Weekly Market Update – 21 February 2021

Russia and Ukraine tension weighs on markets

What a roller coaster of a week it was for financial markets. 

Equity markets were weaker, slipping -1.84 per cent in AUD terms as investors continue to assess the building tension between Russia and Ukraine at the end of a volatile five days of trade. 

From an economic data front, there was little to discuss, though rising inflation and forthcoming Fed rate hikes continue to cast uncertainty on investors’ minds and drag markets lower. 

The ongoing geopolitical tension between Russia and Ukraine whiplashed markets as fears that a Russian invasion into Ukraine would take place after a build-up of Russian troops at the Ukrainian Border. 

The VIX Index, which is a commonly utilised indicator for the level of fear and stress in the market, shot up to levels of 31~ reflecting ongoing nervousness amongst investors.  

Naturally, news of geopolitical tensions intensifying between Russia and Ukraine sent markets tumbling in the early stages of the week, though the drop was swiftly recovered mid-week after Russia’s Defence Minister commented that Russian military units had begun returning from the Ukrainian border to military garrisons. 

The minister’s comments were interpreted as alleviating the conflict to some extent, and ultimately led stock markets across the world to rally from the news. 

Just the next day, NATO dismissed the comments from Russia’s Defence Minister, accusing Russia of in fact increasing their troop count at the Ukrainian Border. US President Joe Biden also spoke at the White House later that day, declaring that there is a ‘very high’ risk of Russia invading Ukraine in the coming days. 

Following on from this, there was a sharp dive in stocks worldwide with the tech-heavy Nasdaq index facing the brunt of the losses, falling -1.60 per cent, while the blue-chip S&P 500 slid -1.4 per cent for the week. 

How did the beaten-down CSL fair after reporting? 

As previously mentioned, CSL has continued to be one of the biggest detractors in terms of portfolio returns, with it underperforming the broader index by -15 per cent. 

Though the underperformance was certainly not ideal by any stretch, we remain confident in the ability of CSL from a long-term perspective. 

Last week, we commented that the sharp decline in CSL’s share price seemed unwarranted and represented an attractive buying opportunity as the price action seemed oversold. 

Last Thursday, CSL reported its interim results, so let’s review how it fared and assess if our call was correct. 

 On a headline level, CSL’s results were solid and in line with management forecasts. It maintained its interim dividend despite profits falling during the first half of the new financial year. 

CSL had experienced strong growth in several of its product lines, namely its influenza vaccines business, Seqirus, which recorded a record volume of doses distributed. 

As expected, the company had flagged that its plasma-derived immunoglobulins (IG) collection volumes had been constrained due to the outbreak of the Omicron variant.  

Despite this, plasma collection volumes were up 18 per cent in 1H22 vs 1H21, with 18 new collection centres opened and another 35 new collection centres planned in FY22. 

Guidance was also upgraded for FY2022 of a net profit after tax (NPAT) of US$2.15 to US$2.25 billion (AU$3.00-$3.13 billion). 

The half-yearly results went down well with the market, with CSL adding on an impressive  

8.5 per cent for the day and another 5.1 per cent the following day. 

As a reminder, CSL represents one of the largest weights within our Prime Australian Growth SMA and our investment thesis remains the same. 

CSL has undoubtedly faced headwinds throughout the COVID-19 pandemic, though, we believe the defensive-like characterises of the healthcare sector and the long-term trajectory for the company remains strong.  

Both Australia and the United Kingdom continue to ease restrictions with the omicron wave peaking, something we view will lead to an uptick in plasma collection volumes due to increased social mobility. 

Moreover, both semi-urgent and non-urgent category elective surgeries will soon resume in full capacity to cater towards the blown-out backlog which is yet another attractive tailwind we see for CSL. 

How did our portfolio fair in last week’s earnings? 

It was a jam-packed week with several of the largest ASX listed stocks reporting earnings. 

Various names held within the Prime Australian Growth SMA reported, and we thought it would be a good opportunity to touch on some of their respective results. 

First to report was BHP Group Ltd (BHP), its half-year results demonstrated that despite roller coaster-like commodity prices, the mining giant was able to book strong results across all businesses divisions.  

The mining giant posted better than expected underlying earnings with its pre-tax profit jumping 61% and free cash flow of US$8.5 billion (AU$11.84 billion) largely derived from record prices in iron, copper, and metallurgical coal. 

Those extraordinary numbers are something usually seen from the likes of tech giants or software as a service (SaaS) companies, not capital intensive material companies. 

BHP once again exceeded consensus dividend estimates, declaring it would pay a record interim dividend for the third straight year of $2.10 per share. 

Interestingly, BHP fell -0.64 per cent for the week despite the company embracing rising inflation as it would be ‘fundamentally positive for the resources industry’. 

Santos Limited (STO) was up next, and their full year-results highlighted the benefit the company received from significantly higher LNG and oil prices combined with supply constraints. 

