Weekly Insights

16-20 August 2021

What we think…

Locally, reporting season shifts into fifth gear and enters its second last week of reporting season. According to FN Arena, 128 companies have reported with 39.1% (50) beats, 41.4% (53) in line and 19.5% (25) misses. Overall, 80.5% of companies were able to post a profit result that was either in line or beat expectations. A great result. Surprisingly though, the market seems to be losing steam and has been selling down over the last week. A range of different headwinds are brewing, driving down investor sentiment and causing the share market to record its fifth straight. Here are a few of the factors that have caused the fall:

• Minutes from the US Federal Reserve’s July meeting showed their willingness to wind back its stimulus measures as soon as possible. This has caused some analysts to be concerned that interest rates hikes will soon follow.
• Uncertainty was quite high about the outlook with the Covid-19 delta variant posing one challenge and inflation another.
• Worries that tighter lockdown restrictions in Melbourne and Sydney will have a heavy impact on the national economy.
• China is moving to gut the iron ore market by cutting steel exports to Australia by more than 50 per cent. The iron ore price sits at US$160 a tonne down from US$230 a tonne at the start of the year.

Despite the minutes from the Federal Reserve, some economists are saying the COVID-19 Delta variant could sway the Fed to take a more cautious approach to the speed of its tapering plan and push back the timeline for reducing asset purchases. While Washington is wrapped up by the chaotic scenes in Afghanistan, public officials will probably focus on ramping up vaccinations rather than introducing lockdown restrictions to tackle the Delta variant. The upcoming week will offer more clues as to the severity of the virus.

Highlights for August

• The ASX200 (ASX:XJO) fell another four points last Friday, capping a full week of lower closes and a loss of 2.2 per cent for the five days.
• Cochlear (ASX:COH) – Shares in the hearing aid manufacturer fell despite recording record sales of $1.49 billion and a 54 per cent increase in profit. Management also increased the dividend over 50 per cent.
• Redbubble (ASX:RBL) went some way to recovering its losses up 32 per cent over the last five days.
• Radiology tech company Pro Medicus up 17.5 per cent, and Kogan (ASX:KGN) benefitting from another extension to lockdowns.
• BHP Group (ASX:BHP) delisting with the share price falling all but closing the premium to their London listed shares. This is likely a surprise to management who would have expected the opposite.
• Origin Energy (ASX:ORG) delivered a previously flagged $2.3 billion loss behind an 8 per cent contraction in revenue which sent shares down 4.1 per cent. That said improving energy prices are beginning to feed through which supported a solid if not surprising dividend of 7.5 cents per share.
• Redbubble led the market on Friday, adding 18 per cent, however, it remains down over 50 per cent from its 2020 high. The group reported a 58 per cent increase in marketplace revenue to $533 million and a tenfold increasing in earnings to $53 million. Profit was just $31 million as margins remain challenged and last years fast mask dominated sales growth becomes hard to follow.
• Woodside Petroleum (ASX:WPL) – Under the deal BHP’s oil and gas assets, valued at US$14 billion will be transferred into a new entity, 48 per cent owned by BHP shareholders, with all debt remaining in BHP. The combined entity will move Woodside from being an also ran to a top ten energy producer but most importantly it allows BHP to improve its environmental credentials and double down on the future, which they see in potash.
• COVID-19 cases surge in Australia, lockdowns expand to four states and Victoria was plunged into another curfew.
• A2 Milk (ASX:A2M) was a surprise winner, its shares rising amid rumours that global giant Nestle may be considering acquiring the group.
• Sydney Airport (ASX:SYD) rejected the unsolicited bid by a group of industry super funds.
• Bendigo Bank (ASX:BEN) was a major detractor, the second tier bank’s shares falling despite reporting a 50 per cent increase in profit to $457 million. Investors were clearly concerned about a 3 per cent increase in costs rather than their banking business which is lending at a rate of close to three times that of the broader market. Management declared a 26.5 cent dividend, down on 2020’s 31 cents per share.

Ishan Dan

Ishan is an experienced journalist covering The Inside Investor and The Insider Adviser publications.