Crispin Murray: ASX trends to continue amid constructive reporting season
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.
MARKETS were relatively quiet on the macro front last week. US bond yields rose a touch, while the USD weakened and commodities were higher.
We think these trends can continue, supported by the immense scale of US fiscal stimulus and its size relative to the output gap.
Australian equities underperformed last week, falling 0.46% (S&P/ASX 300) versus a 1.28% gain in the S&P500. This was likely a knee-jerk response to the Victorian lockdown.
So far reporting season has been reasonably constructive, though the market has been in a mood to punish disappointing results.
Covid and vaccine outlook
Recent trends continue. New daily cases continue to plummet from early-January highs in the US and UK. German cases are also trending down.
Hospitalisations are also falling away. The US hospitalisation rate has almost halved from its peak.
Vaccine roll-outs continue to progress in line with plans. The US has stepped up to a daily rate of 1.6 million vaccinations, consistent with herd immunity by July.
We are starting to see the impact of vaccinations on case numbers. For example in Israel overall new cases are dropping — but this is happening much faster in the over-60 age cohort. This is a key positive marker.
Northern hemisphere mobility data is a second area to watch. We’ll be looking for signs that warmer weather, looser restrictions and vaccine-induced confidence are encouraging people to venture out again. This should feed into economic activity and further bolster confidence.
At this stage there are only tentative signs of improvement in mobility data.
Economics and policy outlook
There’s an increasing probability that the US fiscal package will be close to US$1.9 trillion as the Democrats pursue the “reconciliation” approach to passing the package, reducing the need for Republican support.
Key Democrats seem determined to avoid the “mistakes” of the Obama administration — ie not stimulating enough in the wake of the GFC.
This determination is leading to vocal debate as to whether the package will create an inflationary impulse.
Former Obama adviser Larry Summers makes the point that the Obama stimulus was equivalent to half the output gap at the time. The proposed package is three times the current output gap.
A total of US$3.3 trillion in stimulus was passed last year. It’s thought US$1 trillion of that amount is still unspent.
Adding another $1.9 trillion suggests cumulative stimulus is 14% of GDP at a time when pent-up demand is being released.
There is noise that a follow-up infrastructure package later this year will be around $2 trillion — although this spending would be spread out over a longer period.
Finally, Fed Chair Jerome Powell continues to highlight the goal of getting the labour market tight enough to help the most marginalised workers.
There are signs that point to another sell-off in bonds. Yields have been inching up, commodities have strengthened and the US dollar is weaker. Higher bond yields would continue to support cyclicals and financials in the equity market.
The S&P/ASX 300 fell 0.46% last week.
Resources bounced back as commodity prices recovered. Industrials were hit hardest due to stock specifics and the Victorian lockdown.
Results and company-specific news
IAG (IAG, +8.1%). After some recent disappointing updates and a capital raise linked to further provisions, the market was relieved by a lack of news. The new CEO articulated some cautious targets and laid the groundwork for expectations that coming halves will not disappoint.
Macquarie Group’s (MQG, +7.3%) quarterly trading updated indicated an uplift on full-year guidance. The commodities business is benefiting from hedging activity related to rising prices and volatilities.
Gold miner Newcrest’s (NCM, +4.4%) result indicated a plan to drive higher-than-expected production from its Lihir mine in PNG, helping offset headwinds in other parts of NCM’s portfolio.
James Hardie’s (JHX, +3.6%) strong result reflected a combination of surging US housing demand, alongside gains in market share and good margin leverage. JHX outlined an aggressive plan to grow its presence in the “repair and remodel” market, which should help alleviate constraints from supply bottlenecks in new housing.
Telstra’s (TLS, +3.2%) actual result was mixed. Covid had a negative impact on revenue with the enterprise business continuing to suffer from the shift to NBN. But there was strong growth in mobile subscribers relative to competitors. The outlook was more positive. Management indicated the company was at a turning point. Underlying EBITDA is expected to grow in 2H FY21 and into FY22. There are two key drivers: lower costs and increased average revenue per user (ARPU) in mobile as better pricing comes through. Cash flow should be strong as capex falls. Management committed to the current dividend — implying a 4.9% yield — while potential asset sales could support future capital management.
Downer (DOW, -1.5%) delivered a decent result, in-line with expectations. Cash conversion was good, with signs of improving performance and higher prospects of capital management as the company divests some segments. The result emphasised Downer’s shift from an unpredictable, capital-intensive business to a capex-light urban services strategy with a more predictable workflow.
Telecom provider Megaport (MP1, +4.1%) was among the market’s strongest. A good reaction (despite pre-announced results) was driven by optimism on new product launches.
Commonwealth Bank (CBA, -2.0%) delivered a pretty good result. Credit growth picked up and the capital position is very strong. It is looking like it has over-provisioned for bad and doubtful debts. But the market was disappointed as expected capital management was deferred. The company announced a further $300 million of investment in technology. CBA has outperformed peers over the past year, given the perception of relative safety. But other banks have greater leverage to rising bond yields.
Suncorp (SUN, +0.1%) sounded positive with some ambitious longer-term targets. Near-term guidance pointed to weaker underlying margins. There are questions about provisions for potential business interruption claims.
Gold miner Northern Star (NST, +1.6%) has now merged with Saracen. Both segments are delivering well operationally. The merged entity offers a good combination of underground and open-pit assets, good long-term projects and decent near-term cash flow.
The Transurban (TCL, -4.7%) result was a touch disappointing. Traffic to airports was a bigger headwind than expected. This issue is small in the scheme of things but however the Victorian lockdown looms as a bigger near-term issue.
Crown (CWN, -0.9%). The Bergin review was in line with our expectations. There is a path to open and run the Sydney casino. Crown will outline its response in April. The market is looking for changes in management and the board as part of this. The current CEO has announced his departure.
AMP (AMP, -16.2%) is facing headwinds on several fronts. Ares pulling out of a potential takeover was a further blow. The company is focusing on cost-out opportunities but the market’s attention is on short-term revenue trends.
Challenger (CGF, -12.9%) disappointed. The market was looking for higher margins, driven by a shift to more risk assets. Issues with capital intensity have precluded this for now.
Boral’s (BLD, -7.9%) Australian business is in worse shape than expected major projects ending and delays to new ones. Weather and a slower apartment market have dampened concrete demand and pricing. The US business overall was better but not enough to satisfy the market, particularly given a dusty outlook for fly ash.
Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and a strong track record leading Australian and European equities funds.
Crispin manages a number of our flagship funds along with one of the largest equities teams in Australia.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.