12 August 2024 | Weekly Snapshot

Did you know?

The below chart shows that over half of investors’ equities are managed passively in the USA. Buying yesterday’s winners has been a successful strategy for >10 years and hence the growing popularity of passive investing. Will today’s winners keep winning or will there be a cycle of new winning companies ahead?

Market Movements

The ASX fell 2.2% this week amidst a more dramatic sell-off in Japan on Monday, where stocks were down as much as 15% before rebounding to recover over half the losses. A combination of converging factors caused the sell off including softening economic US data and softer Q3 earnings guidance from some large US tech stocks including Microsoft and Amazon. In Japan, interest rates have finally got above 0%. The result has been a change in investors expectations around earnings and interest rates. The USA is now expecting 4 rate cuts before the year is out for example.

Pilbara Minerals was among the best performers (up 7.7%) despite ongoing declines in lithium prices. Woodside Energy fell over 7% after announcing another acquisition, which wasn’t well received by the market, who may be showing their preference for dividends. A 9% rise in gas prices wasn’t enough to deter any Woodside sellers.

The RBA held rates steady at 4.35% and maintained a hawkish bias with inflation remaining uncomfortably high. It must have been a close call with the RBA upgrading both their growth and CPI forecasts with Governor Bullock noting at the press conference the RBA board gave “very serious consideration” to raising interest rates at yesterday’s meeting. Bullock also ruled out a rate cut before Christmas, warning the economy remains too hot, inflation is too high and that means “near-term interest rate cuts are not on the agenda”. Pricing for the first expected rate cut had moved to November from Feb recently, with the first expected cut likely being pushed back into 2025.

In the USA, stocks were flat for the week, recovering after some significant declines on Monday. Uber and Eli Lilly rose 16% and 11% respectively after strong earnings results.

The July Nonfarm payrolls report showed a 114K jobs gain, a decent miss on the 175K gain expected. The unemployment rate rose to a 3 yr. high of 4.3%, above the 4.1% expected with some expectations rising for a 50-basis point rate cut at the next FOMC meeting in September. Bond yields tumbled as a result.

75% of the companies in the S&P 500 have now reported Q2 results with the annual earnings growth rate at 11.5%, up from 9.8% this time last week and better than the 8.9% expected at the end of the quarter. Lofty estimates for Q3, Q4 and CY25 have been revised somewhat lower.

Portfolio Movements

Ramsay Healthcare earnings update

• Leading private hospital owner Ramsay provided an FY24 earnings update ahead of their FY results later this month with FY24 NPAT from continuing operations, ex-items of $294-299M. This is below consensus estimates $309M
• Total Group capex for the 12-month period was approximately $740m, well below the forecast range of $0.8-1bn as they are spending and investing less.
• They did note some improving activity trends including higher labour productivity.

Woodside to acquire US clean ammonia project – Market seems unimpressed

• Woodside announced are acquiring 100% of OCI Clean Ammonia Holding, and its ammonia project in Texas for around $2.35 billion in cash.
• The Beaumont project is the World’s first ammonia plant paired with auto thermal reforming. It has the capacity to abate 3.2 Mtpa of Co2, which is over 60% of Woodside’s Scope 3 targets.
• Woodside CEO Meg O’Neill said the project exceeds their capital allocation target of 10% IRR, will be earnings per share accretive from 2027. Adding “This transaction positions Woodside in the growing lower carbon ammonia market. The potential applications for lower carbon ammonia are in power generation, marine fuels and as an industrial feedstock, as it displaces higher-emitting fuels.
• Woodside reckons “Global ammonia demand is forecast to double by 2050, with lower carbon ammonia making up nearly two-thirds of total demand” although the market didn’t seem too impressed with the announcement.

Intel report disappoints

• Intel, one of the world’s largest semiconductor chip manufacturers, reported a weaker than expected Q2 result on with Q2 EPS of $0.02, a decent miss on the $0.10 expected. Q2 revenue of $12.83B was largely in line with the $12.92B expected but guidance was also weak with the expected turnaround still a while off yet.
• Q3 guidance for a $0.03 EPS loss was way off the positive EPS of $0.31 expected as the company announced a $10B cost reduction plan and the dividend will also be suspended. CEO Pat Gelsinger said “Our Q2 financial performance was disappointing, even as we hit key product and process technology milestones. Second-half trends are more challenging than we previously expected, and we are leveraging our new operating model to take decisive actions that will improve operating and capital efficiencies.
• The Cost-Reduction Plan includes structural and operating realignment across the company, headcount reductions, and operating expense and capital expenditure reductions of more than $10B in 2025 compared to previous estimates.

The Week Ahead

• Monday: Another 79 companies in the S&P 500 index are reporting this week.
• Wednesday: USA inflation data will be reported, with expectations for 2.9% inflation rate (was 3.0% in June)
• Thursday: Australia’s unemployment rate, expecting no change at 4.1%. USA retail sales numbers expecting 0.3% growth on same time last year. US retail giant Walmart is expected to report 4% sales growth and 5% earnings growth. China retail sales are expected to improve from 2.0% in June to 2.6% July.