Global markets continued to sell-off on Friday (S&P 500 Index -1.1%) and the US market has now recorded 3 consecutive weeks of declines (which we didn’t even see in February or March). The US market is at a 6-week low and the Nasdaq Technology index has undone all of the August euphoria.
While there wasn’t much in the way of news to blame for the fall in equities on Friday, there might be an element of market apprehension creeping in ahead of the upcoming US presidential election, at a time when equity market valuations are already very extended on traditional metrics.
In Europe, markets were lower, weighed down by declines in travel and leisure shares on the threat of wider restrictions to ease the spread of coronavirus – as France’s daily cases rose by more than 10,000 to the highest since the end of lockdown in May.
Auckland Airport (AIA:NZX / AIA:ASX)
AIA shares have been climbing higher recently, as investors somewhat overlook near-term uncertainty in favour of a long-term recovery. AIA released a weak 2020 result which was expected, however due to the supportive nature of domestic travel in recent months is now out of survival mode, as the Airport maintains positive cashflow and enters a recovery phase, setting up for when international travel eventually re-commences.
AIA’s underlying business is in a strong financial position thanks to its capital raise and can comfortably weather a delay in opening international borders due to the relatively low-cost nature of the business and supportive levels of domestic travel, helping to avoid significant cash-burn.
We continue to remain comfortable with our High-Risk BUY rating on AIA. However, due to its current valuation there are still considerable near-term downside risks (largely pinned towards any covid-19 related news both locally and to a lesser degree in Australia and abroad). Significant upside potential now rests on a vaccine and return of international travel, which is now a medium to long term play.
Australia & New Zealand Market Movers
The Australian market was lower on Friday (ASX 200 Index -0.3%) as the initial recovery from the prior day’s heavy losses ran out of steam. Resources was the best performing sector on optimism about Chinese demand for commodities, while most others, such as utilities and healthcare, drifted into the red.
The Australian government is reportedly preparing to unleash an "astounding" amount of spending in the 6 Oct budget. Some of the spending is due to the government bringing forward its already legislated personal income tax cuts while the HomeBuilder program, which ends on Dec 31, is being considered for extension along with extra infrastructure spending.
The New Zealand market sold off on Friday (NZX 50 Index -1.2%) extending its losses, locking in a third consecutive weekly decline as the kiwi dollar continued to climb. Currency strength is hurting the index’s heavyweight exporters, such as NZ’s biggest company Fisher & Paykel Healthcare. The strength in the Kiwi seems to be more a story about a weaker US dollar rather than a buoyant New Zealand economy.
In stock news, Fonterra Shareholders Fund units rose, bucking the trend after Fonterra posted a profit following two years of losses following a strategic reset and said it would resume paying a dividend of 5 cents per share, the low end of its 5-to-7 cent range. The company has provided a wide range for 2021 guidance, which reflects an allowance for COVID related uncertainty impacting the food services businesses and stream returns.
Tourism Holdings also made gains, up +10% after reporting an underlying net profit of $20 million, down -28% on the prior year result of $27.9 million, but a strong result considering the impact of covid-19. The result highlighted a strong management response to the extreme COVID disruption. Key drivers remain timing of border re-openings, domestic yields in the interim and re-fleeting profile.
Also in tourism, Air NZ’s CEO was in the press shooting down the idea of a Trans-tasman bubble until March 2021 at the earliest. Further, he thinks flights to the US won't resume until the end of 2021 and international travel will be "clunkier" when it does restart.
3 Things Markets Will be Watching this Week
- COVID-19 related -flow remains key, with second wave and lockdown headlines, while US Congress debate what an extension of stimulus will look like.
- Locally, the RBNZ OCR meeting is the key event on Wednesday.
- There will also be earnings from Nufarm, Kathmandu, Premier Investments and Hallenstein Glasson. AGM’s are scheduled for Turners Automotive, Mercury, Oceania Healthcare and Vector.