February 2019 – Monthly Market Round up

The ASX 200 Index closed the month of February up 5.19% making it the second consecutive month of positive gains and a bumper start to the new year. Fears that a US-China led trade-war together with a local housing downturn could curb corporate earnings was quickly dismissed as the Australian market posted its best month of returns since 2016, supported by a reasonable Half Year corporate earnings season.

 

The clear standouts in February were the big four banks which benefited from a post Royal Banking Commission relief rally. The modesty of the Hayne’s recommendations shows that the report stopped short of making any damaging recommendations to lending requirements or detrimental structural changes to the big banks. Most of the damage has already been done and was well and truly factored in. The banks had already divested non-core assets and APRA enforced strict lending regulations. As a result, Banks shares were hit hard over the year and old bad bank behaviour was on the way out. The real reason Hayne stopped short was to prevent a crushing credit squeeze followed by a housing collapse and economic slump. Unfortunately, those looking for blood from the banks, will be bitterly disappointed. It wasn’t a brutal bank bashing recommendation. It was a reasonable and measured report. Perhaps Hayne recognised that it is dangerous to throw the baby out with the bathwater by implementing far-reaching structural change to our banking institutions because of the poor experience on a relatively minor share of customers, albeit those actions by the institutions were egregious in some cases. It is easy to form a view that the malaise was ubiquitous, but it was not, despite media coverage to the alternative. After all, balancing risk and cost outcomes to customer seems to have been a sensible consideration, notwithstanding all the rhetoric from both sides of politics. That said, the big banks enjoyed a stellar February rally with NAB +5.32%, CBA +5.78%, ANZ +11.87% and WBC 9.82%. The financial sector was up 8.12% and the Banks up 7.51%.

 

 

It wasn’t just the big banks that fared well, the miners also have a solid run finishing the month up 7.51%. Brazil’s iron ore mining crisis led to a dramatic rise in the iron ore price and increase in profit for Australian miners. As a result, this loss of production from Brazil’s Vale, helped BHP, RIO and Fortescue release better than expected results. Their respective share prices hitting multi-year highs. RIO’s underlying earnings beat expectations, rising 2% to US$8.81bn. The miner also announced a final dividend of US$1.80 and a US$4bn special dividend of US$2.43 per share. Fortescue posted a 19c interim dividend together with an 11c special dividend on the back of a US$644m profit. Andrew “Twiggy” Forrest set to reap $327m in dividends.

 

It was a relatively flat season overseen by dividend increases. Profit warnings at the start of the year failed to materialise, expectations were low, and concerns were rather high. Overall 33% of companies beat consensus earnings estimates by more than 2% while 38% missed by around 2%. According to an article published in the AFR, the best performing stocks were: Automotive Holdings +47.9%, Appen Group +46.7%, Breville Group +43.4%, Ausdrill +38.1% and Speedcast +33.3%. The worst performing stocks were Blackmores -27.2%, Pact Group -23.2%, Saracen Minerals -23.2%, McMillan Shakespeare -21% and Bingo Industries -20.1%.

 

Here are some earning seasons facts courtesy of Commsec:

 

·         Overall companies have found it tough.

·         Companies are still reporting profits – 93% posted a profit, near the high of 94% a year ago.

·         Only half were able to lift profits.

·         Companies are still issuing dividends.

·         A number of companies elected to pay special dividends.

·         But the 83% of half-year reporting companies that paid a dividend was below the average of 86% over the 18 reporting seasons covered.

·         Resource companies have benefited from strong demand and higher prices.

 

March market Outlook:

 

So far January and February have been positive for the local market. With corporate earnings season out of the way, all eyes refocus on the US-China trade war spat. This week the Trump administration officially shelved its threat to sharply increase tariffs on $200bn of Chinese exports and the two countries edge closer towards a deal. Tariffs were set to rise from 10% to 25% were delayed which is a positive move for markets. It makes markets hopeful that a deal can be reached.  If so, we could see markets rally quite hard during March. It could prove to be the positive catalyst needed for our market to push past the 6500 mark.  On the flip side, the month of March is dividend payout season. Dividends that were declared during reporting season go Ex-Dividend during March and will be paid out accordingly.

 

Assuming a positive agreement is made between the US and China on trade, we expect global and local share markets to recover over the course of this year.