Australian Market Summary | 4 May 2020

This week sees parts of Australia, Europe and the United States slowly ease quarantine restrictions which will no doubt give some investors room for hope.

Whilst in the interim it might feel good for investment markets, any increase in social activity is highly likely to ‘pay it forward’ with many noted infectious disease experts all but certain that within a week of the US Memorial Day long weekend, case numbers will again begin to escalate following the month’s increased social interaction.

Interestingly in the United States, infection rates continue to grow if you exclude case numbers in both New York and New Jersey, both of whom are past the peak.

This is concerning.

 

Observations for the past week


Bank Results and thoughts

  • Westpac (WBC) reported interim profits this morning following on from both ANZ (ANZ) and National Australia Bank (NAB) last week and the trend was much the same in the sense of preserving capital (deferring the dividend) and raising collective provisioning in anticipation of a jump in loan delinquencies as the year progresses

  • Where NAB announced a $3.5bn raising attractively priced at $14.15, a near 20% discount to net tangible asset value, both ANZ and WBC chose to defer dividend payments

  • Credit quality has already begun to deteriorate modestly across all major banks with arrears upticking and specific provision increases also a feature for rising corporate bad debts

  • Notably all major banks increased collective provisioning with WBC and NAB seemingly the most conservative in their assumption, most of which took into account falls in house prices of 10-15% and the trough in economic activity in mid-2020 taking 18 months to recover

  • ANZ results were perhaps the most disappointing as its Tier 1 capital strength unwound back to 10.8% (same as Westpac, NAB 11.4% post capital raising) and analysts cast doubt over the underlying core earnings of the group

  • We have recommended a major underweight in Australian banks for nearly 5 years and still feel like the sector has a torrid year ahead in terms of earnings headwinds generated by the likely deterioration in domestic credit quality effected by the COVID-19 outbreak. However bank stocks are now largely at or below net tangible asset value (ex CBA) and in the medium-term we believe most major banks are capable of achieving their cost of capital which infers banks are now at least pricing in some of these admittedly increasing headwinds

  • A further fall in major bank share prices of ~15% from here would open up potential value to close our longstanding underweight recommendation, and more significant falls could open up the potential to be even more positive

 

Coles sales figures and new BUY

  • COL Q3 sales numbers unsurprisingly were strong benefiting from Australian quarantine efforts through March

  • Q1 food sales were +13.1% and liquor sales rose +7.2%, albeit the group confirmed that Q2 sales to date had begun returning to pre-COVID 19 levels which is around +3.5-4%, though these numbers include a weak Easter suggesting an underlying level of around 5% which is strong

  • COL confirmed that they were incurring higher costs as part of the need for enforcement of social-distancing rules

  • We believe COL is an ideal stock for Australian equity portfolios during the current time given its dependable cashflows, modest leverage and 4% full-franked dividend yield

 

Warren Buffett remarks at Berkshire Hathaway AGM - important

  • We feel there is a lot for investors to read into in the comments from Berkshire founder Warren Buffett during his televised Annual General Meeting address held over the weekend

  • BRK currently hold US$137bn in net cash on balance sheet, or approximately 30% of the market value of BRK

  • Mr Buffett remarked that they hadn’t made a deal because they haven’t found anything ‘that attractive’

  • He also remarked that the company had only bought back US$1.7bn in stock during the first quarter because ‘the share price hasn’t been at a level where it feels better to us than other things including the option value of money’ – this is key as it infers BRK believe in retaining cash in the likelihood that better opportunities will emerge going forward (our view also)

  • Lastly, confirming these remarks he commented that the ‘cash position isn’t that huge when I look at the worst-case possibilities’. I think that speaks for itself

 

We feel very strongly that in retaining higher cash levels in the coming months, investors will put themselves in good positions to add to their portfolio at attractive prices later in 2020.

 

One-liners …

  • Afterpay (APT) announced that Chinese tech giant Tencent (700 HK) had bought a 5% stake in the company during the market sell-off last month, and this has unsurprisingly led the stock to rise +20% this morning. Regrettably, our recommended portfolios no longer hold APT given our caution surrounding its business model during a time of significant consumer stress and reduced discretionary spend, however we remain hopeful of a chance to re-build holdings at attractive levels during the year

  • Nufarm (NUF) executives confirmed that Australia agrichemical trends were up in January on an annual basis, confirming evidence that the drought across much of eastern Australia was indeed breaking – we remain optimistic for NUF shares in 2020

  • Amongst US earnings results last week, outcomes were mixed – Apple (AAPL) failed to give forward guidance for the first time in history, Microsoft (MSFT) sailed through the quarter with virtually no impact according to the CEO and home remarked ‘we have seen 2 years of digital transformation in 2 months’ courtesy of the virus, Google (GOOG) and Facebook (FB) noted a slowing advertising environment, but that it hadn’t impacted Q1 business significantly, whilst Amazon (AMZN) benefit from the renewed online sales surge, but that they would re-invest profits into the consumer to take advantage of the rising consumption patterns

  • European GDP figures were released for Q1 that showed a fall across the continent of -3.8% for the quarter and some of the worst quarterly economic declines in countries like France, Spain and Italy since the 2nd World War

  • In other economic data, early signs on April Retail Sales in the United States look to be down -25% annually

Another important week for market’s as we get to assess the performance of national economies during April, albeit I think we know it was carnage.

The major reports will be US employment on Friday and the various readings on service sector activity locally and abroad.

Also of importance is any early news on Chinese consumer spending over the extended 5-day Chinese May Day holiday this year.

The holiday extends until mid-week and the early signs seem to point to a modest uptick, but by no means at a rate indicative of any normalisation whatsoever in consumer demand.

We also get Macquarie Bank’s (MQG) interim profit announcement on Friday which will be interesting as the stock falls into the camp of one that investors rapidly hoover up on any weakness.

The collapse in energy markets and falling asset prices are likely to impact both the markets and asset management divisions, and without a major corporate debt franchise, it’s hard to see where MQG will surprise positively at $100 a share.

Next week see’s results from AMCOR (AMC), Pendal (PDL) and a trading statement from Commonwealth Bank (CBA).

For more information on the above please contact your Partners Wealth Group advisor directly or on 1800 333 143.

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.