KEY INDICIES consolidated gains last week in the face of surging Delta cases around the world. The S&P/ASX 300 was flat, while the S&P 500 shed 0.4%.
Commodities were generally stronger with the notable exception of iron ore. Materials (+2.8%) were the leading sector on the ASX.
The market is watching the spread of Delta, but so far remaining relatively sanguine. Ironically the rapid growth in Delta cases is creating a scenario where current policy settings may remain in place longer than expected.
US reporting season has been strong and is providing near-term support to markets, as is the flurry in Merger and Acquisition activity in major developed markets.
The outlook for China remains unclear. The government previously looked to moderate growth in specific sectors, but the overall slowing of growth may have reached a bottom. Implications of a change in government policy toward the biggest tech names is yet to be fully understood.
New daily cases continue to plummet in the UK, while rising in France and the US.
US regions with low vaccination rates are reporting the greatest rise in new cases. Critically, the link between vaccination and lower rates of hospitalisation appears to be holding.
The curve just refuses to bend in NSW. Recent mobility data suggests we have only now got back to mobility levels last seen in April 2020.
There are signals that the NSW government has pivoted from a policy of elimination to suppression. The National Cabinet has adopted a new framework which makes lockdowns a first resort — and vaccination targets of 70-80% to move away from the lockdown strategy.
India has experienced a 90% drop in daily confirmed cases over the past two months. A recent serum study indicated 67% of the population had Covid antibodies either from the vaccine or through infection. The number of tests has remained pretty constant at around 1.6 million for the past two months as daily case numbers have fallen.
Israel has started a program of a third vaccination for people over 60. Some troubling data on the duration of the effectiveness of the vaccines continues to emerge, though questions remain about its accuracy given it’s not a controlled test. The current positivity rate in Israel is about 2.4%
The small amount of macro data out last week didn’t raise many headlines.
The core personal consumption expenditure (PCE) deflator — a measure of inflation — was 3.5% year-on-year versus an expectation of 3.7%. The month-on-month reading was 0.4% versus 0.6% expected. This is still well above the Fed’s flexible 2% target, though its rate of change may be starting to slow.
US headline private sector wages are growing at 3.5% year-on-year — the strongest rate for many years. Labour supply issues from the past few months are likely still affecting the data. Better indications of the extent to which the wage data will remain high should be forthcoming in the fourth quarter data (late January 2022).
At roughly the halfway mark of the US and European earnings season, a record number of companies are beating consensus sales and EPS estimates.
In the US, 88 per cent of S&P500 companies that have reported beat EPS estimates. EPS growth for these companies is running at +83% year-on-year — 18% ahead of consensus expectations. Revenue growth in the US is coming in at +23% year-on-year — 5% ahead of consensus expectations.
Find out about
Crispin Murray’s Pendal Focus Australian Share Fund
The average positive surprise and the proportion beating expectations has been pretty broad-based across sectors, though the more cyclically exposed parts are leading the charge.
This strength in earnings is important because it further eases the market’s valuation multiple and provides support even as concerns about the Delta variant mount.
Australian equities have so far held up despite the Sydney lockdown and lack of clarity regarding re-opening.
The expectation of fiscal assistance to counter the economic impact is likely a key part of this.
Last week resources (+2.5%) outperformed on signals of a more pro-growth tack from China and the prospect of huge dividends. We are still expecting to see positive adjustments to consensus expectations, which are lagging on recent commodity price increases.
M&A continues to feature. Santos (STO, -2.1%) and Oil Search (OSH, -4.5%) appear to have agreed to terms for a merger. There was a bump up in the bid for Spark Infrastructure (SKI, +5.9%), which will now allow due diligence to take place. This week we saw a bid by Square for Afterpay (APT, -9.4% last week) valuing it at a 30% premium to recent trading.
Crown (CWN, -14.1%) was the worst performer in the ASX 100 last week. This followed comments from the Victorian Royal Commission that it could take years for Crown to meet the conditions for its licence. The upcoming West Australian Royal Commission extended the reporting time frame to Q2 2022.
A2 Milk (A2M, -13.6%) fell on concerns that Beijing’s efforts to alleviate the cost of raising children — exemplified by turning the huge tuition business into not-for-profit with the stroke of a pen — may flow through to regulated pricing for infant formula.
AGL (AGL, -9.5%) and Origin (ORG, -9.3%) saw earnings downgrades for 2022 in their energy markets business due to higher coal costs.
Some of the growth names had a soft week following recent strength. In addition to APT’s fall, Seek (SEK) was down 4.4%, Fisher & Paykel Healthcare (FPH) fell 3.1% and Ansell (ANN) lost 4.6%.
Solid quarterly production updates helped resources lead the pack. Lynas (LYC, +14.2%) was the best in the ASX 100. Oz Minerals (OZL, +9.3%), IGO (IGO, +5.3%), BHP (BHP, +4.3%) and Alumina (AWC, +3.1%) also fared well.
Rio Tinto (RIO, +5.0%) was disappointing on the production front. Nevertheless, a slightly higher-than-expected dividend and a high payout ratio is emphasising the cash flow story.
BlueScope Steel (BSL, +6.7%) upgraded earnings expectations for 2H FY21 on strength across the board in volumes and spreads.
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 August 4, 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 1300 346 821 or visiting 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.
The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund.