With the higher inflation and rise in global bond yields in early 2022 the volume of global negative yielding debt has plummeted to less than $5 trillion from $14 trillion in late December.
Australian Share Market (ASX200) – down -3.10% ending a 3 week winning streak with the Russia / Ukraine conflict escalating rapidly late in the week. The defensive Consumer Staples (+3.39%) and Utilities (+1.67) led the gains with Energy (+0.72%) also higher on the rising tensions. Consumer Discretionary (-6.09%) led the declines followed by Materials (-4.59%) and Financials (-4.31%) on increased risk aversion. Prior to the geopolitical developments investors were focused on the domestic first half reporting which had been going pretty well. By the end of the week 164 companies of the ASX200 had reported earnings results. Just under 67% of companies that reported increased profits and was well above the 60% long term average. Eighty eight percent of companies reported a statutory profit, the highest in 2 years and is now back in line with the pre pandemic long term average. Aggregate cash holdings increased by 60% and the cash holdings of the 164 companies that had reported stood at a record $246 billion at December 31. Eighty one per cent of companies issued a dividend which is still below the long term average of 85% although those that did pay paid more with aggregate dividends lifting 5.9%. In summary the domestic economy is rebounding from last year’s lockdowns with restrictions easing. The unexpected surge in covid cases over the December and January period rattled companies and led many to be a bit more conservative which is evident in the higher retained cash, cautious outlooks provided, and improving but still below average dividends paid. Company balance sheets are in excellent condition and well positioned to deploy growth capex, make acquisitions or return surplus cash to shareholders.
US Share Market (S&P 500) – up +0.82%, with the Dow down -0.06% and the Nasdaq up +1.08% in a volatile and mixed week for US equities as geopolitics dominated the headlines. US equities were already down sharply earlier in the week with the S&P500 falling well into correction territory down 14% from the January high, and the Nasdaq falling into bear market territory down 22% from the November high. As the conflict broke out further selloffs were met with big intraday reversals that saw the main indices either close flat or higher for the week. REITs (+2.83%) led the gains followed by Healthcare (+2.71%) and Utilities (+2.03%). Consumer Discretionary (-2.16%), Consumer Staples (-0.31%) and Financials (-0.27%) were the only sectors lower. Its hard to know why US equities rallied as the conflict broke out. Some suggest those markets had already become oversold and were due for a bounce anyway. Others put it down to the global response being fairly benign and focused more on sanctions than any direct military involvement or retaliation. But more likely is the impact this unexpected development could have on the Federal Reserve at their upcoming March meeting where instead of aggressively hiking interest rates by 50 basis points as many were predicting, they may take a more cautious approach and see how this situation plays out. Over the weekend the odds of a 50 basis point rise have diminished with the market now predicting a smaller 25 basis point rise instead.
Alibaba (BABA) 3rd quarter revenue rises, profit declines. Alibaba reported 3Q results with quarterly revenue up about 10% to $38.07 bill but below the $38.98 bill that analysts were expecting and the slowest growth in quarterly revenue since it went public in 2014 . The company posted a profit attributable to ordinary shareholders of $3.21 billion, down about 74% from a year earlier as the Chinese e-commerce giant faced sluggish consumption in the world’s second-biggest economy. The drop was mostly due to a $3.95 billion impairment of goodwill the company took in relation to its digital media and entertainment segment. The decrease in value of the company’s equity investments also dragged down quarterly profit. There appeared to be a renewed focus on retaining users on its platforms rather than pursuing user expansion, marking a strategic shift for the Chinese e-commerce giant. “We believe we have substantively captured all consumers with purchasing power in China,” Mr. Zhang said. “Our focus will shift from new user acquisition to user retention.” Although global annual active consumers grew at a solid pace, reaching 1.28 billion on the strength of a quarterly net increase of 43 million and revenue from its cloud segment rose 20% to $3.07 billion was a bright spot.
Woolworths (WOW) reports better than expected first half NPAT. Woolworths reported a better than expected first half profit with NPAT of A$795 mill vs consensus A$743.6 mill. Revenue of A$795 mill was also a beat vs consensus of A$743.6 mill. The fully franked interim dividend of 39 cps was a bit lower than the 41cps expected. Woolworths also provided a trading update with Australian Food (Woolworths Retail) total sales increasing by ~+5% for the first seven weeks of the current half with the strongest sales growth in the first two weeks of January during the omicron case peak on the east coast. Inflation has also continued to trend upwards with shelf prices in H2 to date increasing by +2-3% on the prior year reflecting cost pressures being experienced by suppliers. They provided a positive outlook and expect an improved group financial performance in the 2nd half assuming a continued normalisation in the operating environment during the current Q3 period as the worst of the covid supply chain disruptions seem to have passed.
Qube Holdings (QUB) beats first half estimates, provides strong outlook for full year 2022. Qube reported first half results and was a decent beat. First half underlying NPAT has come in at A$88.3 mill vs consensus A$82.3 mill. Revenue of A$1.22 bill is up 27% year on year and well ahead of consensus A$1.04 bill while underlying EBITDA of A$190.4 mill beat estimates of A$184.2 mill. These were record half year underlying results for the company. The full year 2022 outlook provided for the operating division is for strong underlying earnings growth reflecting solid volumes across most parts of the business, the contribution from past growth capex and acquisitions and a strong ability to mitigate the impact of cost inflation. Highlights included the renewed two key contracts which add certainty to Patrick’s future volume and revenue profile. These extensions add to agreements already in place with Patrick’s two largest customers that run to December 2023. Qube also said they intend to proceed with capital management initiatives of up to A$400 million expected to commence during H2 FY22 with further information expected to be provided in the near term.
The Week Ahead
Domestic data ramps up this week with private sector credit today, manufacturing index and the Reserve Bank meeting tomorrow, Q4 GDP on Wednesday, AIG construction index Thursday and retail sales Friday with several of our ASX companies going ex-dividend during the week.
Internationally, headlines are likely to be dominated by the evolving Russia / Ukraine situation. Canada, China, eurozone, France, Germany, Italy, Japan, UK and US IHS Markit manufacturing PMI data is on Tuesday, President Joe Biden delivers the annual State of the Union address on Wednesday along with EU, flash eurozone inflation data and monthly unemployment figures plus retail sales data. On Thursday Eurozone, France, Italy, Germany, UK, US: IHS/Markit services PMI. There is no major reporting from our international companies this week.
Saward Dawson Wealth Advisors Pty Ltd, a Corporate Authorised Representative of Akambo Pty Ltd t/a Accountants Private Advice
The information presented in this publication is general information only, and is not intended to be financial product advice. It has not been prepared taking into account your investment objectives, financial situation or needs, and should not be used as the basis for making an investment decision. Before making any investment decision you need to consider (with your financial adviser) your particular investment needs, objectives and financial circumstances.
Some numerical figures in this publication have been subject to rounding adjustments. Akambo Pty Ltd (including any of its directors, officers or employees) will not accept liability for any loss or damage as a result of any reliance on this information. The market commentary reflect Akambo Pty Ltd’s views and beliefs at the time of preparation, which are subject to change without notice.