RBA, Melbourne Lockdown | Afterpay

8 July 2020

Global markets were lower overnight as the US market (S&P 500 -1.1%) ending its longest streak of gains this year as covid-19 cases continue to rise. We see this as a healthy pull-back and likely profit taking given the market is possibly 'overbought' considering the current situation.
Large parts of the US are reporting tens of thousands of new coronavirus infections, as New York expanded its travel quarantine for visitors from three more states, while Florida’s greater Miami area rolled back its reopening. 
The sell off included the major tech companies which have been on an extraordinary run, representing a slight pull-back from new all-time highs, while stock linked towards full-reopening of the economy were hardest hit. 

Closer to home, Melbourne is to enter into a 6-week lockdown, with the NSW and Victorian border set to close, in an attempt to contain the growing spread of covid-19 – with residents limited to when and how they may leave home. This will weigh heavily on Australia's economic recovery given the state represents roughly 1/4 of Australia's economy. As a result, Australia’s Treasurer said the Federal government would continue to provide all the support necessary to Victoria, which could include extensions to the JobSeeker and JobKeeper payments due to end in September, and there is talk of mortgage payment deferral extensions form the banks. 

The RBA also announced it would keep rates unchanged at 0.25%, with rates likely to remain at record low levels for some time, which was inline with expectations. Reserve Bank governor Philip Lowe adding "the outlook, including the nature and speed of the expected recovery, remains highly uncertain and the pandemic is likely to have long-lasting effects on the economy."

Afterpay Limited (APT:ASX)

Shares in buy now pay later service financial service provider Afterpay (APT) entered a trading halt after announcing a $800m capital raise, which will include the two founders selling 4.1m shares netting them $250m,

The funds will be used to accelerate its investment growing sales, prioritising global expansion in the short term to maintain its market position. Chinese giant Tencent which owns 5% of Afterpay, made a bid for the new shares on the upper limit $66 per share (only 2.9% discount), in an attempt to possibly increase its holding and re-enforce its commitment to the company, possibly relieving some concerns over its extended valuation.

Management also provided a trading update, expecting 2020 financial year revenue to surge 112% to $11.1 billion, as it is benefitting from a +116% boost in active users on its platform on the back of the covid-19 pandemic and rise in online shopping. 

We currently do not cover Afterpay but have concerns around its business model as it bears the default risk.
Afterpay's valuation has also always appeared to be well ahead of itself, and given its recent run is now the most expensive Payment/Fintech company with a Price to Forward Sales (not earnings, but Sales) multiple of ~25x, with much of the future growth likely to be priced in.

Australia & New Zealand Market Movers

The Australian market fell again on Tuesday (ASX 200 -0.9%) as news Melbourne would enter into a 6-week lockdown ignited fears about the strength of the country's economic recovery, with the second wave potentially causing a fall in economic activity which would continue to lag the rest of Australia. Not surprisingly, financials and real estate companies took the brunt of the selling, particularly shopping mall operators.

Understandably travel related companies also sold off heavily. On the flip side iron ore miners bucked the trend rising higher as data showing the Chinese economy is improving (a major buyer of Australian iron ore).   

The New Zealand market edged higher yesterday (NZX 50 Index +0.8%), as investors bet on a low interest rate environment and central bank stimulus (allowing companies access to cheaper debt to fund future growth) would continue to support equity markets after a strong lead by both Wall street Chinese equity markets. 

Air New Zealand posted the day’s biggest decline, falling 2.4% after announcing it agreed to temporarily suspend all new bookings into NZ for the next three weeks to help the government manage accommodation capacity at its isolation and quarantine facilities. Meanwhile a slower start to a Trans-Tasman bubble is looking more likely with Melbourne returning to six weeks of lockdown tonight after the virus re-emerged in the state of Victoria, also weighing down on travel- and tourism related stocks.


3 Things Markets Will be Watching this Week

  1. ​​​​Covid-19 newsflow around a second wave and re-opening of economies remains top of mind.
  2. The Reserve Bank of Australia makes an interest rate decision on Tuesday.
  3. Trade tensions with China remain a risk to keep an eye on.
Global markets were lower overnight as the US market (S&P 500 -1.1%) ending its longest streak of gains this year as covid-19 cases continue to rise.

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