From Jonathan Bayes, consultant Chief Investment Officer, Bentleys Wealth Advisors
Market’s enjoyed the absence of fresh negative news-flow on coronavirus infection rates and in a quiet week of economic data and posted strong gains.
Riots across major cities of the United States and an escalation in economic tensions between the U.S and China failed to temper the drive higher with cautious investors dragged into rising markets without really knowing why.
Momentum creates more momentum.
Last week we referred to this as a twilight period for markets and we maintain this outlook.
We believe markets likely peak in the coming fortnight before being faced with stiffer headwinds as June draws to a close and investors are faced with Q2 reporting season in the U.S and Europe from late July, and full-year results in Australia from early August.
It’s quite likely that COVID-19 infection rates across many US regions will also be on the rise fuelled by the end of quarantine measures during May and the threat of reactivated shelter-in-place orders emerges as hospital intensive care unit capacities fill.
The end of US income support packages through the Paycheck Protection Program at end July (Australia’s Jobkeeper end September) is another looming threat to demand.
In the very near-term however, in spite of all of the heavy headwinds, markets are giddy on the enormous liquidity provision afforded by central banks.
As above, we think this can continue for a further 2-3 weeks.
We believe as the economic and cashflow realities of mass unemployment and ongoing restrictions of trade and free movement emerge that much of the recent share-market optimism will fade as reality bites.
Observations for the past week
Capital Raisings continue – Vicinity Centres (VCX) of particular interest
- Though capital raisings have slowed from their rapid April and early May run-rate, corporate equity raisings continue and reflect the need for companies to protect balance sheets ahead of a highly uncertain demand outlook
- The head of Citigroup’s Global Investment Banking franchise was quoted over the weekend as saying that the bank is urging corporate customers to raise capital now while market resilience is with us and given the highly uncertain economic outlook ahead
- Last week saw Blackmores (BKL) raise $117m at $72.50 and already this morning we have seen the announcement of capital raisings from each of software provider Iress (IRE) for $150m at $10.42 and retail property giant Vicinity Centres (VCX), the owner of major complexes Chadstone in Victoria and Chatswood Chase in Sydney
- VCX is a very interesting statement as the group are raising a substantial $1.4bn at $1.48 (last traded price was $1.61) which equates to just over 20% of the current market cap of the company
- VCX commented that a) foot-traffic in its properties had rebounded to 74% of the previous year, up from 50% in April and that b) 80% of stores across its portfolio are now back up and trading, while c) the latest valuation on its portfolio was likely down -11% to -13% on last
- VCX is an interesting case as it reflects the uptick in social activity we have seen in recent weeks well, but equally highlights that we remain a long way off pre-COVID 19 levels and that to operate in a period of weak demand, it requires a balance sheet with far less leverage
- This is precisely the point we continue to argue for in our assessment for equity markets and highlight the ongoing dilution in returns for equity holders as balance sheet leverage is reduced in a backdrop of falling cash-flows. A double-negative for shareholder returns.
Sino-American tensions rise but unlikely to upset markets yet
- In what is likely to become a regular theme as 2020 progresses, last week saw a significant escalation in tensions between the US and China albeit we do not expect this to be a major hindrance to equity markets in and of itself near term
- Last week saw the actively question the ‘special status’ afforded to Hong Kong (tariff-free trade the major benefit) after China unilaterally sought to impose legislation allowing it to prosecute acts deemed treasonous or against the national interest and seen widely as a major step in drawing Hong Kong back under mainland control and rule of law
- Beyond the HK-legislation and the S response to it, the United States’ decision to withdraw from the WHO and to pass initial legislation requiring all foreign-entities listed in the United States to comply with U.S accounting standards were further deemed to be firmly targeted at China,
- Though the near-term impacts of the escalating tensions are unlikely to bring about heavy investor concern near term, these moves do consolidate the nationalistic theme emerging in global politics and this is a major long-term negative for corporate profit margins as corporate supply chains will focus more intently on security of supply than cost efficiencies
|Monday||AU AIG Manufacturing (MAY), AU CBA Manufacturing (MAY), CH Caixin China
Manufacturing (MAY), US Markit Manufacturing (MAY), US ISM anufacturing (MAY)
|Tuesday||AU Weekly ANZ Consumer Confidence, RBA Meeting|
|Wednesday||AU AIG Construction (MAY), CBA Services (MAY), AU GDP (Q1), AU Building Approvals (APR), CH Caixin China Services (MAY), US ADP Employment (MAY), US Markit Services (MAY), US ISM Non-Manufacturing (MAY)|
|Thursday||AU Trade Balance (APR), AU Retail Sales (APR), US Challenger Job Cuts (MAY), US
Weekly Jobless Claims, US Weekly Bloomberg Consumer Confidence
|Friday||AU AIG Services (MAY), US Employment Report (MAY)|
A busy week of economic data for the month of May to be reported, albeit markets seem entirely comfortable with the ongoing economic destruction created by shelter-in-place orders and the like.
Markets remain in the twilight zone during early June, free from new negatives on infection rates or economic data, however as the month progresses risks are likely to emerge from a likely escalation in infection rates in certain U.S states with still uncontrolled spread and as U.S corporate results for the June quarter loom.
We would expect market strength to peak in the first fortnight of June with pressures emerging as the month draws to an end.
Friday 5pm values
|S&P / ASX 200||5755||+258||+4.7%|
|Property Trust Index||1243||+69||+5.9%|
Friday closing values
|U.S. S&P 500||3044||+189||+6.7%|
|Mon 1 June||Div Ex-Date – MQGPD|
|Tue 2 June||N/A|
|Wed 3 June||N/A|
|Thu 4 June||Div Ex-Date – CBAPD, CBAPE, CBAPF, CBAPG, CBAPH, CBAPI|
|Fri 5 June||Div Ex-Date – NABPF|
Monday 01 June 2020, 5pm
For more information on the above please contact Bentleys Wealth Advisors directly or on +61 2 9220 0700.
This information is general in nature and is provided by Bentleys Wealth Advisors. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decision based on this information.