Australian Market Summary | 23 August 2021

Markets finally had a negative week as weaker than expected Chinese economic data and disappointing U.S. retail sales dented investor confidence. The S&P/ASX 200 fell 2% as BHP sold off on a tumble in the iron ore price and the proposed unification of its dual-listed company structure as the London listing traded at a discount to the ASX listing prior to the announcement. Materials and energy stocks paced declines with a 9.5% and 7.6% fall respectively, whilst defensives were the best performers with Staples and Telecoms up 3% and 2.8% respectively. The U.S. S&P 500 fared better, falling just 0.5% for the week. However, emerging markets continued to drag with the MSCI Emerging Markets falling 4%, now down 1.8% year-to-date as other markets are posting double digit gains.

Bonds rallied in the risk-off environment, with the Australian 10-year yield falling below 1.1% as lockdowns hit sentiment whilst the U.S. 10-year yield still sitting around 1.25%.

Last week, we saw the domestic unemployment rate surprisingly drop to 4.6% as 2,200 jobs were added in July. This defied expectations for a large fall in jobs and a rise in the unemployment rate. However, looking under the hood, this was not a cheery report. The fall in the unemployment rate was primarily driven by a 0.2% fall in the participation rate as people stopped looking for jobs altogether. Full-time employment fell, usually an indicator of a weaker employment market, and the underemployment rate, a measure of people not working enough hours, rose markedly by 0.4% to 8.3%. With the situation continuing to worsen in both New South Wales and Victoria, we expect August and September economic data to continue to worsen.

As we continue our coverage on earnings season, the 2021 financial year continues to be strong as companies continue to deliver more earnings beats relative to historical ratios, but trading updates and forward guidance paints a bleaker picture as 2022 estimates are moving lower with many companies citing lockdowns and supply chain issues having an impact.

Earnings season recap – week 3

Another very busy week, chock-full of earnings, with many companies within our models reporting largely positive results.

Starting with the good, Amcor (AMC) had another stellar report with the Bemis integration completed and synergies likely to be at least 10% above the initial $180 million per annum target. Pleasingly, the company handled raw material costs, a source of worry for us, very well. The company delivered upbeat guidance for the coming year, and we remain positive on AMC with a strong management team and the business firing on all cylinders.

Bapcor (BAP) delivered strong earnings with double digit growth across all of its business lines, with strategic execution remaining strong as it continues to transition to the new Tullamarine Distribution Centre as planned, with a new Queensland one planned for this year. However, the company noted the negative impact of lockdowns on its businesses so far this year, driving a sell-off. BAP remains a quality company with a resilient business that we expect will bounce back quickly when restrictions are eased.

Coles (COL) had an upbeat report, noting that it recovered to pre-pandemic levels of market share at the end of June as foot traffic quickly returned to malls when restrictions eased. The company also noted that Supermarket sales were up 1% in the current financial year as it benefits from lockdowns driving up grocery sales. This was better than an expected fall in sales as COL cycles difficult comparisons. We remain positive on COL as it continues to improve its margins via the Smarter Selling strategy and invests heavily in delivering improvements to its offerings.

CSL was another that had a good report, however, guidance disappointed as profits for FY22 were expected to fall. It’s Seqirus business is doing extremely well but we expect that the main profit generator, Behring, will face a tougher time in the next year or two as it faces difficulties in plasma collection which is vital for its production. We continue to regard CSL as one of the highest quality names on the ASX, but one that is fully priced.

Breville (BRG) had more of a mixed report relative to expectations, but it continues to deliver strong growth as it expands to new geographies. Supply chain issues have been managed very effectively though the company is not immune to delays in moving products. The market sold down BRG on the day as it was priced for perfection but the stock made a quick recovery. We continue to hold the company in high regard as it has an excellent management team delivering its long-term growth strategy by continuously developing market-leading products.

In terms of disappointments, Lendlease (LLC) had pre-reported a few weeks ago but the market was disappointed on the lack of update regarding the CEO business review. The company has now guided for an update at the end of August via a market briefing. A slate of mining companies also reported in conjunction with BHP, OZ Minerals (OZL) and Newcrest (NCM). Whilst most of the miners had strong earnings including the aforementioned three, rising costs across the board were an area of concern, with both unit costs and capital expenditures rising.

Woodside (WPL) had a disappointing report, but the big news was the proposed merger with BHP’s petroleum business. WPL shareholders would own 52% of the merged company, with BHP shareholders being distributed WPL shares with 48% ownership. We view the deal as positive for WPL as the combined entity will have an improved balance sheet, highly cash generative operations and top tier assets. The combined entity will be in the top 10 of global energy producers and should generate sufficient cash flow to fund its development plans.

Other companies that provided trading updates were Westpac (WBC), ANZ and Fisher & Paykel Healthcare (FPH). Both WBC and ANZ had slightly disappointing quarters. WBC also pushed forward its capital management plans to November, unlike the other three major banks that all announced buybacks over the past few weeks. FPH had a positive trading update as it noted that sales were more resilient than expected, down only 2% versus the previous year which had a large boost due to COVID-19 related demand.

We have another busy week ahead with Sonic Healthcare (SHL), A2Milk (A2M), Appen (APX), IOOF (IFL) and NextDC (NXT) reporting. Heavyweights Wesfarmers (WES) and Woolworths (WOW) also report alongside other companies of interest such as Ramsay Healthcare (RHC), Seven Group (SVW) and APA Group (APA).

The bulk of major earnings reports will wrap up by the end of the week just as the macro environment starts to get interesting again. Investors will be closely watching for taper announcements as central bankers meet for their annual symposium in Jackson Hole. We will also get preliminary readings on Purchasing Manager Indices which are a series of closely watched, forward-looking economic activity indicators.

This information is general in nature and is provided by Partners Wealth Group. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.

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