Week Ahead, Interest Rate Angst – Bullish Banks | CSL

1 March 2021

Global markets were mixed on Friday (S&P 500 index -0.2%) helped by a rise in economy-sensitive cyclical sectors, with the S&P 500 and the Nasdaq on track to end the week on a dull note as investors rotated out of technology-related companies.

US stocks finished mostly lower as Treasury yields climbed to the highest levels in a year (US 10-year are now at 1.34%), renewing concern that rising borrowing costs and price pressures could derail the economic recovery. The reflation theme continues to drive sector rotation in equity markets, with small cap and cyclical stocks outperforming.  As we have discussed previously, this is a risk we are watching for markets generally. However, we think most at-risk stocks are utility type businesses which will not be paying as an attractive of a dividend yield soon if interest rates continue to rise. A sector which we are now very bullish on and wins from higher interest rates is the bank stocks.


CSL shares continued to weaken last week despite reporting a solid result. CSL released an exceptionally strong result for the 1st half of the 2021 financial year that surprisingly led to CSL maintaining guidance and management looks very conservative.

CSL reported a first half profit of $US1.8 billion – up 44% on the prior year. The company cited reasons including the performance of its vaccinations arm Seqirus for the strong result and announced an interim dividend of 88¢ a share, its highest on record. Gross profit margins are improving despite the COVID related top line revenue softness.

CSL has pulled back recently as investors move more into value names such as the Aussie banks and out of healthcare stocks such as CSL. We reiterate our view that this an opportunity to BUY into a top-quality global healthcare business, with earnings and revenue set to rebound once COVID related weakness abates. 


Australia & New Zealand Market Movers

The Australian market had its biggest fall in more than three weeks (ASX 200 index -1.3%), with sizeable losses in energy, materials and health. This was the second week of losses running despite a number of strong earnings results and dividend surprises, with a heavy sell-off on Friday offsetting a strong start to the week’s trading.

QBE shares bucked the trend and were higher on Friday (+3.1%) after announcing a -$1.5bn loss for the 2020 year which was pre-announced.
Underlying underwriting profits doubled for QBE in 2020 as global premium rate increases accelerated. QBE looks to have bottomed and reserve conservatism should assist and we see upside for the year ahead – with QBE also benefiting from higher interest rates as it improves their investment income.

The Australian housing market remains red hot with Sydney’s preliminary auction clearance rate of 88.2% across 769 auctions up from the previous week’s preliminary clearance rate of 87.5%, while Melbourne’s preliminary clearance rate of 82.2% was down from last week’s preliminary clearance rate of 87.8% – partly due to a spike in withdrawn auctions while the city was in lockdown the previous weekend.

The New Zealand market joined the general fall in global markets (NZX 50 index -0.7%) as investors priced in rising bond yields, that have been climbing on inflation expectations. High yielding stocks aren’t going to go completely out of fashion any time soon, but there could be some profit taking in certain segments of the market.

New data from RBNZ shows residential mortgage lending up to a record $9.65bn in Dec, +47.6% year on year. First home buyers made up 17% of commitments, while investors took up 25.4%.


3 Things Markets will be Watching this Week

  1. Once again, corporate earnings dominate the week ahead on both side of the Tasman.
    Key results include Bluescope Steel, Chorus, Freightways, Mercury NZ, Summerset, Woolworths, Vocus, Sydney Airports, Scentre Group, Meridian Energy, Spark NZ, Flight Centre, Qantas, Zip Co, Stockland, Afterpay, Ramsay Health Care, Air NZ, a2 Milk, Precinct Properties, and Genesis Energy.
  2. The RBNZ’s official cash rate call on Wednesday will be a focus.
  3. From a macroeconomic point of view, investors will be keeping a nervous eye on bond markets as the growing chances of normalization on a global acceleration of vaccinations and rising commodity prices leads to a rise in bond yields amidst inflationary concerns. Vaccine & COVID news flow also continues to dominate headlines.


Global markets were mixed on Friday (S&P 500 index -0.2%) helped by a rise in economy-sensitive cyclical sectors, with the S&P 500 and the Nasdaq on track to end the week on a dull note as investors rotated out of technology-related companies.

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