Happy new year to all. Hopefully the year will play out as optimistically as markets have suggested over the past week.
Since the last update was published in mid-December, markets have rallied strongly as hopes of a stronger recovery on fiscal stimulus and vaccines, coupled with easy money from central banks and free money from the U.S. government drive risk assets to all-time highs.
There are some signs of bubbles forming in some speculative segments of the market. Though there are signs of frothiness and exuberance, we do not believe that there is a bubble in everything as suggested by some and continue to see merits in remaining invested in a well-diversified portfolio without trying to chase the rally too much, and equally, without going too conservative on valuations given the unprecedented support provided by governments globally.
A recap of events
It has been an eventful few weeks since the last update.
On the political front, we saw the U.S. approve a stimulus bill of $900 billion, and the Blue Wave coming to fruition as Democrats won both Georgia run-off elections, giving them control of the Presidency, Senate and House. As a result, markets are humming on the prospect of trillions of dollars in additional stimulus, whilst the 50:50 split between Democrats and Republicans in the Senate means the main concerns for stocks of broad and heavy corporate tax hikes are unlikely given that some Democrats remain opposed. A Brexit deal was also finally clinched in the final weeks of the year, reducing a key geopolitical risk for Europe.
On the macroeconomic front, data out from Europe and the U.S. have not been great as the pandemic remains out of control, with further restrictions hurting the services industry. Manufacturing remains resilient this time around though, cushioning against another steep drop in economic growth. The domestic situation remains more sanguine despite the recent flare ups in cases, with authorities acting quickly to contain the spread. Consumer and business confidence is strong, with the robust employment figures and job advertisement numbers supporting the outlook for economic recovery.
On the markets side, equities have proven resilient to the recent spike in yields, with the U.S. 10-year yield breaching 1.1%. Global banks have also earned a reprieve, with governing bodies easing a variety of restrictions over dividends and buybacks. Meanwhile, industrial commodities have soared, with iron ore supported by strong demand from China coupled with seasonally lower Chinese domestic production. Copper and oil are rallying on optimism for the global recovery, with oil further supported by additional cuts from Saudi Arabia.
There were also several updates from domestic companies over the past few weeks that warrant attention.
Starting with the positive news, Bapcor (BAP) posted a strong trading update, upgrading guidance to 25% growth in revenue and 50% for profit for the first half of the financial year.
Nufarm (NUF) also had a good start to the year, with revenues up 47% over the same period last year, though admittedly, last year’s figures were very weak. Management continued to highlight the focus on improving supply chain operations to expand margins.
BHP also announced that the Samarco mine has met licensing requirements to restart operations, as it expects to produce 8,000 tonnes of iron ore yearly. The Brazilian mine is jointly owned with Vale.
Challenger (CGF) also reiterated guidance for 2021 and announced the acquisition of MyLifeMyFinance, a domestic customer savings and loans bank for $35 million. Though a small acquisition, CGF will receive an ADI licence which could provide broader benefits such as access to a wider range of customers and distribution channels.
Downer (DOW) has also continued to make progress in selling off parts of their mining business with the sale of the Western Australian open cut mining business to MACA for $205 million as they continue to re-focus on the less capital-intensive segments of the business and strengthening the balance sheet.
On the negative side, A2 Milk (A2M) posted another downgrade, citing a weaker than expected recovery in the daigou channel which caused the earlier downgrade just several months ago, along with a downgrade to the cross-border e-commerce channel, which they had just reiterated strong growth trends at their AGM in November. Though the daigou issues were widely expected by the market, the poor performance in the cross-border e-commerce channel raises new concerns, especially around competition or a weakening in branding perception.
Altium (ALU) announced a sale of its TASKING business for U.S. $100 million in order to focus on Altium 365, their core cloud platform for printed circuit board design. It also announced a downgrade on first half expectations citing ongoing lockdowns in the U.S. as having a marked impact on the usual revenue split over the first and second halves of the year, but ‘remains confident of achieving full year guidance adjusted for the sale of TASKING’.
Moving forward, the U.S. quarterly earnings season kicks off this week, with Australian earnings season starting later in the month. Central bank support and bond yields will also be key, a slow and orderly rise in yields would be supportive for equities, but a sharp run-up and 10-year U.S. bond yields over 1.5% could lead to a significant correction in equities.
On the political front, markets will be focussed on the U.S. and the Democratic policy agenda, with big fiscal stimulus expected, along with tax hikes targeting high earners and potentially a minimum tax rate for companies. A full roll-back of Trump’s tax cuts would be highly negative for U.S. equities. How Biden handles international affairs, particularly the tensions with China, will also be key to sentiment.
Perhaps most importantly, the progress of vaccination and reopening remains key, with question marks still surrounding the duration of immunity from various vaccines and the efficacy of those vaccines to the new virus strains.
|Monday||AU Retail Sales (Nov), CN Inflation|
|Tuesday||AU Westpac Consumer Sentiment|
|Wednesday||US JOLTs (Nov), EU Industrial Production|
|Thursday||US Inflation, CN Trade Balance|
|Friday||US Retail Sales (Dec), US Industrial Production (Dec), US Inventories (Nov)|
Monday 11 January 2021, 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.