Weekly Market Update – 29 November 2021

Global equity markets were weaker last week with the MSCI World Index falling -1% in AUD terms.

The currency fell for the fourth consecutive week (-1.6%). This was more a function of USD strength given peaking PMI’s (the diffusion index which summarises the prevailing direction of economic trends across manufacturing and service sectors) and slowing global growth tends to support the USD.

In the short term we think the AUD has more upside than downside on account of the fact miners and the iron ore price are bouncing back off their lows and this tends to bode well for the currency.

Last week was a quieter week on the data front with US PMIs and the reappointment of Federal Reserve Chair Jay Powell the main highlights.

In the US, manufacturing PMI’s bounced slightly despite supply-side constraints with new orders driving this increase. However, this was offset by a fall in services PMI’s which remain well off their highs and continue to struggle amid rising prices.

The services sector accounts for two thirds of the US economy so the fall is meaningful and this continues to reinforce our thesis that PMI’s appear to have peaked. We believe PMI’s will continue to weaken as monetary policy starts to tighten (2H22) and central banks continue to withdraw support for financial markets through the unwinding of their QE policies.

Another talking point may have been somewhat overlooked. The Biden Administration reappointed Federal Reserve Chair Jerome Powell for another four-year term which was expected, but commentary suggesting the Federal Reserve may scale up its tapering program probably didn’t receive enough attention.

Vice Chair Richard Clarida indicated that the Federal Reserve might speed up its tapering process from $15b a month (which would see the taper on track to end mid-2022) to get the tapering ended sooner.

In our view, this means the Federal Reserve want to start hiking rates sooner than later but also want to ensure there is a suitable time delay between when the tapering is finished and when rates rise to allow markets to settle. Rising rates too quickly after the tapering program has ended would cause too much instability.

US equities fell -2.2% last week in a quieter week which saw markets closed on Thursday for the Thanksgiving holiday.

Local news

Locally, we saw private capital expenditure fall -2.2% in the September quarter which was in line with analyst forecasts. Spending also ticked higher as various states emerged from lockdowns and the outlook improves.

Importantly, there is now an expectation amongst businesses that FY22 capex will climb close to 9% in a sign momentum is improving. Stronger business investments and capex is essential to overall economic productivity and ultimately is a key driver of overall growth.

The positive outlook for private expenditure was timely given this Wednesday’s Q3 GDP data release is expected to show a sharp contraction in the economy on the back of stay-at-home orders in Sydney and Melbourne.

Pleasingly, forecasts have been revised upwards in a sign that the potential damage to the economy throughout lockdown restrictions may not have been as bad as first thought.

Westpac recently upgraded its Q3 GDP forecast from a -4% contraction to a -2.5% contraction following a better than expected decline in consumer spending and upside surprise on net exports and construction work.

This would imply +3.2% year on year GDP growth exceeding the RBA’s recently revised 3% GDP projection by year’s end.

Spark Infrastructure (SKI) takeover approved

Spark Infrastructure (SKI) finally received all the necessary approvals last week for it to be taken over by private equity firm KKR and a consortium of other parties.

The final approval was granted by the Foreign Investment Review Board (FIRB) which will see SKI shares suspended from the ASX at the close of trading today.

SKI has been the best performer in PRIME’s Diversified Income portfolio over the past year with units up +47% on our initial purchase price at $1.96.

We had initially forecast a 15-20% upside in SKI shares believing the future cash flows generated from its Transgrid electricity network in NSW were likely to exceed expectations.

Pleasingly, the underlying value of SKI’s infrastructure assets were being closely followed by private equity firms who believed SKI’s optimally geared balance sheet, strong free cash flows and long term contracts were attractive and this ultimately led to a takeover bid.

Investors will receive $2.7675 per SKI share once the scheme of implementation becomes effective (expected to be December 22). Two week’s prior (on December 8) investors will receive a 12c special distribution (record date is December 1) meaning total proceeds per SKI security is $2.88.

This is a fantastic result for unitholders, and we will look to recommend a replacement for SKI in the new year that can provide a similar level of income for client portfolios.

