Global markets sold off on Friday, to cap the worst week for equities since the global financial crisis amid dire warnings about the economic effects of the coronavirus pandemic and as governments stepped up efforts to keep people at home. Goldman Sachs warned the US economy may shrink 24% on an annualized basis in the second quarter.
In response to feedback on Friday’s email, we would like to highlight there is clearly a large amount of uncertainty as global shutdowns mean there is no doubt we are in a global recession. However, the question is, how long will it last. In our view, this comes down to how long containment measures remain in place. Looking at the experience in China/Wuhan, Wuhan was shut down for 50 days, and economic activity in China looks to be returning. Further, we are entering into summer in the US/Europe, which is good news as data shows coronavirus prefers colder weather to spread.
We reiterate that we believe the market turning point will come once markets get comfortable that the growth rate in new cases has peaked/slowed. Officials around the world are being proactive with low interest rates and government stimulus. Following yesterday’s $66bn stimulus package focused on small and medium sized businesses, Australia’s PM has given notice a third economic package is being devised in preparation for a near total shutdown of the economy. Thus far the RBA and Australian Government has provided $189bn stimulus in response to the crisis, which amounts to 9.7% of GDP.
We are watching developments closely as they unfold, but our base case remains that there will be a buying opportunity for medium term investors over the next few months.
Stock in Focus: Rio Tinto (RO:ASX)
Rio Tinto shares have remained relatively resilient, delivering a solid result for the 2019 financial year, as it managed to meet market expectations. RIO also delivered a record ordinary dividend of US$3.82 per share, which was up +24% from last year.
Iron ore prices have pulled back from their rally last year but look like they have stabilised. News flow is indicating that China is re-opening, and officials are pumping money into industrial production, which should be positive for RIO and something which has been overlooked by many in the market. The Aussie dollar has also fallen significantly which is positive for RIO as an iron ore exporter. While it is notoriously difficult to forecast iron ore prices, we see relative value in RIO, combined with a number of tailwinds highlighted above. There are always risks, but on balance we have a positive view and upgrade our rating to a BUY on a medium term view.
Members can login to read our full reports on Rio Tinto.
Australia & New Zealand Market Movers
The Australian market was marginally higher on Friday (ASX 200 index +0.7%) but the ASX still ended the week 13% lower, rocked by coronavirus uncertainty. Telstra updated the market as to its operating earnings guidance, lowered to be at the bottom end of the A$7.4-$7.9bn range. The change reflects lower international roaming revenues, temporary suspension of late payment fees and disconnections for consumer and small business customers, and the impact on revenues as enterprises pull back on IT/communications spend. While a negative update, Telstra should remain resilient relative to others stocks given its defensive nature and attractive dividend. There are reports ooh media will launch a heavily discounted $167m equity raising at $0.53/share (37% discount to last trading price) that will more than double its shares on issue. Advertising spend is one of the first hit sectors in a recession.
The NZ market was higher on Friday (NZX50 +1%) as buyers returned to the market. The big company news related to Air New Zealand.
The NZ Government has provided Air NZ with a Z$900m (7-9% interest rate) debt funding agreement, and with Air NZ burning $200m a month, this will likely last about 6-months. Conditions include cancellation of the interim dividend (equates to a cash saving of $123m) and a prohibition on the payment of any future dividends while the debt facility is in-place. Air NZ will start laying off staff this week in a move to cut the overall costs of its business, with a broad measure of dropping ~30% of its employee base. Cinema services business Vista Group has decided to cancel the acquisition of a further 14.5% of Vista China (~$16m), which is prudent at a time when cash preservation is paramount.
3 Things Markets Will be Watching this Week
- Coronavirus related news-flow remains key in terms of driving investor sentiment.
- Moves from central banks globally in response to coronavirus,
- Corporate earnings guidance changes from Australasian businesses.
Have a Great Day,