What’s driving ASX stocks this week
Here’s what’s driving Australian equities this week according to Pendal’s head of equities Crispin Murray (pictured above) and portfolio manager Jim Taylor. Reported by portfolio specialist Chris Adams.
WHILE headline Australian index moves have been muted recently, we are seeing material shifts within the market.
This is fertile ground for active investors.
Inflationary pressures continue to be front of mind for investors. As a result we are seeing rotation away from long-duration deflationary trades such as growth and low volatility/quality stocks towards shorter-duration inflationary trades like commodities and value stocks.
This is supportive for Australian equities relative to markets such as the US, given our higher weighting to commodities and value stocks.
The S&P/ASX 300 was up 0.75% last week and the S&P 500 gained 1.3%.
Covid and vaccines
The tragic situation in India continues to hold attention and emphasises the danger that the virus and its mutations still pose.
Elsewhere there was little deviation from recent trends. New daily cases continue to decline in the US. The EU finally appears to be getting on top of recent outbreaks, demonstrating the effectiveness of lockdowns. EU hospitalisations are also improving rapidly.
With China, the US and EU all showing signs of control we expect the recovery in global growth to remain intact.
More than 60 per cent of Israelis have had at least one dose of vaccine. Vaccination rates remain strong at 45-55%, though there is a question whether this will be replicated in other countries.
The rate of UK vaccinations started to slow after 45% had a jab. The US is at this point now. Surveys suggest about 20% of the population still strongly resists vaccination.
There is now chatter around inducements to encourage the “wait and see” cohort. This issue has implications for the pace of re-opening and needs to be watched.
Economics and policy
The big news last week was the large miss in US payroll data, which showed 266,000 new jobs versus an expectation of 1.1 million. This figure is at odds with all indications for labour demand.
The unemployment rate ticked up to 6.1%, the first increase since April 2020.
Many are pointing to a “crowding out” effect of government stimulus. There is a sense that people have money in their pockets and are delaying job hunting until after summer, confident demand will still be there.
On the positive side, the participation rate increased by 0.2% to 61.7%. The average work week also increased to 35 hours.
Average hourly earnings increased by 0.7%, versus an expectation of no growth. This is especially remarkable given the big job increases came in lower-paid parts of the economy such as leisure and hospitality.
Trends in wage growth are important to watch given their importance for the inflationary pulse.
From a Fed perspective this data stumble inserts a gap into the “string” of strong jobs reports that Fed Chair Powell says is needed to constitute substantial progress toward his goals. This is likely to calm market fears around balance sheet tapering for the moment.
Domestically the federal government flagged that the Budget would continue to be expansionary, with no desire to tap the brakes yet. Spending is likely to be highly targeted, including a focus on social outcomes.
This is in line with a shift in thinking evident in other Western governments.
Commodities were strong last week, reflecting the focus on inflation. Iron ore rose another 13.2% to US$211 per tonne. Copper gained 3.1% and Brent crude 1.8%.
In equities this translated to strength in Materials (+3.9%) and Energy (+1.9%) while Information Technology (-9.9%) sold off.
This thematic rotation — coupled with the buy-now-pay-later sector starting to cycle the high base effect of sales last year — saw Afterpay (APT) fall 18.9%.
Fellow WAAAX stocks Appen (APX, -21.5%), Altium (ALU, -15.0%) and Wistech (WTC, -10.2%) rounded out the ASX 100’s worst performers last week. Our preferred name in the space, Xero (XRO), held up better than the sector but was down 5.5%.
The health care growth names were also underperformers. Fisher & Paykel Health Care (FPH, -6.5%) and Ramsay Health Care (RHC, -6.5%) were among the weakest. ResMed (RMD, -5.0%) is likely still feeling the impact of a high base effect given the strength in ventilator sales this time last year.
CSL (CSL, -1.2%) bucked the broader trend in health care. Uncertainty over the impact of lockdowns on plasma collection have weighed on the stock over the past year.
Travel stocks took a hit after fresh lockdown concerns in Sydney. Sydney Airport (SYD) was down 4.4% and Qantas (QAN) lost 3.6%. This was against the backdrop of the Covid situation in India, which suggests international travel is likely to remain complicated for longer than many expected.
QBE Insurance (QBE, +7.8%) was the best performer in the ASX 100. It bucked the trend of recent halves and delivered an AGM update that did not downgrade expectations. Instead, management highlighted the supportive environment for growth in premiums, which are up 13% in the past year. IAG (IAG, +4.7%) and Suncorp (SUN, +4.5%) were also strong.
Westpac (WBC, +4.4%), ANZ (ANZ, -3.4%) and National Australia Bank (NAB, +0.5%) all reported last week. Results were generally in line with expectations and confirmed the more benign environment.
The question now is whether the banks can continue to perform without the tailwind of rising yields in the near term. The outlook for costs is a key question in this regard.
Westpac has far more scope here and management grasped this nettle, flagging $1.5 billion of planned reductions to bring the cost base back in line with peers.
Elsewhere commodity price strength was reflected in the outperformers as investors sought inflation hedges.
Copper miner Oz Minerals (OZL) gained 7.4%, contractor Worley (WOR) was up 7.3% and rare earths play Lynas (LYC) moved ahead 5.5%. The diversified majors BHP (BHP, +5.0%), Rio Tinto (RIO, +4.9%) and South 32 (S32, +4.2%) all gained ground.
On the M&A front Apollo upped its initial bid for Tabcorp (TAH, +2.4%) from $3 billion to $3.5 billion. There are now multiple suitors circling with credible bids.
As of Monday morning Star (SGR, -1.8%) had also entered the ring with a merger proposal for Crown (CWN, -0.8%). There is a logic to the proposal including significant synergies. But in our opinion this bid and the existing one from private equity undervalue CWN’s assets.
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 28 Feb 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.
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