Australia’s GDP outlook, Afterpay’s user-base and liquidity questions
We examine some of the key market moves from the week that was, GDP and employment forecasts, institutional investment decisions and ponder questions around liquidity.
On Thursday news broke that a further 6.65 million Americans had filed for unemployment.
On that same day, the Dow Jones Industrial Average, the S&P 500 and the NASDAQ Composite all stormed higher. Equity markets have no time for bad news, it would seem; or, as some will argue, such figures were already 'priced in'.
Even so, US unemployment claims have now risen by a staggering 9.95 million, in the last two weeks alone.
Australian GDP & unemployment forecasts
Though not quite as dramatic as the US figures; the Commonwealth Bank is forecasting that Australia will lose around 580,000 jobs as a result of the coronavirus (Covid-19) pandemic.
By comparison, Westpac provided a more dire piece of research this week, positing that Australia’s CY20 GDP is expected to decline by 3.0%, while unemployment will peak at 11.1% in the June quarter – contributing to a loss of approximately 800,000 jobs.
Optimistically at least, Westpac argues that 'As the economy is restored to a more normal footing in the September and December quarters, activity will bounce and the unemployment rate fall – we believe to 8.8% end-2020 and 8.0% end-2021.’
ASX 200 finishes out the week down
Even when considering all this, local equity markets have remained mostly bullish this week: from Monday’s open to Friday’s intra-day high, the Aussie benchmark hit a high of 5,246 points; before tapering off as the session wore on.
The ASX 200 finished out the week at the 5,067 point level.
Of course, global health crisis or not, there will always be investors and traders looking for opportunities in the markets. Over the last five trading sessions for example, the PointsBet share price rose 32%, Santos gained 19%, FMG ran 11% higher and Zoono saw its stock increase 23%.
Afterpay share price and its adoring investors
Elsewhere, buy now pay later (BNPL) darling Afterpay (APT) continued to defy the sceptics – finishing out the week around the $20 per share mark.
Though typically known for its heavy retail investor base, it seems that the Covid-19's potential impact on consumer spending hasn’t dissuaded institutional players from ratcheting up their Afterpay positions at current price levels.
Specifically, on 30 March, two 'change in substantial holding' statements were released.
Firstly, it was revealed that Mitsubishi UFJ Financial Group (MUFG), had increased their Afterpay holdings to 35,298,543 fully paid ordinary shares – giving the firm a sizable 13.27% voting interest.
MUFG owns 545,500 APT options.
Secondly, with Afterpay’s stock still down about 50% from its 52-week high, investment bank Morgan Stanley has also taken the opportunity to size up their position in the BNPL leader. As part of their latest substantial holdings form, it was revealed that Morgan Stanley's total Afterpay holdings had risen from 25,807,823 million shares to 29,787,503 million shares; giving the firm an 11.20% voting interest.
Incidentally, Morgan Stanley also own 545,500 APT options.
In spite of those moves, Morgan Stanley recently downgraded its rating on Afterpay from Overweight to Equal-weight (EW). As part of this revised rating, Morgan Stanley argued that:
‘This recession is unique and will test the [Afterpay] business model. We think APT faces a trade-off between maintaining revenue growth and containing credit risk, which will weigh on investor sentiment.’
Moreover, potentially defying some anecdotal suggestions that many Afterpay users sit on the lowest-end of the economic spectrum, research from Morgan Stanley recently found that:
‘The greatest frequency of Australian BNPL users is in the A$60-70k income range – highlighting that BNPL users aren't necessarily skewed to low-income millennials.’
What liquidity really means
While investors may not really care for arcane financial formulas, they certainly care about liquidity.
Indeed, amidst the market carnage of the coronavirus pandemic – a plethora of ASX-listed companies have now come out to remind investors just how stellar their liquidity positions really are; or, on the other hand, what precise measures they are taking to shore up those positions.
Telstra for example emphasized that ‘we are in a strong liquidity position’; energy giant Woodside Petroleum stressed that it had US$7.9 billion in liquidity available; Qantas secured $1.05 billion in new debt funding; and Fortescue recently reminded the market that it had approximately US$4.3 billion of liquidity available – most of which was cash.
Now, if you don’t want to raise debt or don’t have the ideal amount of cash on hand, you can always issue new equity.
Many companies did just that this week: Outdoor retailer Kathmandu launched a NZ$207 million equity raise; Webjet raised $231 million from institutional players; IDP Education successfully completed a $225 million institutional placement; and NextDC issued 86.1 million shares and raised a gargantuan $672 million.
Of course, by issuing new equity companies necessarily dilute their current shareholders’ positions – with key metrics such as earnings per share (EPS) and voting power – impacted to varying degrees.
More broadly though, the issuance of fresh stock brings into question what a security – and by extension a company in totality – may actually be worth. For instance, Webjet’s recently finalised institutional offer saw the company raise $231 million and issue 135.7 million new shares at $1.70 per share.
Prior to announcing any kind of capital raise however, Webjet’s stock traded at $3.760 per share; and prior to that, its 52-week high saw the travel company’s stock worth as much as $17.190 per share.
Make of these discrepancies what you will.
According to Paul J. Davies from the Wall Street Journal, in the most basic of terms, all liquidity represents is ‘the ability to trade close to what investors think are market prices.’
Or, as Roger Lowenstein once wrote in his international best seller, When Genius Failed:
‘As Keynes observed, there cannot be "liquidity" for the community as a whole. The mistake is in thinking that markets have a duty to stay liquid or that buyers will always be present to accommodate sellers.’
How to trade markets – up and down
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