24 February 2025 | Weekly Snapshot

Did you know?

Equity investors continue to favor passive investment vehicles over active. Could this explain some of the higher valuations we see in the ASX large caps, including CBA?

Market Movements

The ASX market was down 2.9% last week, driven by a selloff in the banks (financials down 7.5%). Consumer staples were higher by 2.4%. REA was down 12.8% on the back of news that competitor Domain Holdings, received a takeover offer from US listed CoStar. CoStar operates a similar business to REA in the USA and has a market value of US$32bn, which is not too far away from REA’s size.

The RBA cut the cash rate by 25 basis points to 4.10% as was widely expected in what was a cautious cut. They assessed current policy as restrictive and will remain so with (tight) labour market conditions. They were cautious about the outlook for further cuts. Markets clearly aren’t buying into this narrative, currently pricing in 2 more rate cuts for this year.

US equities were lower by 1.7% last week, led by consumer discretionary stocks (down 3.6%). Consumer staples was also higher (up 1.2%). Palantir was one of the largest decliners (down 15%) on the back of ‘DOGE’ reports for military spending cuts, from which Palantir is a recipient. Walmart, the world’s largest retailer, provided some soft earnings guidance. Shares fell 8.9% for the week.

In US economic news, January housing starts fell 9.8% for the month, a bit below the 7% decline expected. The FOMC minutes showed that the central bank still sees inflation as on track toward the 2% target, but many noted that rates could be held at a restrictive level if the economy remained strong, and inflation remained elevated. Similar messaging to what we got from RBA.

CBA has been one of the market leaders over the past few years but has not necessarily been a popular stock among institutional investors, who struggle to reconcile its high valuation (refer blue line in chart below). Looking back over the past 10 years, CBA has historically traded on a valuation level (Price divided by earnings or PE) of approx. 15x. Something happened in 2024 however, and the PE went from 18x to 24x. This could be due to many reasons, including superior earnings results (relative to ANZ etc), high levels of passive investors and a faithful long standing investor base who are reluctant to realise capital gains taxes on their shares.

Portfolio Movements

Big4 Bank earnings on the soft side and lead the market lower.

• CBA’s first half result was pretty good and showed an increase in profits of 2% on the same time last year. They also increased their dividend by 5%. NAB reported a 2% fall in profits, whilst WBC reported a 9% decline in profits.
• A consistent message across the banks was ‘competitive pressures’ on the lending book and ultimately margins. An inconsistent message was around capital hedges, whereby CBA realised a profit, whilst WBC realised a loss of $0.2bn
• NAB’s credit quality was worse than expected with a $200m step-up in non-performing loans.
• Shares prices were lower across the board led by NAB, who was down almost 10%.

Telstra beats first half estimates – Announced $750 million buyback

• Telstra reported a pleasing first half result with revenue up 1.5% to $11.60 billion with EBITA of $4.25 billion ahead of the $4.16 billion estimate.
• Income from mobile services led the better-than-expected result rising 4.5% year on year to $5.57 billion and now up to 43% of product income, from 41% a year earlier.
• The interim dividend of 9.5 cents was ahead of the 9 cents expected the company announced a share buy back worth up to $750 million.
• Full-year guidance for annual underlying Ebitda of between $8.5 billion and $8.7 billion.

Charter Hall beats first half estimates

• Leading office and industrial REIT Charter Hall reported another solid first half yesterday with Operating EPS of $0.415 a decent beat on the $0.39 expected.
• The also company upgraded its fiscal 2025 post-tax earnings guidance to $0.81 per security from $0.79 per security in the previous outlook, representing 6.9% year-on-year growth and ahead of the $0.791 consensus estimate.

The Week Ahead

• Tuesday: United States Chicago Fed National Activity Index (Jan): Expected -0.05, previous 0.15. Dallas Fed Manufacturing Activity (Feb): Expected 6.4, previous 14.1.
• Wednesday: United States Conference Board Consumer Confidence (Feb): Expected 102.7, previous 104.1.
• Thursday: United States New Home Sales Expected 675k, previous 698k. Australia CPI YoY (Jan): Expected 2.6%, previous 2.5%.
• Friday: United States GDP Annualized QoQ (4Q S): Expected 2.3%, previous 2.3%. Personal Consumption (4Q S): Expected 4.1%, previous 4.2%. Core PCE Price Index QoQ (4Q S): Expected 2.5%, previous 2.5%. Durable Goods Orders (Jan P): Expected 2.0%, previous -2.2%. Initial Jobless Claims: Expected 1872K, previous 1869K.
• Saturday: China Manufacturing PMI (Feb): Expected 50.3, previous 50.2.