4b of government securities weekly) was also overlooked which surprised us given this policy continues to overinflate asset prices.

Lastly, the RBA increased inflation expectations from 2.25% in 2022 and 2.5% in 2023. We believe actual inflation will prove to be higher with core inflation (currently 2.1%) very likely to hit 2.5% by mid next year. GDP was lowered from 4% to 3% in 2021 whilst unemployment and wages growth were kept steady.

Being framework driven, like all central banks, it is these forecasts that they have used to argue they don’t need to hike rates until 2023 or end QE for now. However, what these forecasts show is a far stronger economy than they thought a few months back.

Our own sense is that inflation will likely hit 2.5% in mid to late 2022, GDP will come in stronger not weaker, unemployment could normalise swiftly and hit 4.25% by mid to late 2022 and that wages growth could rise towards 3% by mid to late 2022.

Under these circumstances, we expect the RBA would hike rates in H2 2022, not late 2023.

WBC FY21 result

Westpac (WBC) shares fell -12% last week after posting FY21 results which disappointed the market.

WBC reported a cash profit of $5.3b for FY21 which fell short of expectations whilst net interest margins (NIMs) declined by 4 basis points with management expecting a lower NIM in FY22.

Investors were also somewhat underwhelmed with margins falling further in a low-interest rate environment and costs rising. Much of the increased cost base can be attributed to an increase in the workforce to improve risk management as well as bringing more than 1000 jobs back to Australia.

2H21 reported expenses were up +22% including notable items and the $1.3b asset write down flagged in mid-October which resulted in a $965m write down of assets at WBC Institutional Bank, extra provisions for customer refunds and litigation provisions of $172m.

However, there were some positives to take out of the result.

Cash profit, which despite falling short of expectations, was twice as much as last year and cash earnings were higher.

WBC achieved better than expected bad debt charges and achieved major bank system growth in Australian home loan in 2H21. Management continues to target lower fixed costs in the future which will improve return on equity (ROE).

The balance sheet remains strong with WBC’s CET1 capital ratio rising to 12.32% which ultimately led WBC to announce a return of surplus capital to shareholders through a $3.5b off-market buyback.

As is typically the case, shareholders in a zero-tax environment (pension phase) will benefit most from this and we will shortly advise all clients holding WBC in pension phase to participate in offer.

A final dividend of 60c was a notable improvement on the prior corresponding period’s 31c dividend with the stock going ex-dividend last Friday.

We retain our hold thesis on WBC with the stock currently the cheapest major bank at 1.2x book value.

Goodman upgrades guidance

Goodman Group (GMG) upgraded FY22 earnings per share (EPS) guidance by +5% with operating EPS growth likely to be above +15%.

We believe the upgrade was driven by a combination of factors. Strong rental growth and strong revaluations of industrial assets underpinned the upgrade. GMG also cited increases in development activity with development work in progress exceeding FY22 forecasts of $10-$11b climbing +20% to $12.7b.

With GMG’s yield on costs increasing, development margins similarly increased and group performance fees ultimately spiked higher on the back of increases in valuations.

We remain favourable on Goodman Group. The upgrade to EPS provided last week followed Charter Hall’s upgrade to guidance the day earlier which we believe provides some confirmation of the ongoing strength in conditions within the industry.

GMG shares rose +8% last week.

Amcor Q1 update

AMC rallied +3% despite highlighting shortages in raw materials, both in resins and aluminium that affected their Q1 result.

AMC reaffirmed guidance of EPS growth of 7-11% and importantly were still able to manage and supply their customer base notwithstanding supply chain impacts.

Despite resin prices and aluminium prices increasing AMC has a strong history of being able to navigate price increases in raw materials. AMC typically passthrough these heightened costs to customers which essentially lifts its bottom line.

Amcor trades on a FY23 forward price to earnings ratio of <15x, a dividend yield of >4%. AMC looks like it will be able to deliver at least 10% EPS growth this year which could see a possible EPS ‘beat’ and subsequent re-rating in its share price.

We currently hold AMC in the PRIME Diversified Income SMA.

ASX Weekly Wrap

The ASX200 climbed +1.8% last week with large caps (+1.8%), mid caps (+1.9%) and small caps (+2%) all providing positive returns.

Telcos, consumer staples and healthcare led the charge higher rising 3-4%. The PRIME Australian Equity Growth SMA remains overweight staples and healthcare for its defensive-like characteristics, so it was pleasing to see such strong attribution across both sectors.

Energy stocks fared worst falling -2% as oil fell -5% last week without any major catalyst driving it lower. OPEC decided to stick to its original plan to boost production by 400,000 barrels per day rejecting pleas to increase production to cool oil prices. However, this should have supported oil prices not weakened them.

Perhaps further rises in US inventories may be indicating waning demand? Or perhaps it is merely a consolidation in the price following a +66% price rise in 2021?

Looking ahead

Monday 8th November 2021 – Friday 12th November 2021

  • Monday: N/A
  • Tuesday: AU NAB Business Confidence (OCT), US Producer Prices (OCT)
  • Wednesday: AU Westpac Consumer Confidence (NOV), Building Permits (SEP), CN Inflation Rate (OCT), US Inflation Rate (OCT)
  • Thursday: AU Unemployment Rate (OCT), UK Balance of Trade (SEP)
  • Friday: CN M2 Money Supply (OCT)

Friday 5th November, 5pm values

 IndexChange%
All Ordinaries 7777 +138 +1.8%
S&P / ASX 200 7457 +134 +1.8%
Property Trust Index 1686 +69 +4.2%
Utilities Index 6221 +176 +2.9%
Financials Index 6853 +39 +0.6%
Materials Index 14861 +45 +0.3%

Friday 5th November, closing values

 IndexChange%
U.S. S&P 500 4698 +93 +2.0%
London’s FTSE 7304 +67 +0.9%
Japan’s Nikkei 29612 +720 +2.5%
Hang Seng 24871 -506 -2.0%
China’s Shanghai 3492 -55 -1.6%

Key dividends

Monday 8th November 2021 – Friday 12th November 2021

  • Monday: Div Ex-Date – ANZ Bank (ANZ), Macquarie Group (MQG)
    Div Pay-Date – Metrics Master Income Trust (MXT), Metrics Income
    Opportunities Trust (MOT)
  • Tuesday: Div Pay Date – Jupiter Mines (JMS)
  • Wednesday: Div Ex-Date – ResMed Inc (RMD)
  • Thursday: Div Ex-Date – Australian Pharmaceutical Industries (API)
  • Friday: N/A

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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