Weekly Market Update
It was a largely flat week for equities, whilst bonds rallied slightly. The S&P/ASX 200 outperformed with a 1.2% gain, whilst the U.S. was marginally higher and Europe was lower on renewed lockdown measures. Australian bonds rose on the longer end as the Reserve Bank of Australia (RBA) indicated further easing measures may be on the horizon.
It is earnings season again in the U.S., whilst Australia is going through AGM season. The largest U.S. banks all reported last week, with provisions for bad debts slowing significantly and coming in well under estimates, indicating that the worst may be over for defaults and deferrals. However, many of them highlighted the need for further fiscal stimulus or further provisions would be required.
Domestic updates were positive as well, with Commonwealth Bank (CBA) noting an acceleration in the recovery of deferred loan payments, sending banks higher.
Pendal Group (PDL) posted funds under management (FUM) that grew 3.4% for the September quarter with net inflows driven by the J O Hambro business whilst the Australian segment was flat as legacy Westpac outflows offset by inflows elsewhere. Overall, it was a positive report and PDL surged, helped by global merger and acquisitions (M&A) activity for asset managers globally.
Challenger Group (CGF) provided an update on the same day, with FUM up 4% for the quarter and management reaffirming guidance. FUM growth was highlighted by another quarter of notably strong annuity sales in Japan and strong inflows for their funds management business, Fidante. The balance sheet was also strong, with prescribed capital amount at 1.7x relative to CGF’s 1.3-1.6x target range. Like PDL, CGF saw a strong rally post the update.
James Hardie (JHX) jumped as it posted a big upgrade to guidance as it sees strength across the board in its Americas, Asia Pacific and European segments. JHX now expects net operating profit after tax in the USD380-420 million range.
Telstra (TLS) also rose as it reiterated guidance and management reassured investors that they were aware of the importance of its dividend, indicating that they were prepared to temporarily the capital management framework to maintain the dividend.
In healthcare, CSL upgraded the lower end of guidance from 0-8% growth to 3-8% growth, whilst Sonic Healthcare (SHL) rose sharply as it posted a strong trading update, boosted by global COVID-19 testing volumes. Revenues were up 29% year on year, with earnings up 71%. Non-COVID testing was still down on pre-pandemic levels in the U.S. and U.K. by 5-10% and 10-15% respectively but it was a very strong result overall. SHL has been a major beneficiary but management noted that it expects continued volatility in volumes and earnings which will be heavily reliant on the pandemic situation in different geographies, and opted not to provide any guidance.
RBA looks to do more
Over the past few weeks, speculation has been building that the RBA would have to cut further to 0.1%. Last week, the RBA went a step further, with RBA Governor Phillip Lowe reaffirming that the RBA is looking to do more to help the economy and stating that the RBA will look into the benefits of buying longer term bonds, an indication that there may be an expansion to the current quantitative easing program. The current program involves buying bonds up to 3 years in maturity in order to flatten the yield curve at the shorter end. An expansion would mean bringing down longer term borrowing rates, in line with what other central banks are doing, resulting in an even flatter yield curve.
As a result, a cut to 0.1% for all three of overnight interest rates, term funding facility and 3 year government bond yield targets are all on the cards for November, though the RBA may not announce the switch to longer maturity government bond purchases that quickly.
These drove yields long end yields down significantly last week, with the Australian 10-year bond yields falling from 0.84% to 0.74%.
With the big Budget announced the previous week and the RBA showing its intention to fully commit to supporting the economy, we remain confident that Australia continues to be one of the better placed economies coming out the other side of the pandemic.
Looking forward, with the U.S. election just a stone’s throw away, there will likely be little room for other headlines, but there’s lots going on with U.S. fiscal stimulus still up in the air, Europe potentially issuing further lockdown measures, earnings and trading updates at the stock specific level. Best to be prepared for some volatility in the weeks ahead.
Looking ahead
| Monday | CN GDP, CN Industrial Production, CN Retail Sales |
| Tuesday | CN PBoC Loan Prime Rate, US Building Permits, US Housing Starts |
| Wednesday | |
| Thursday | |
| Friday | AU, EU, US Flash Manufacturing and Services PMIs |
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Tuesday 20 October 2020, 5pm
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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.
