Weekly Market Update – 6 December 2021

Welcome to the final instalment of the PRIME Weekly Market Update for 2021.

On behalf of the Prime Investment Committee, I want to take this opportunity to thank you all for your ongoing support and wish you a happy and healthy holiday season.

The Weekly Market Update will recommence on January 24, 2022.

It was only a matter of time before the Federal Reserve had to admit inflation could no longer be considered transitory.

Markets have been pricing in sustained inflation for some time and markets have also been forecasting a faster than expected US central bank tapering of asset purchases. So, it was really no surprise that Federal Reserve Chairman Jerome Powell publicly stated it was time to stop referring to inflation as transitory.

Powell’s comment last Tuesday that it is “appropriate to consider wrapping up the taper of assets purchases a few months sooner” caused global equities to weaken. A faster than expected rollback of bond purchases also has the potential to speed up the Federal Reserve’s timeline for hiking rates.

Whilst the market was somewhat expecting a statement of this nature, that did not mean it was well received. The volatility index (VIX) climbed +7% to close above 30 for the first time since February this year.

Further causing instability in global equity markets was the increasing number of omicron covid cases which continue to pose a threat to the global economy and downside risks to employment.

Finally, Friday’s non-farm payrolls data in the US were a clear ‘miss’ with 210,000 new jobs added in November compared to expectations of 550,000. Whilst November’s payroll data clearly led the market lower there was one shining light.

The household survey which is a separate survey to the non-farm payrolls showed unemployment fell to 4.2% as the labour force participation rate climbed higher. So, whilst the number of jobs clearly missed expectations, there is some renewed positivity in the health of the economy with more people looking for work.

The overarching view is that November’s payrolls are likely to be revised upwards next month.

US equites closed the week down -0.8%.

GDP better than expected

GDP data released last week was a positive surprise.

The Australian economy contracted -1.9% in Q3 which was significantly ahead of consensus views that the economy would fall around -2.7%.   Whilst disappointing, given this was the first contraction since Q2 2020, the end result was significantly better than expected. Prolonged lockdowns in both Victoria and New South Wales led to household consumption falling -4.8% and service spending declining.

As a result, household savings almost doubled rising to 19.8% on the back of increased saving and government support.

We expect GDP to rebound significantly in Q4 with this sizeable household savings buffer likely to be drawn upon to help fund future spending. The reopening of borders will also provide a further level of support assuming the omicron variant does not have too much of a negative impact.

The overall result was even more impressive when you consider that Australia’s primary export iron ore fell -49% in Q3.

OPEC

We flagged last month that oil prices may have peaked in the medium term due to an increasingly risk-off sentiment amongst investors and due to the Biden Administration’s decision to release additional oil reserves to combat a rapidly rising oil price.

We retain this view in the near term after OPEC members agreed to proceed with a plan to increase oil production by 400,000 barrels a day starting in January.

OPEC said it would “continue to monitor the market closely” and is prepared to halt any increase in oil production if the new covid variant causes any disruption to global trade or leads to further travel restrictions.

The decision is likely to put a ceiling on the oil prices in the medium term at around the US$70/barrel level.

Boosting the quality of portfolios

We have further reduced our exposure to banks in the PRIME Australian Growth SMA.

The decision to sell Westpac Bank (WBC) was based on WBC’s disappointing FY21 result which showed increasing challenges in the sector.

In our view, the main concern with WBC was that competitive pricing amongst the major banks and lower margin fixed rate loans were causing a deterioration in net interest margins (NIMs) which ultimately flowed through to WBC’s profitability.

Another issue we found was that 57% of WBC’s new loans were written through mortgage brokers which is significantly less profitable for the group whilst WBC’s cost base was higher than expected.

As a result, market expectations for cash earnings in FY22 and FY23 were downgraded.

We have reallocated the proceeds from the WBC divestment to BHP (BHP), Brambles (BXB), News Corp (NWS) and Telstra (TLS) which we believe have a more favourable outlook and offer better risk-adjusted returns to investors.

