1 July 2024 | Weekly Snapshot

Did you know?

The market has many faces. In the short term, valuations (multiples) are the key driver for share prices as shown by the orange bars below. But in the long term, revenues are what matters the most, as shown by the green bars.

Market Movements

The Australian market finished up 0.5% last week. The energy sector was the strongest, up 2.8%. Woodside was up 4.7%. Insurance Australia group was among the strongest performers helped by an outlook for stronger interest rates for longer. APA group was among the weakest performers for the week down 4.8%. This fall echoed a 2.6% decline across the listed property sector, which was hurt by the strong interest rate outlook.

Australia’s monthly inflation indicator for May was much higher than expected with headline inflation jumping to 4.0% for the year, from 3.6% in April, and well above expectations for 3.8%. Price increases were broad based. Several economists are now expecting the RBA to hike rates by 25 basis points to 4.60% at their next meeting in August. The changing inflation and interest rate expectations can explain the diverging performance between insurers (IAG) and defensives (listed property stocks, Stockland) noted above.

In the USA, the S&P500 finished up 0.2%. Info tech was the strongest sector up 1.8%, whilst utilities were the weakest, down 2.2%. Tesla was among the strongest performers with no news. Investors are, potentially, turning more bullish on the outlook for driverless cars, an industry which Tesla seems to be a leader. FedEx was among the strongest performers, up 18.2% after a strong earnings result for 4Q. Their revenue was modestly stronger vs same time last year. Guidance was also stronger at approx. 4% revenue growth and margin improvement on the back of permanent cost savings of US$2.2bn

May inflation (PCE) was in line at 2.6% annualised for May. Personal consumption expenditures rose 3.4% for the quarter, which taken with the inflation number, shows that spending is running modestly above inflation.

The Australian market is trading on a price-to-earnings ratio of 16.9x (next year’s earnings) which is modestly above average. For prices to keep rising, this will largely depend on the earnings line (Green) rising or interest rates to fall, thereby making equity valuations relatively more appealing.

Portfolio Movements

IAG provides market update – Says FY24 reported profit and margin to be around the upper end of guidance ranges

• Insurer IAG has provided a market update, citing 2 strategic agreements with global reinsurers that should reduce earnings volatility and result in a capital benefit of around $350m.
• IAG CEO Nick Hawkins was pleased to confirm that IAG is on track to achieve FY24 Reported Insurance Profit and Margin around the upper end of guidance set at the beginning of the financial year.

Treasurer Chalmers approves ANZ’s Suncorp Bank acquisition

• Federal Treasurer Chalmers has approval ANZ’s acquisition of Suncorp Bank with ANZ CEO Shayne Elliott saying this is a significant milestone in our plans to expand our presence in Queensland and bring the best of ANZ to Suncorp Bank customers.
• Elliot said “Queensland is thriving. With strong economic growth, high workforce participation and more interstate migration than any other state or territory, we’re excited about the opportunities Queensland presents for ANZ and our customers”.
• The takeover was first announced in late 2022.

Novo to spend $4.1B on new fill and finishing plant

• Novo Nordisk announced plans to invest US$4.1B to build a second fill and finishing manufacturing facility in North Carolina, to further increase production capacity for their injectable treatments for people with obesity.
• The expansion will double the combined square footage of the company’s existing facilities with construction to be completed between 2027 and 2029.
• This is a large-scale long-term investment signalling the companies confidence in the long-term demand for their GLP1 drugs.

The Week Ahead

• Monday: In the USA, we have manufacturing data, which is expected to show a modest contraction (reading of 49), similar to the previous month’s reading.
• Tuesday: We will see minutes from the last RBA meeting. Investors are expecting the tide to turn towards rate rises. In the USA, we see job openings data, which will provide insight into slack in the labour market. This is important given that wage inflation is the big contributor to total inflation. Job opening have been high but the trend is softening. Markets are expecting 7.85m new job openings, which will be down from the last month of 8.06m.
• Wednesday: We have retail sales in Australia. The previous month’s reading was a rise of 0.1%. We also get the USA’s service sector reading (services PMI) which is expected to soften to 52.5 compared the previous month’s strong number of 53.8
• Friday: In the USA we have non-farm payrolls, which will show how many new jobs were added to the economy. Market is expecting 180,000 new jobs, which will be down from 272,000 new jobs in May.