Crispin Murray: what’s driving Australian equities this week

Pendal's Head of Equities, Crispin Murray

Here’s what’s driving Australian equities this week according to Pendal’s head of equities Crispin Murray (pictured above). Reported by portfolio specialist Chris Adams.

 

 
IT WAS relatively quiet on the macro front last week.

Signs that the Fed was “thinking about thinking about” tapering were absorbed without any ructions in the bond market.

It seems the local market is also content to look through the Victorian Covid outbreak and lockdown. The S&P/ASX 300 gained 2.17% last week, with good market breadth. The S&P 500 was up 1.2%.

Covid and vaccines

It’s too early to make a call on whether the Victorian shutdown will contain the latest outbreak. At this point the market seems sanguine. Travel and casino stocks have not been punished.

Overseas the biggest outbreaks appear to be improving. New case numbers continue to decline in India, the EU and the US. Brazil may also have turned a corner.

New daily cases have been ticking up in the UK where the Indian (B.1.617.2) variant is becoming the dominant strain.

We are watching new outbreaks in Asian countries such as Taiwan and Vietnam which had previously kept the virus under control.

There is some talk of a new variant emerging there, which has elements of both the Kent and Indian strains. But it is too early to be clear on this.

Macro and policy

There was little news last week. Anecdotal evidence from the US continues to demonstrate the strength of recovery and pent-up demand.

There is a growing focus on recent developments in China and the implications for resource demand. Beijing has made efforts to talk down commodity and crypto prices in recent weeks. It has also sounded warnings against speculation in property.

Data suggests Chinese credit growth is decelerating, which is seen as an important indicator for commodity demand. This issue needs to be watched.
 
Money Management Fund Manager of the year awards
 
While credit growth is slower than this time last year, the base effect of stimulus in 2020 needs to be considered. Credit growth remains ahead of 2019.

Meanwhile 10-year bond rates remain very low and the RMB has been appreciating, which helps purchasing power. The global economic recovery will boost the Chinese manufacturing sector.Despite some restraining measures at the margin, we think Chinese policy remains supportive and is unlikely to be the catalyst of a significant correction in commodities.

There have been notable developments regarding oil — all of which are likely to constrain medium-term supply and support prices.

The International Energy Agency published a roadmap for the industry to achieve net zero emissions by 2050. The projections will be difficult to achieve, but this sends a strong signal that energy companies should not be investing in new green-field projects.

Last week a small US hedge fund successfully gain institutional support to force three new directors onto the board of Exxon.

At this point there is no specific plan for change — the move stems from desire to drive a share price re-rating rather than ideological motivations.

But it relates to a view that Exxon has been dragging the chain when it comes to pivoting its portfolio towards renewable sources.

This highights a shift against new investment in oil and gas.

Elsewhere a Dutch court ruled that Shell’s plans to cut emissions were not stringent enough. The energy and petrochemical giant was told to cut emissions by 45% before the end of 2030. The ruling will be appealed — a process that could take several years. But it places more pressure on the company to act.

All of the above highlights the forces being applied to oil supply growth.

Meanwhile volume decline rates are rising, given the increased share of shale in total supply. Demand is likely to be maintained for much of the decade, leading to a potential future squeeze in oil prices.

Markets

We are seeing some rotation back to growth leaders in the global equity market, following underperformance for much of the past three months. This is broadly supportive of market breadth.

Merger and acquisition (M&A) activity is proving to be supportive in 2021 — driven by low funding costs, improving economic fundamentals and substantial fire power in private equity.

There have been US$1,266 bilion in M&A deals in the US so far this year. The previous record was US$861 billion at the same point in 2019.

Commodities generally bounced back last week. Brent crude rose 4.8% and copper gained 4.1%. Iron ore bucked the trend to end 4.3% lower.

Costa Group (CGC, -23.7%) fell last week as management downgraded EPS guidance by about 30% for the current year and by 10-20% for FY22. Several factors were at play — all in the domestic market — off-setting strength in the international segment. Pricing in avocados wass weaker than expected. A fruit fly issue in South Australia and higher labour costs in a mushroom facility have also dragged. These issues were previously flagged, but the impact was far greater than expected.

Fortescue Metals (FMG, -0.81%) was also among the laggards after confirming a cost uplift for its Ironbridge project. The increase from $2.6 billion to $3.3-3.5 billion is significant, but it’s in line with the market’s current expectation.

There was relief in the market as the potential investment from Domain Group (DHG, +14.8%) in PEXA looks set to be a lot less than many feared. Underlying trends in housing also remain supportive.

Testing company ALS (ALQ, +11.3%) delivered a strong result with margins higher in its commodity and life sciences divisions. Management delivered a positive outlook, helped by strong exploration activity from smaller miners. Earnings expectations were upgraded by 10-15% for out-years.

Carsales.com (CAR, +10.4%) bounced back from last week’s sell-off. Management made an effort to put the acquisition in the US — which has not been well received — into the context of an overall healthy business.

Tabcorp (TAH, +3.6%) received a bid for it wagering business from Betmakers Technology (BET). This is effectively a proposal for TAH to buy BET and the dynamics of the deal do not look particularly appealing. But it adds an extra layer of competitive tension into the battle for control of TAH’s wagering business.
 

About Crispin Murray and Pendal Focus Australian Share Fund

Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia.

Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions , as this graph shows:

Source: Pendal. Performance is after fees and before taxes. *From 01 Apr 05; **as at 30 Apr 21. Past performance is not a reliable indicator of future performance.

 
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

Find out more about Pendal Focus Australian Share Fund here. 

Contact a Pendal key account manager here.

This article has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and the information contained within is current as at May 31, 2021. It is not to be published, or otherwise made available to any person other than the party to whom it is provided.
PFSL is the responsible entity and issuer of units in the Pendal Focus Australian Share Fund (Fund) ARSN: 113 232 812. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling Customer Relations on 1300 346 821 (8am to 6pm Sydney time) or at our website www.pendalgroup.com. You should obtain and consider the PDS before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested.

This article is for general information purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation.

The information in this article may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information in this article is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information.

Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance.

Any projections contained in this article are predictive and should not be relied upon when making an investment decision or recommendation. While we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections.

Related Articles