All things market related – February 2020

 

 

It’s been a stellar start to the 2020 financial year with the Australian share market closing the month of January up 4.98%. For the first time in its history, the ASX pushed past the milestone of 7,000 index points on the back of an initial US-China trade deal. Towards the end of the month, good gains were given back as volatility picked up on rising concerns over the spread of coronavirus. Trump administration imposed a temporary travel ban upon non-US citizens travelling to the US from China. Investor concerns over disrupted supply chains and weakened demand led to fears that growth could slow.

 

  • US markets closed flat with the Dow Jones Industrial Index closing +0.73% and the S&P 500 Index closing +2.69%. A strong start to the year was cut short after fear and panic gripped markets following the spread of the Corona virus. But there are reasons to be cheerful after US President Trump eased trade tensions by signing an initial deal with China. The new deal will open Chinese markets to more American companies and will bring together the world’s largest two markets once again. China will commit to buying an additional $200 billion of American goods and services by 2021.
  • In UK PM Boris Johnson claimed a triumphant election victory in the UK paving the way for Brexit and greater market confidence. The UK officially exited the EU on 31 January 2020 but there is still a long way ahead. Both the UK and EU will need to negotiate a fresh Free Trade Agreement.
  • China – All the media press seems to be centred around the Corona virus and a potential outbreak in the near future. We are still in the early stages of the outbreak, and given the incubation period of up to 14 days, it is hard to forecast how quickly the virus will spread the subsequent economic impact. It is likely that this will be a near-term drag on growth in China and its neighbours, as infrastructure networks shut down and more people remain at home. A concerted policy response from the Chinese authorities seems likely, which may assist a recovery in the coming quarters. At the time of writing, +17,000 people have contracted the disease, with 362 confirmed fatalities. In comparison, the SARS outbreak of 2003 infected over 8,000 people, with 774 deaths.
  • Europe – Christine Lagarde was appointed to take over from Mario Draghi as ECB leader at the start of November 2020. The move is likely to see the ECB release a stimulus package sooner rather than later. Policy rates remain unchanged for now but a comprehensive review of monetary policy strategy was announced.

 

Outlook for February

Whilst the concerns over the coronavirus remain front and centre, share markets around the world will treat water until a positive catalyst helps change investor sentiment. One such catalyst could the signing of a phase one trade deal between the US and China. February is also the start of the Australian company reporting season – (Bell Potter Calendar & Morgans Calendar) . Themes that we expect to play out this reporting season and stocks affected:

 

  • Bushfires and drought – Insurance and agricultural ✘
  • Resources – Rise in commodity prices ✔
  • Retail and Consumer – Christmas trading period just gone ✔
  • Iron ore miners – Higher prices and elevated earnings ✔
  • East coast Infrastructure – Higher spending. Civil construction companies, contractors and waste removal companies. ✔
  • $AUD weakness – Benefit to offshore earners (CSL, Resmed and Amcor) ✔
  • Growth over Value stocks – Earnings momentum is up ✔
  • Data – Increased dependency on data centres, cabling, IT services and communications ✔

 

Keep an eye out for companies that have the potential to beat expectations and avoid stocks that have the potential to disappoint. Outlook statements also provide great insight into future earnings and can have and can contribute to share price volatility in the short term. Being vigilant and having the cash on hand to seize opportunities as they occur will be critical to succeeding this earnings season.