Equities continue to rally despite some worries on the economic front as the Delta variant impacts the domestic economy. The S&P/ASX 200 rose 1.3% even as business confidence turns negative and consumer sentiment falls. Meanwhile, the U.S. S&P 500 continues to hit new highs, rising 0.8% alongside the MSCI World which rose 0.9%. Emerging markets remain out of sync, falling 0.5% as Chinese liquidity data disappoints and the government released a five-year blueprint calling for further regulatory pressure across a broad swathe of industries.
Bond yields were largely flat as U.S. inflation figures showed some moderation, with the core slowing to a 0.3% rise over the previous month as some components thought to be transitionary have started to ease. Whilst the worst may have passed, things are still unclear as the inflation reading for producers continue to push higher, posing a potential issue for companies and their profit margins if they do not pass this on to the consumer. This reading comes alongside reports that the semiconductor shortage continues to worsen, with delivery times now estimated at 26.5 weeks versus the six to nine week pre-pandemic average.
Elsewhere, the U.S. made progress on its infrastructure spending plans as the Senate passed a $550 billion bill on physical infrastructure which includes spending for roads, power grids, broadband and electric vehicle charging stations. Separately, the Senate also passed the budgetary framework for the $3.5 trillion social infrastructure bill. Both bills still have several hurdles before full approval but investors cheered the progress.
Corporate news is being dominated by earnings season. Overall, signs have been positive with nearly double the beats versus misses, but the most encouraging sign comes from guidance provision. Though still early in the season, it looks like more companies are starting to resume guidance after many have spent the last couple of reports citing uncertain conditions due to the pandemic as reasons to withhold guidance. A resumption points to some confidence and certainty returning, or at least a better understanding of the road ahead, despite the latest lockdowns.
Earnings season so far
It has been a good start to earnings season as we saw beats by several of the companies in our models.
Telstra (TLS) had an in-line result but investors cheered signs of a turnaround as mobile revenues grew alongside an improvement in margins. The company remains on track to deliver its cost-out programme and announced a $1.35 billion buyback using part of the proceeds from the sale of the 49% stake in InfraCo Towers. We are encouraged by the result and remain optimistic that the upcoming sale of a stake in InfraCo Fixed will help release further value for TLS.
Downer EDI (DOW) also had a good week as it posted a slight beat to consensus figures. Encouragingly, there seemed to be significant progress in its strategic shift to focus on Urban Services, the more cash generative and stable business lines for the company. It has made progress in selling down the bulk of its mining services and winding down its engineering division, using proceeds to shore up the balance sheet and buy back shares. We are pleased with the progress and believe that the shift to more stable business lines with better margins will drive higher valuations for the company. However, we expect recent lockdowns to continue to impact DOW negatively, though with government now representing 90% of the company’s work-in-hand contracts, we see the company as well-positioned to weather the storm.
Challenger (CGF) also posted a marginal beat to downgraded expectations, driven by continued sales strength and a surging funds management business. There were signs of margins starting to bottom which will be key to a recovery in the share price. We expect sales growth to remain strong, boosted by the Retirement Income Covenant coming into force next financial year, but the margin recovery will hinge on higher bond yields, corporate spreads, repricing of annuities and reducing the current conservative cash levels. Whilst some of this is out of CGF’s hands, we see CGF as attractively priced if margins can recover.
Finally, Suncorp (SUN) had a great report as earnings came in above expectations alongside a special dividend of 8 cents per share and a $250 million buyback. There were positive signs across both insurance and banking, whilst management remains upbeat on the strategic initiatives, investing in digital enhancements to improve efficiency across the business. We remain upbeat on SUN as it sees tailwinds from rising insurance premiums, rising bond yields and potentially better margins from the efficiency programme, with investment spending set to peak this financial year.
Elsewhere, we saw disappointing results from Mineral Resources (MIN), Commonwealth Bank (CBA) and Transurban (TCL), whilst beats came from James Hardie (JHX) and Goodman Group (GMG).
We continue to have a packed week as Lendlease (LLC), BHP, Breville (BRG), Bapcor (BAP), Coles (COL), CSL, OZ Minerals (OZL), Woodside (WPL) and Newcrest (NCM) all report alongside other companies of interest such as Brambles (BXB). We also get trading updates for Westpac (WBC) and ANZ.
On the economic front, we have employment figures, U.S. retail sales, and a range of Chinese economic data with industrial production and retail sales of particular interest to markets as the world’s second largest economy continues to slow.