This week markets seem to have begun on an optimistic footing and willing to focus on the positive.
Numbers out of Europe definitely point to a flattening of the case curve and a slowing in the daily mortality rate in the worst-affected countries such as Italy and Spain.
In the United States, despite the likely escalation in deaths in New York expected in the coming week, the President and Vice President have declared Sunday night a belief that the situation looks to be peaking more broadly in that country.
Bill Gates and hedge fund manager Bill Ackman both made comments to infer a more optimistic viewpoint.
Markets continue to gyrate wildly simply because the range of outcomes remains highly uncertain and significantly varied, but using Australian equities as a guide, markets are broadly flat on where they were 8-9 days ago.
The optimistic view point centres on the idea that far more of the population has already caught coronavirus in recent months and worked up a collective immunity to it which, if true, would allow the various quarantine and social distancing efforts to be eased sooner than anticipated.
With barely 1% of the Australian population tested and the medical fraternity still scrambling to determine how to determine the relative immunity of those who have acquired the virus, this optimism still remains highly debatable.
For now, we continue to take a cautious view insofar as portfolio’s and in our willingness to expend a lot of the liquidity we have built up in portfolios over the past year.
Observations for the past week
Bank dividend cuts are coming
- Australian banks continue to trade under pressure as investors last week fretted over the decision by bank regulators in Europe, the UK and New Zealand to limit bank’s ability to pay dividends in 2020 due to the significant effort being made by governments via their domestic banking systems to provide much-needed liquidity to households and small-business
- Though APRA did remark that it would not be forcing banks to cut dividends in the same manner, it is highly likely that having been extremely extended in the lead up to this liquidity crunch, Australian bank dividend payout ratios will be reset at the next set of results due in a month’s time
- On current broker estimates we have seen, investors should expect absolute dividend per share to be cut between 30% and 50% from their 2017 levels with NAB and Westpac (WBC) seemingly worst hit
Capital raisings coming thick and fast but so far very well received
- In the Australian market over the last fortnight we have seen a variety of companies seeking emergency liquidity with the vast majority of issuers fortunate to have received strong support
- Webjet (WEB) last week saw a successful raising that when done will have raised them well over $300m and should now safely provide the beleaguered travel group with enough liquidity to last deep into 2021 even without any revenue
WEB was and in a normal world remains, an excellent travel business that will likely win market share as global travel networks re-open, however this is a hugely uncertain environment so we would expect that the stock becomes a highly volatile play on the ‘coronavirus crisis’ and will likely bounce around in a range of $2.00 to $4.50 based upon the idea of 40-50c as a potential post-virus 2022 EPS.
- Cochlear (COH) surprised the market with a deeply discounted $880m raising at $140 as a means to pay for lost litigation and as a cashflow ballast to a business witnessing an unprecedented drop off in cochlear implant surgeries
- NextDC (NXT) was opportunistic in its $670m raising at $7.80, taking advantage of a strong share price and investor affection for all things ‘cloud-related’ in the current environment
NXT have managed to raise enough money to ensure development of their greenfields Sydney site and to expand capacity in each of Melbourne and Sydney to take advantage of likely additional hyperscale customer wins.
US Weekly Jobless Claims skyrocket
- Having seen 3.3m people sign on for unemployment benefits the previous week, last Thursday saw the number double again to 6.6m and take the total to 10m people in a fortnight, or some 6.5% of the entire US workforce now newly seeking unemployment insurance
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