ASX Weekly Wrap

Whilst markets were trending lower throughout the week, Friday saw a rapid selloff after news emerged that a new strain of coronavirus had been detected in South Africa.

Whilst it remains unclear whether the new variant is more effective at resisting existing vaccines and just how infectious the new strain really is, the news prompted a sell-off in riskier assets such as equities and saw a rally in safe haven assets such as government bonds and gold.

The ASX200 fell -1.7% on Friday to close the week down -1.6%.

Oil stocks were the worst performers falling -4.6% on Friday (down -3% for the week). Brent oil fell -7.3% and crude oil slid -10% on Friday amid fears the new variant will negatively impact demand for oil.

Major oil producers Woodside Petroleum (WPL), Santos (STO) and Oil Search (OSH) all fell around -5% on the news.

Travel stocks also suffered ahead of the government announcing restrictions on non-Australian citizens travelling to Australia from nine African countries – South African being the major one on the banned list.

Flight Centre (FLT), Qantas (QAN) and Webjet (WEB) were sold off falling between 5-7% on Friday and rounding out the week down around -10%. FLT fared worst falling -13% for the week.

The broad-based selloff saw most sectors weaker with consumer discretionary stocks falling -2.6%, financials down -3.6% and tech stocks which are very much risk-on assets falling -6%.

Utilities (+2%) and miners (+1.7%) were the only positive sectors with iron ore heavyweights BHP and RIO climbing around +5% for the week on the back of a 16% rally in the iron ore price which now trades above US$100/tonne.

Fortescue (FMG) shares also rode the iron ore tail wind rising +11%. Whilst iron ore has no doubt been volatile this year, sentiment continues to improve with a stabilisation in China’s property market supporting demand for the commodity despite the well-known ‘shutdown’ likely to occur over Chinese winter.

BHP was the best performing stock in the portfolio last week whilst Macquarie Group (MQG) and Northern Star (NST) weighed on performance falling -6%.

Looking ahead

Next week will be the last edition of the PRIME Weekly Market Update for the 2021 calendar year but we will return in late January 2022 to continue with our weekly market views and insights.

Monday 29th November 2021 – Friday 3rd December 2021

  • Monday: AU Business Inventories (Q3)
  • Tuesday: AU Private Sector Credit (OCT), CN Non Manufacturing PMI
    (NOV)
  • Wednesday: AU GDP Growth Rate (Q3), CN Caixin Manufacturing PMI
    (NOV), US House Price Index (SEP)
  • Thursday: AU Balance of Trade (NOV), Retail Sales (OCT), US ISM
    Manufacturing PMI (NOV), Weekly Jobless Claims
  • Friday: US Non Farm Payrolls (NOV)

Friday 26th November, 5pm values

 IndexChange%
All Ordinaries 7600 -130 -1.7%
S&P / ASX 2007279-188 -1.6%
Property Trust Index1700+14+0.8%
Utilities Index6336+127+2.0%
Financials Index6335-237-3.6%
Materials Index15562+258+1.7%

Friday 26th November, closing values

 IndexChange%
U.S. S&P 5004595-103-2.2%
London’s FTSE7044-180-2.5%
Japan’s Nikkei28752-994-3.3%
Hang Seng24081-969-3.9%
China’s Shanghai3564+4+0.1%

Key dividends

Monday 29th November 2021 – Friday 3rd December 2021

  • Monday: Div Ex-Date – Kathmandu Holdings (KMD)
  • Tuesday: Div Ex-Date – BENPG (BENPG) Div Pay-Date – Plato Income
    Maximiser (PL8)
  • Wednesday: Div Ex-Date – Aristocrat Leisure (ALL), Incitec Pivot (IPL),
    MQGPD (MQGPD)
  • Thursday: Div Ex-Date – Pendal Group (PDL), SUNPF (SUNPF), SUNPG (SUNPG), SUNPI (SUNPI)
  • Friday: Div Ex-Date – MBLPC (MBLPC)

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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