ASX Weekly Wrap

The ASX200 underperformed the global benchmark falling -0.5% last week.

Mid-caps (-0.2%) provided investors with the most downside protection whilst small caps fell -1.9% which is not surprising in a risk-off environment. Large caps fell in line with the broader market.

At a sector level, miners and banks delivered positive returns rising +1.3% and +0.6% respectively. Iron ore rallied +2.6% which saw the commodity round out the week at around US$100/tonne.

Of the banks CBA was the best performer rising +1.9% whilst Westpac fared worst falling -1.8% after agreeing with ASIC to pay penalties in excess of $100m following widespread compliance failures which saw WBC apply inflated interest rate charges to credit card debts and charge fees for no service.

Staples, healthcare, and tech led the market lower all falling between around -3%.

At a stock level, Worley (WOR) was the best large cap performer climbing +10% after announcing a partnership with Shell to produce 820,000 tonnes of sustainable aviation fuel and renewable diesel.

From a portfolio perspective BHP was the best performer rising +5.8% after announcing it intends to proceed with the unification of its dual listing structure. We also believe BHP will reward shareholders with a return of capital once the sale of its oil and gas assets to Woodside has completed.

Disappointingly, Northern Star Resources (NST) fell -10% which was significantly underperforming the pullback in the gold price. The completion of NST’s US$95m acquisition of gold producer Newmont Corporation’s power business did little to steady the ship with shares falling four out of five trading days.

NST has a very strong balance sheet with no debt and is a stock we continue to think will outperform if markets entire a more volatile trading range and for this reason we continue remain comfortable with its place in the portfolio. 

Looking ahead

Monday 6th December 2021 – Friday 10th December 2021

  • Monday: AU ANZ Job Advertisements (NOV)
  • Tuesday: AU House Price Index (Q3), CN Balance of Trade (NOV), US
    Balance of Trade (OCT)
  • Wednesday: N/A
  • Thursday: AU RBA Governor Lowe Speech, CN Inflation Rate (NOV),
    US JOLT Job Openings (OCT)
  • Friday: UK Balance of Trade (OCT), US Inflation Rate (NOV)

Friday 3rd December, 5pm values

 IndexChange%
All Ordinaries 7544-56-0.7%
S&P / ASX 2007241-38 -0.5%
Property Trust Index1670-30 -1.8%
Utilities Index6272-64 -1.0%
Financials Index6372+37+0.6%
Materials Index15758+196+1.3%

Friday 3rd December, closing values

 IndexChange%
U.S. S&P 5004538-57-1.2%
London’s FTSE7122+78+1.1%
Japan’s Nikkei28030-722-2.5%
Hang Seng23767-314-1.3%
China’s Shanghai3607+43+1.2%

Key dividends

Monday 6th December 2021 – Friday 10th December 2021

  • Monday: Div Ex-Date – BENPH (BENPH), CBAPD (CBAPD),
    CBAPF (CBAPF), CBAPG (CBAPG), CBAPH (CBAPH), CBAPI
    (CBAPI), CBAPJ (CBAPJ)
  • Tuesday: Div Pay-Date – MBLPD (MBLPD)
  • Wednesday: Div Ex-Date – NABPF (NABPF), NABPH (NABPH)
    Div Pay-Date – Metrics Master Income Trust (MXT), Metrics
    Income Opportunities Trust (MOT)
  • Thurday: Div Ex-Date – ANZPG (ANZPG), ANZPH (ANZPH),
    ANZPI (ANZPI), NABPE (NABPE). WBCPG (WBCPG), WBCPI
    (WBCPI)
  • Friday: Div Pay-Date – CSR Limited (CSR)

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 4738Michelle BromleyT: (03) 8825 4751
Livio Caiolfa T: (03) 8825 4748Nicole LewisT: (03) 8825 4734
Marcus AingerT: (02) 9134 6292Nicholas Miller T: (03) 8825 4722
Dylan CresswellT: (03) 8825 4707Gina McIntoshT: (07) 3557 2557
Jarrod Rodda T: (03) 8825 4729

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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