11 September 2023 | Weekly Snapshot

Did you know?

The oil price is up 25% over the past 3 months with the US days of supply (including the Strategic Petroleum Reserve) at a new 40 year low of 46 days.

Market Movements

Australian Share Market (ASX 200) – down 1.67% giving back much of the week prior’s large gain. Energy (+0.60%) was the only sector higher with Materials (-2.98%), Consumer Discretionary (-2.29%) and Info Tech (-2.29%) leading the declines. The week started positively with another raft of measures from China as they continued taking steps to support the ailing property sector, wider economy, and poor sentiment. The recent easing of mortgage rules spurred sales in top-tier cities and a new special bureau was established to promote development and growth of the private economy. And Chinese property developer Country Garden that was in the news the week prior won creditor approval to extend a maturing bond alleviating some of the rising default risks. The RBA left cash rate unchanged at 4.10% as expected with no noteworthy changes to the policy statement. Some economists still expect a final rate hike by year-end given upside risks to wages and inflation. But the RBA has said they now think inflation will fall back to target over the forecast horizon without any additional rate hikes. The Aussie dollar fell to a new 11 month low below 64 US cents last week. The USD was stronger against the crosses but the RBA on hold at a relatively low level (relative to the headline and core inflation rate) likely also weighed. Our Q2 GDP grew 0.4% for the quarter last week, in-line with consensus and accelerating from Q1’s 0.2%. The economy expanded 2.1% for the year, down from Q1’s 2.4% (that was revised higher) but beating the 1.8% expected. Exports and investment were the main contributors, offsetting a drag from inventories. Household consumption growth slowed further as the savings ratio declined. Cost of living pressures saw a decline in discretionary spending offset by an increase in essential spending. The tight labour market drove the largest increase in employee compensation since 1990 with declining productivity driving a big increase in unit labour costs. Takeaways for monetary policy were mixed although the ASX 200 fell on the better-than-expected data in what looked like another recent example of equities taking good news as bad news.

U.S. Share Market (S&P 500) – down 1.29% with the Dow (-0.75%) and Nasdaq (-1.93%) also lower and snapping a 2-week winning streak. US markets reopened after their long weekend with equities lower and yields higher although the volatility index (VIX) has dropped back to the 3-year lows. US recession odds continue to be wound back with Goldman Sachs slashing their probability of a US recession and FactSet’s latest Earnings Insights report noted “recession” mentions on the recent company earnings conference calls fell to 62 in Q2 from 113 in Q1 and the fourth straight quarter of decline. Recession mentions were down nearly 75% from the Q2 2022 peak. The Tech sector led the declines last week as stronger data kept pressure on bond prices (yields elevated) with the US 10yr yield now not far off the 13 year high of 4.33% hit last month. Services makes up around ¾ of the US economy with the August ISM Services index rising 1.8 points to 54.5, well ahead of the 52.4 expected and expanding for the eighth consecutive month. It was a strong report with New Orders up to 57.5, Business Activity up to 57.3, the Employment Index grew for the third month, and Prices Paid up to a strong 58.9 in further signs of waning disinflationary trends. Apple, the world’s largest company, was weaker after China ordered officials at government agencies not to use Apple’s iPhones and other foreign branded devices for work or bring them into the office. Weekly initial jobless claims fell for the 4th week in a row to 216K, well below the 232K expected and the lowest reading since February with plenty of strength still apparently left in the labour market. The good economic news has become bad news for equities recently with the economic data still chugging along with much less impact from the massive 525 basis point increase in the Fed Funds Rate than might have been thought initially. The data is keeping bond yields elevated, weighing on equity valuations, and have also seen a slowing in the disinflationary trends evident in the earlier and middle part of the year.

Portfolio Movements

Schlumberger (SLB) upgrades revenue guidance. Schlumberger, the world’s largest offshore drilling company and the world’s largest offshore drilling contractor by revenue, at the Barclays CEO Energy-Power Conference in New York last week said they are on track to add ~$5B in revenue and $1.5B in EBITDA compared to 2022. With potential to add similar revenue and EBITDA growth in 2024 thanks to a recent resurgence in offshore and international drilling. Previous guidance was for revenue growth of $4.2 billion. Deepwater production remains the fastest-growing upstream oil and gas segment with production set to increase by 60% by 2030. Ultra-deepwater production is set to continue growing at breakneck speed to account for half of all deepwater production by 2030 according to recent report from consultants Wood Mackenzie.

Sony (SONY) Indian TV mega merger given green light. The proposed merger between Zee Entertainment Enterprises and Sony’s Indian TV operations was given the go-ahead last month nearly two years after the deal was first announced. The merged entity’s estimated value is around US$10 billion. The deal will combine the two companies’ Indian TV networks, digital assets, production operations and program libraries. The merged company would retain Zee’s stock market listing in India with Sony providing a large cash injection and control a majority share stake of 51%. In an interview last week Sony CEO Kenichiro Yoshida said that if you look at a country’s advancement, the entertainment field expands in the latter half of the development phase and that is happening now in India, and while there is various competition there, instead of solely pursuing subscriber numbers, Sony wants to do content creation as well, and if necessary, will consider offering its content to other platforms, while Sony also ultimately wants to expand PlayStation console sales in India.

Verizon (VZ) increases dividend for 17th consecutive year. Verizon, one of the world’s leading providers of technology and communications services, increased their quarterly dividend on Friday to 66.50 cents per share, from 65.25 cents last quarter and is the 17th consecutive year Verizon’s Board has approved a quarterly dividend increase, with the stock trading on around a 7% dividend yield. “Our consistently disciplined approach to driving strong cash flow, operating the business, and serving our customers has once again put the Board in a position to raise the dividend,” said Chairman and CEO Hans Vestberg. “We continue to deliver value to our shareholders as we execute our network-as-a-service strategy.”

The Week Ahead

Domestic economic data highlights this week include NAB Business Conditions and Confidence and
Westpac Consumer Confidence Indexes tomorrow. Consumer Inflation Expectations is Thursday along with the August Employment data which is the highlight of the week with a 2.8K jobs gain and the unemployment rate to hold at 3.7% expected.

International highlights include China Loan Growth today, with UK Unemployment Rate, German ZEW Economic Sentiment, and US Small Business Index tomorrow night. China foreign Direct Investment is Wednesday with UK Constructions Output and Industrial Production, Eurozone Industrial Production, and US Consumer Price Inflation Wednesday night. The US CPI is the highlight this week with annual headline inflation rate is now expected to increase to 3.6% in August from 3.2% in July. The European Central Bank meets Thursday night to set interest rates along with US PPI, Retail Sales, and Business Inventories. China Industrial Output is Friday with US Empire State Index, Capacity Utilization, Industrial Production and University of Michigan Consumer Sentiment on Friday night.

There is no corporate reporting for our portfolio companies this week although a number are going ex-dividend following the reporting season.