Santos’s earnings from product sales rose 39 per cent which translated to the company posting a sharp increase in underlying profit of 230%, to US$658 million (AU$946 million), though the results were slightly light in terms of total earnings. 
 
The company declared a final dividend of 8.5 US cents (12 cents) per share, up 70% on the corresponding period. 
 
Santos fell -5.6 per cent following their FY21 results, with the drop possibly being attributed to the spot price of WTI crude oil retreating from its seven-year-highs after US-Iran sanction talks progressed on the same day. 

Another stock held within the Prime Australian Growth SMA which reported was the industrial and commercial property conglomerate Goodman Group (GMG). 
 
Earnings from GMG highlighted strong rental growth, largely driven by e-commerce retailers’ increasing demand for logistics facilities. 
 
The company posted an impressive $2 billion statutory profit, with earnings per share up 27 per cent to 41.9 cents. 

We believe GMG’s focus on urban warehousing and logistics property ownership will remain advantageous as consumer demand behaviour continues to tilt towards e-commerce. 

GMG shares jumped upwards on the upgrade, rising almost 5 per cent, though fell sharply after resulting in the stock closing 1.14 per cent up for the week. 

Several other names in the portfolio reported such as Cleanaway Waste Management Ltd (CWY)  

which saw the stock gain 1.74 per cent, Wesfarmers Limited (WES) which disappointingly fell -4.85 and Telstra Corporation Ltd (TLS) also fell -2.73 per cent post their results. 

We currently sit in the middle of the reporting calendar with plenty of more earnings to come next week, so stay tuned. 

ASX Weekly Wrap

The ASX200 closed relatively flat for the week, adding 0.06 per cent after a volatile week of trading.

The index jumped 2% mid-week on news that Russian troops were retreating from the Ukrainian border, though these gains were eroded away following the accusations made by NATO and US President Joe Biden. 

Investors favoured exposure to the A-REIT sector resulting in the index being the strongest performer, it rallied over +3 per cent with the likes of Vicinity Centres (VCX) and Scente Group (SCX) leading the charge. 

The worst performers were utilities and materials, which fell -2.2 per cent and -1.4 per cent, respectively. 

With the threat of conflict continuing to unfold, investors swiftly flocked to the gold sector which acts as a “safe-haven” commodity in times of uncertainty. 

This led Northern Star Resources (NST) to be the best performing stock in the Prime Australian Growth SMA adding on an impressive +12.70 per cent for the week. 

We continue to view NST favourably and believe exposure to gold within portfolios is a key aspect in terms of capital protection to hedge against market volatility. 

Disappointingly, Santos Limited (STO) weighed on performance last week after the market was disappointed on earnings numbers, it fell -5.66 per cent. 

We remain confident in STO as we expect the recent acquisition of Oil Search (OSH) to increase the group’s scale and capacity of its already existing low-cost operating model. 

In other portfolio news, Brambles Limited (BXB) found itself subject to media speculation after rumours surfaced that global private equity giant KKR & Co was conducting early-stage due diligence on the company which may point towards a possible future buyout opportunity. 

The stock gained a healthy +8 per cent for the week despite BXB declaring it was in no talks with third parties. 

Looking ahead

Monday 21st February 2022 – Friday 25th February 2022

  • Monday: N/A
  • Tuesday: N/A
  • Wednesday: AU Wage Price Index YoY (Q4)  
  • Thursday: N/A
  • Friday: UK Consumer Confidence (FEB) 

Friday 18th February, 5pm values

 IndexChange%
All Ordinaries 7502-14-0.2%
S&P / ASX 2007221+4+0.1%
Property Trust Index1622+48+3.0%
Utilities Index6938-156-2.2%
Financials Index6558+21+0.3%
Materials Index17616-250-1.4%

Friday 18th February, closing values

 IndexChange%
U.S. S&P 5004348-71-1.6%
London’s FTSE7513-148-1.9%
Japan’s Nikkei27122-574-2.1%
Hang Seng24327-580-2.3%
China’s Shanghai3490+27+0.8%

Key dividends

Monday 21st February 2022 – Friday 25th February 2022

  • Monday: Div Ex-Date – Ansell Limited (ANN)  
  • Tuesday: Div Ex-Date – Amcor Plc (AMC), Div Pay-Date – Challenger
    Capital Notes 2 (CGFPB), Transurban Group (TCL) 
  • Wednesday: Div Ex-Date – AGL Energy Limited (AGL), Downer EDI
    Limited (DOW), JB Hi-Fi Limited (JBH) 
  • Thursday: Div Ex-Date – BHP Group Ltd (BHP), Div Pay-Date –
    Goodman Group (GMG) 
  • Friday: Div Ex-Date – Bapcor Ltd (BAP), Beach Energy Ltd (BPT), Div
    Pay-Date – Australian Foundation Investment Co.Ltd.(AFI), Challenger
    Capital Notes (CGFPA), Challenger Capital Notes 3 (CGFPC)

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 MillerT: (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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