Global markets were a touch higher overnight, as the US markets (S&P 500 index +0.2%) continue to digest earnings season ahead of the US Federal Reserve interest rate decision which is due Thursday morning.
US equities rebounded from session lows, led by commodity and retail shares. Small cap stocks posted their best day since August, with stocks linked to the economy performing better as a strong earnings season builds investor confidence – albeit supply chain disruptions remain the major concern with the average time it takes for materials and supplies to reach US factories increasing to a record last month.
More than 80% of S&P 500 companies reporting 3Q earnings have beaten Wall St estimates, supporting a near 6% benchmark gain since the earnings season began – the best performance in 7 years over a comparable period. Overnight Tesla +8.5% charged higher, riding on momentum after reaching US$1 trillion market capitalisation last week. Coca-Cola (-0.2%) agreed to take full control of BODYARMOR, a marketer of sports drinks aimed at athletes, paying US$5.6b for the 85% of the firm it does not already own.
European Markets (Stoxx 600 index +0.7%) with all sectors finishing in positive territory. News coming out of China remains negative with the release of more weak data. While Evergrande has managed to avoid default for now, a couple of other smaller players have defaulted in the past month. Meanwhile the government’s zero-COVID strategy continues to cause more lockdowns and disruptions and will remain a key source of weaker domestic demand for the indefinite future.
Westpac (WBC:ASX / WBC.NZX)
WBC shares slumped -7% yesterday after delivering their 2021 full year result, which missed market expectation that were set high since its strong first half announcement, as the bank struggled over the second half of the financial year.
Higher operating costs, and tighter net interest margins (due to low interest rate environment and intensive competition) were contributors to the weaker second half result where earnings fell -49% compared to the first half. Overall, the full year result was much stronger than the previous year as statutory profit jumped 138% to $5.46 billion, while cash earnings increased 105% to $5.35 billion – driven by reversal of impairment charges in the previous period triggered by the covid-19 pandemic and lower notable items in the current period. Westpac also announced a $3.5 billion off market share buy back which was also below what market had anticipated.
We remain BUY rated on Westpac as the risks associated amongst the banks have subdued significantly and tighter margins over the near-term are now reflective in WBC’s current share price, and we see an attractive “buy the dip situation”. WBC looks attractively priced (especially on a medium-term view), paying out a dividend of 5.2%, which could be much higher over the medium-term, especially compared to its big 4 Aussie bank peers – largely due to WBC's aggressive cost out-playing out (albeit it has been slower than anticipated so far).
Australia & New Zealand Market Movers
The Australian market was up yesterday (ASX 200 index +0.6%), as investors brace for today's RBA meeting.
All sectors were in the green except for financials, dragged down by Westpac’s disappointing result and Macquarie resuming trade after announcing its capital raise, which was well over subscribed from institutional investors.
AusNet jumped +3.6% after board and major shareholders backed an increased takeover offer of $2.65 per share from Canadian Asset manager Brookfield.
Lynas Rare Earths jumped +2.2% after singing a letter of agreement with Japan Australia Rare Earths, allowing Lynas an extra five-months to pay interest of US$11.5m.
Street Talk is reporting IFM Investors and Global Infrastructure Partners’ are finalising legal structures under their “Sydney Aviation Alliance” suggesting the consortium is very close to firming up its $8.75 a security takeover offer for Sydney Airport.
Travel stocks posted solid gains as international travel resumed in Australia, as Qantas reportedly taken close to half a million domestic bookings in the past 2 weeks, compared with ~20,000 a fortnight in August.
The New Zealand market was down on Monday (NZX 50 index -0.5%) on low volume, reversing some of Friday’s gains.
Large cap’s which are more sensitive to rising interest rates were generally weaker as investors seek value in small caps.
Tower is on track to complete ownership of its National Pacific Insurance Limited, bringing its ownership to 93%, acquiring another 225% stake in in October and will seek to purchase the remaining shares from minority shareholders.
The government’s announcement to ease restrictions in Auckland slightly next week, allowing retailers to open did not do much to influence the market – as (dine-in) hospitality and large gatherings remain closed.
3 Things Markets will be Watching this Week
- Key events this week include RBA announcement, Fed meeting this week, Bank of England announcement, and employment data (nonfarm payrolls) in the U.S.
- US Third quarter Earnings continues with Pizfer, T-Mobile, Uber, and Lyft among those reporting this week
- Locally, earnings from Westpac, Goodman Group, Amcor and Z Energy, quarterly updates from and AGM’s being held by Worley, Domino’s Pizza, Qantas, Spark NZ and Precinct Properties.
