Week Ahead, Worst Month Since March | CSL Update

3 November 2020

Global markets were lower on Friday (S&P 500 Index -1.2%) as US equities closed out their worst week and month since March. The backdrop of a second wave of COVID-19 and fresh lockdowns in Europe and now the UK, mixed earnings from big technology companies and this week's Presidential election has investors on the side-lines. In contrast to global markets, the New Zealand market has remained remarkably resilient, ending the month up +2.9%.

The Nasdaq technology index dragged the US market lower as Twitter plunged -21% after posting its slowest user growth in years and warning uncertainty around the election could compress ad spending. Apple shares dropped -5.6% after reporting weak iPhone sales while shares of Facebook, Amazon, Tesla and Netflix all declined by more than -5%. Google’s parent Alphabet bucked the trend and rose 3.8% after reporting 3rd quarter profit ahead of analyst estimates. As we touched on last week, the expectation bar was set high for Technology stocks this earnings season given how hard the sector had rallied and profit taking has been a trend so far.

We would expect this week to remain a volatile week for markets.
For the week ahead, all eyes will be on the US election, with results set to start coming through around lunchtime on Wednesday (Australian time). While we would not want to predict a result, a Biden clean sweep would be good for markets with investors expecting a large stimulus bill in that scenario. A close and contested election would be the most market unfriendly outcome.


Since our last update in August, CSL shares have drifted lower but we remain bullish on the stock as a top-quality healthcare sector pick.

At CSL’s recent AGM, the company slightly upgraded and narrowed 2021 net profit guidance to be in the range of US$2,170-2,265m or growth of 3% – 8% (on the back of 6% – 10% revenue growth).
The bears remain focussed on levels of plasma collection, which have been much lower during the pandemic. CSL commented that Covid-19 restrictions are expected to constrain plasma collections, and add to plasma collection costs, although there are multiple initiatives underway to mitigate this impact. In any case, we see the issues as shorter term in nature and hence we are happy to look through the shorter-term setbacks. CSL also highlighted they expect continued strong demand for plasma and recombinant therapies, and the Seqirus (flu vaccine division) is expected to benefit from strong demand from vaccines, driven in part by Government wanting to protect their populations from flu amidst the covid-19 pandemic.

On the other hand, CSL has also confirmed that it is talking with partner organisations to roll out University of Queensland's COVID-19 vaccine if it is successful, following a giant deal signed with the federal government to produce Australia's leading vaccine option. CSL's agreement includes producing 51 million doses should trials prove successful.

Finally, CSL held a Research & Development (R&D) investor day. CSL’s R&D budget is now very significant, with spending of ~US$922m in the prior year. CSL highlighted that it continues to expect to spend 10%-11% of revenue on R&D annually. Covid-19 impacted the progression of several of the trials in 2020, as it did with the whole industry. However, CSL has an excellent track-record of spending on R&D, something which is necessary for the company to maintain its competitive edge and market leadership position.


Australia & New Zealand Market Movers

The Australian market sold off on Friday (ASX 200 Index -0.6%) as Australian shares endured their worst week since April, despite a promising start and takeover news buoying some stocks.

AMP shares rose almost 20% after the embattled wealth manager said it had received a conditional takeover bid from a US private equity firm, but did not disclose the amount.
Property stock Dexus said it has sold a North Sydney office block for $273m to HK group Huge Linkage, which owns other buildings in the area. Net sale proceeds of $273m show a 3% premium to the property’s book value.

Healthcare giant Resmed was up +9.5% after the company said its September quarter profit grew 37% to $US184.4 million, driven by strong sales of its ventilators for coronavirus patients.

Tonnes of live Australian lobster are reportedly stranded on the tarmac at a Chinese airport, stoking concerns they are the next victim in the ongoing trade dispute between Australia and China. Beef, barley and wine have been caught in rising tensions between Australia and China in recent months.

The New Zealand market was lower on Friday (NZX 50 Index -1.0%) as end-of-month profit taking – notably in Fisher & Paykel Healthcare pushed the market down (despite a very strong result announcement from peer ResMed in Australia).

Tourism Holdings held steady as investors were encouraged by news it was keeping costs low. Net debt has fallen from $188 million at the end of March to approximately $35 million.
Outside of the top 50 companies, listed cannabis companies took a hit after preliminary referendum results indicated recreational cannabis would not be legalised. Cannasouth fell -16.7% and Rua Bioscience dropped -2.7%. Both are medicinal cannabis companies and current operations should be unaffected by the referendum result.

Interestingly, Australian media reports are again claiming that two-way quarantine-free travel between Australia and NZ is imminent, with travel arrangements in place by Christmas at the latest. However, a NZ Ministry of Foreign Affairs and Trade spokeswoman said discussions were still continuing on NZ-Australia travel.


3 Things Markets Will be Watching this Week

  1. ​​​​​​​​​​​​​​All eyes this week will be on the US election, with results set to start coming through around lunchtime on Wednesday (Australian time).
  2. ​​​​​​​​​​​​​​​COVID-19 news is back at the top of headlines with social distancing measures re-introduced in Europe.
  3. It will be another big week of US earnings ahead with 132 S&P 500 companies due to report including Alibaba Group, Wynn Resorts, and Berkshire Hathaway. Regionally, Westpac, CSR, Pushpay, Z Energy, Trustpower, Goodman Group and News Corp all report earnings.


The backdrop of a second wave of COVID-19 and fresh lockdowns in Europe and now the UK, mixed earnings from big technology companies and this week's Presidential election has investors on the side-lines.

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