Global markets were mostly higher overnight as Republican-led efforts to slash corporate tax rates cleared a major hurdle, with investors picking stocks that have lagged for much of the year.
Financial stocks were once again winners, while Technology stocks continued to come under pressure, with the Nasdaq Technology index selling-off. We are seeing a rotation continue away from technology stocks (which are likely due for a breather after an amazing run year to date), particularly into financial stocks. Not only are financial stocks set to benefit from lower tax rates in the US, but as we have discussed previously higher interest rates generally improve the interest margins for banks. Further, Tech stocks are not seen as major beneficiaries of potential tax reform in the US.
Stock in Focus: G8 Education (GEM:AX)
Shares in G8 Education continued its recent trend of large share price moves as GEM shares plummeted yesterday after the early childhood education company released a disappointing trading update.
GEM downgraded its 2017 financial year underlying earnings guidance to just 5% growth year-on-year to approximately $160 million. This compares to its prior guidance of “mid-$170 million” given at the end of August.
According to the release, the downgrade has been made due to a recent slowing of occupancy growth. Like for like occupancy is now forecast to be around 77%, versus 79.7% in the prior year. Management has blamed this on supply issues in areas including Western Sydney, Gold Coast, East Brisbane and Inner Melbourne, combined with sluggish wage growth and employment conditions in regions such as North Queensland.
This was clearly a disappointing update, particularly given the proximity to the last update. Prior to the update GEM had experienced a strong run particularly on news of a favourable acquisition, and despite concerns around a difficult trading environment.
We currently have a BUY rating on GEM and are reviewing this recommendation.
Members should look out for a full update on GEM to be released in our weekly report.
Australia & New Zealand Market Movers
The Australian share market was a touch lower yesterday (ASX 200 index -0.07%) as investors sold off the banks. A bump in the iron ore price and some positive broker comment boosted materials and resources stocks, with telecommunications and consumer staples also performing well. But the banks were a heavy drag on the index after last week's royal commission announcement and consumer discretionary and healthcare stocks also weighed on the market.
The New Zealand market was slightly lower yesterday (NZX 50 index -0.04%) as shares edged lower in quiet trading as investors weighed up the mixed messages from Wall Street on Friday and NZX's trading platform suffered an outage late in the day. Synlait led the benchmark index lower, falling ahead of its investor day on Friday. The milk processor has soared 138% this year, and some investors may be taking profits before the announcement.
3 Things Markets Will be Watching this Week
1. The Reserve Bank of Australia makes its last interest rate decision of the year on Tuesday.
2. Australian GDP data for the 3rd quarter is released on Wednesday.
3. Closely monitored monthly US employment data is published at the end of the week.
Have a Great Day,
Team