US Tech Turns | Westpac Upgrade to BUY

11 September 2020

Global markets rallied overnight (S&P 500 Index +2%) as all three major Wall Street indices were  higher and snapped a three-session losing streak as investors jumped back in to take advantage of the pullback in technology-related stocks, a day after the Nasdaq confirmed correction territory (-10%).

The Nasdaq technology index rose +2.7%, with Tesla shares rebounding +10.9% after suffering their biggest one-day percentage drop in the prior session. Apple, Microsoft and Amazon – the top three U.S. public companies by market capitalization – each rose by at least 3% – partially offsetting previous days losses. As with the sell-off, there was no clear catalyst for the change in sentiment towards the technology sector. 

Despite the volatility, our market outlook remains bullish on equity markets medium term as global macro economic data and fiscal policy are expected to remain supportive – but we are selective and cautious on companies with weak fundamentals and inflated valuations. 

Westpac (WBX:ASX / WBC:NZX)

Westpac Banking Corporation  shares were down -3.3% yesterday along with most of the market and its banking peers.

In light of this, and some deep diving, we believe Westpac looks cheap when taking a medium-term view.  A major assumption in our view is that there is no major property market crash (fall of over -30%) on either side of the Tasman. After being conservative and reporting a larger loss provision than bank peers, its share price has been punished harder of late. Westpac maintains a fairly strong balance sheet (due to regulation) with a small proportion of its business banking exposed to riskier sectors (retail, tourism and energy) and the core business backed on home-loans which appear to be less likely to experience a significant crash than previously anticipated – given how the residential property market has played out so far after the first lockdown. 

While net interest margins might tighten (limiting growth) we believe they could have seen the bottom, operating at a slightly lower level of profitability than pre covid-19 but allowing the banks to pay an attractive dividend (7-8%) from 2022 onwards. 

We upgrade Westpac to a BUY due to its cheap valuation and anticipated attractive dividend from 2022 onwards.


Australia & New Zealand Market Movers

The Australian market slumped on Wednesday (ASX 200 Index -2.2%), as investor confidence across tech and growth stocks diminished, led by a sharp fall on Wall street.  Adding to investor unease was the news that AstraZeneca had put its covid-19 vaccine trial on hold while it investigated a potential adverse reaction in one of the study's participants, which had put pressure of shares that have recently benefited from hopes of an upcoming vaccine.

The major banks led the losses on the market, pushing the sector's shares to their lowest levels in more than a month, with losses across the board including a number of defensive blue chips also caught in the red. The tech sector also extended its recent run of losses, while the energy sector was also among the worst performing sector, with oil prices breaking lower as investors fretted over rising inventories and reduced demand as multiple economies battled the second waves of covid-19.

The New Zealand market fell yesterday (NZX 50 Index -1.3%) in a day of heavy selling following a major correction in tech stocks on Wall street.  

NZX's  technology stocks with exposure to the US market took heavy losses Vista Group International down -2.6% and Pushpay Holdings slipping -2.8%, as well as the two major exporters A2 milk (-2.4%) and Fisher and Paykel healthcare (-2.4%) also ending the day lower.
Briscoe Group also held up well, thanks to yesterday's strong earnings report and increased dividend, a day earlier and the property sector was generally defensive with only Vital Healthcare Property Trust declining -0.7%. 

Sky Network Television led the local market higher again for a third day in a row, up  +3.1% heading towards its earnings result announcement on Thursday – buoyed by optimistic retail investors – who are generally attracted to cheap and heavily beaten down stocks. 

3 Things Markets Will be Watching this Week

  1. ​​​​​​​​​​​​​​​COVID-19 related news-flow remains key, with second wave and lockdown headlines, while US Congress debate what an extension of stimulus will look like.
  2. Key data this week includes US CPI, Eurozone Q2 GDP, the latest ECB interest rate review and exports/import data from China.
  3. In NZ, Sky TV, Briscoe Group, and Restaurant Brands will report earnings and Investore Property will host its AGM.
Global markets rallied overnight (S&P 500 Index +2%) as all three major Wall Street indices were higher and snapped a three-session losing streak as investors jumped back in to take advantage of the pullback in technology-related stocks, a day after the

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