Australian equities performed well last week, with the S&P/ASX 200 bouncing 1.4% led by the big banks which were boosted by better-than-expected earnings announcements and trading updates. The financial sector was the best performing (+4%) followed by materials (+3.3%) which benefited from a bounce in iron ore prices back to USD$150. Health Care (-3.1%) and Consumer Staples (-2.3%) were the laggards for the week.
The US S&P500 Index underperformed those still rose 0.5% on the back of solid quarterly earnings announcements. However, the Nasdaq composite index fell another 2.2% taking its year-to-date fall to -12.5%. Richly valued technology shares were hit hard following US inflation figures and the associated rising bond yields. The 10-year US bond yield rose 3 basis points to 1.96, although they reached an intraday high of 2.06%. The Australian 10-year yield rose 12 basis points to 2.1%.
In economic news, US Consumer Price Inflation (CPI) figures were higher than expected. Headline inflation rose 0.6% month-over-month (MoM) to 7.5% year-over-year (YoY), exceeding consensus expectations of 7.3%. Core inflation, which strips out the volatile food and energy sectors, also rose 0.6% MoM to 5.9% YoY. The pace of monthly increases has not eased, and as we can see in the core inflation reading, inflation is broad based and impacting most sectors of the economy. The reading led investors to predict the US Federal Reserve will be forced to raise interest rates faster than previously expected, with some market commentators now calling for up to seven 0.25% rises in 2022. The Fed is likely to be more aggressive and we may see a 0.5% rise in March to tackle 40-year high inflation. The impacts from rising prices are most acutely felt by the poorest members of society, as they do not have the safety net to fall back on, so it is imperative that the Fed acts decisively sooner rather than later.
In Australia, ANZ Job Ads figures were marginally lower and retail sales also fell in January. Westpac Consumer Sentiment was lower but remains marginally positive for now. NAB Business confidence rose but business conditions fell with retail, transport, and construction worst hit. With all these economic indicators impacted by Omicron in January, we expect a bounce back in February. In China, new loans and total social financing surprised to the upside as monetary easing is now flowing through the borrowings.
Earnings season so far
It has been a mixed start to earnings season. Commonwealth Bank (CBA), James Hardie (JHX), Suncorp (SUN), Downer EDI (DOW), and IDP Education (IEL), amongst the companies reporting. National Australian Bank (NAB), ANZ (ANZ), and Macquarie Group (MQG) provided a trading update.
CBA reported strong results and rallied on the back of them. Interim profit reached $4.7billion on higher levels of lending and lower levels of bad debt. Volume growth across deposits and mortgages grew well above system growth, meaning they grew at a faster rate than their competitors. However, like the other Big 4 banks their net interest margins were pressured, falling 17bps over the half on the back of a higher proportion of fixed rate home loans and continued home loan competition. While CBA is undoubtedly a strong franchise, we believe the other banks presently offer better value.
JHX reported strong Q3 2022 results and guidance. Q3 sales rose 22% year-over-year led by strong price/mix growth which demonstrates that the strategic decision to focus on higher value innovative products is paying dividends. They once again upgraded full-year profit guidance and took the unusual step to provide very strong early FY23 profit guidance, demonstrating management confidence in the momentum of the business. We believe these upgrades show that JHX maintains earnings and upgrade momentum in a strong US housing market, and that they benefit from pricing power which allows for the passing through of rising input cost inflation to the end consumer, protecting margins.
SUN results beat market expectations with strong gross written premium growth positively impacted from passing through 7.5% premium increase in response to repeated natural disasters. Management commentary continues to be positive on progress of strategic initiatives with digital sales and claim lodgement proportions growing which supports our investment thesis. We were also pleased that full-year disaster budget was trimmed to $1.075 billion.
DOW guided for full-year earnings growth, but COVID impacts continue to affect the business and no specific guidance was provided. We still think there is potential for a re-rating higher as it has shifted to more predictable cash flow and lower capital-intensive business lines after the exit from the mining and laundries business.
IEL reported a strong jump in revenue led by IELTS English testing volumes returning to pre-COVID levels and overall student placement revenue jumping 36%, with northern hemisphere university placements revenue jumping 73%. This was even with Australian placements revenue fell 18% due to strict border closures deterring overseas students. We expect these volumes to rebound with the Australian government decision to open international borders in early 2022. And pleasingly, management stated that early signs indicate that interest levels have rebounded quickly as borders have relaxed.
ANZ provided a Q1 update, which demonstrated the banks profitability remains challenged, with net interest margins falling 8bps to 1.57%. Mortgages grew below system growth but in a positive trend approval time for mortgages sped up. Their balance sheet remains strongly positioned and we believe that the business is starting to show some positive turnaround indicators. NAB’s Q1 update exceeded consensus estimates. NAB grew market share in business lending and home loans, while experiencing less net interest margin (-5bps) pressure than the other Big 4 banks. Their balance sheet remains strong which should provide room for further buybacks soon. We continue to be impressed by the momentum NAB is displaying and are comfortable holding this name in the portfolio. MQG provided a December 2021 quarter update and stated that improved overall market conditions led to the Group achieving a record quarter.
Elsewhere, we saw a disappointing January update from Magellan Financial Group (MFG) with continued net outflows and Mineral Resources (MIN) reported a weak 1H22 result on rising production costs and wider than expected discounting on lower iron ore grades. While Computershare (CPU) shares jumped on a beat.
Looking to the week ahead, Australian earnings season continues with notable reporters this week including BHP, CSL, Fortescue (FMG), Goodman Group (GMG), Wesfarmers (WES), Telstra (TLS) and Woodside (WPL). On the macro front, investors will look ahead to the release of RBA board minutes and Australian January employment data. Investors will also closely monitor the escalating threat of military action between Russia and Ukraine, with the US warning last week that an invasion of Ukraine may be imminent.
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Tuesday 15 February 2022, 11.30am
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