Australian stocks rally, CSL’s bullish update and US jobs data
‘Markets can stay irrational longer than you can stay solvent.’
ASX 200, Dow Jones and S&P 500 all rise
From Monday’s open to Thursday’s close, the ASX 200 rallied some 6.3% to finish out the week at the 5,067 point level. All up, and since its mid-march low, the blue-chip benchmark has now rebounded close to 20%.
Elsewhere in the Australian markets this week: Zip reported that its Q3 revenue had skyrocketed 96%; Treasury Wine Estates announced it was considering a Penfolds demerger; Oil Search completed a $1.16 billion cap raise; and Flight Centre is closing in on finalising its own $700 million equity raise.
It was much the same story for US markets heading into the Easter long weekend: From Monday to Thursday, the Dow Jones Industrial Average climbed about 2,000 points – posting a weekly gain of 9.3%; while the S&P 500 benchmark followed closely behind, rising 8.2% during the four-day week.
Such bullishness – both locally and internationally – looks to have been driven primarily by central bank intervention and news that new cases of the novel coronavirus (Covid-19) had slowed.
On that first point – in a move sparking optimism in US credit and equity markets, in particular – the Financial Times reported that the US Federal Reserve:
‘Would provide an additional $2.3tn in loans to shore up the economy during the coronavirus pandemic, included a hotly anticipated move to back the $1.2tn junk bond market where lower-rated companies secure funding.’
To the second point and regarding global equity markets, sentiment looks to have improved off the back of reports that the rate of coronavirus infections had slowed in a number of key countries.
Mind you, slowing or not, at the time of writing, the global coronavirus case count still stood at 1,696,284.
The US remains the most impacted, with 501,272 reported cases of the virus; while Spain and Italy rounded out the top three – with 158,273 and 147,577 reported cases, respectively.
By comparison, Australia has recorded just 6,203 cases of Covid-19.
Bullish markets & bearish economic data
Though Covid-19 infection rates may be slowing in some regions – the economic data emerging from the US remains concerning.
For one, and as we have spoken of before, US jobs data continues to show signs of stress. Unfortunately, the situation continued to deteriorate this week: with 6.61 million Americans filing for unemployment – for the week ending 14 April. Though slightly down on last week’s figures, this now brings the total US unemployment claims from the last three weeks to 16.78 million – implying an unemployment rate of approximately 15%, according to Bloomberg.
For reference, during the last recession the unemployment rate hit around 10%, Bloomberg also noted.
Looking at why equity markets didn’t fall on such news, the go to explanation appears to be that market participants – sophisticated as they are – had already ‘priced in’ this data. Make of such an explanation what you will.
Australia’s labour force data is due out next Thursday, 16 April.
The ‘premiumisation’ of two ASX giants
High quality and/or popular stocks often come to trade at a premium – either to the market as a whole or against their peer group.
Such an occurrence can be borne of many things: some sort of competitive advantage, high quality earnings, lofty growth expectations or an above market dividend.
Of course, whether a security deserves to trade at a premium at all is another matter entirely; and investors – seeking to profit long or short – will often try to exploit any anomalies they perceive in these premiums.
CSL share price: the consistency premium
As many companies scrap their guidance or rush to raise capital – CSL stands out as a unique case. Indeed, opposed to withdrawing it, the biotech giant this week reaffirmed its already upgraded FY20 earnings (NPAT) guidance.
Here the biotech expects its full-year earnings to come in at between US$2,110 million to US$2,170 million – a range which implies a year-over-year growth rate of approximately 10-13%.
To be sure, at 51x FY19 earnings – CSL currently trades at a steep premium to the ASX 200 benchmark. Investors, so it seems, are willing to pay a high price for implied certainty in an increasingly uncertain world.
And even though CSL may be expensive relative to the market, it doesn’t look like many investors are betting on its decline. According to the latest regulatory filings from ASIC, a scant 0.33% of its stock is held short.
As Keynes once said:
‘Markets can stay irrational longer than you can stay solvent.’
CBA share price: the dividend premium
Elsewhere, the Commonwealth Bank of Australia (CBA) has this week continued its tradition of trading at a premium to its big four peers – ANZ, Westpac and NAB.
For perspective, back in August 2019, CBA traded at a lofty forward earnings multiple of 17.4x. At the time, analysts from UBS opined that on such a multiple, the bank’s valuation was: ‘Unprecedented globally for developed market, large-cap banks.’
Though market participants have become more accustomed to hearing the phrase unprecedented in recent times, things otherwise haven’t changed much. According to a recent research note from Morgan Stanley – CBA still remains the most expensive of the big four banks – currently trading at a forward earnings multiple of ~12.6x. By comparison, ANZ trades at a forward multiple of ~9.3x, NAB at ~10.7x and Westpac at ~11.8x.
Additionally, when APRA this week warned that all authorised deposit taking institutions (ADIs) should consider limiting discretionary capital distributions – including potentially reducing dividends to ‘prudent levels’ – the market unsurprisingly sold off bank stocks at a rapid click.
Specifically, the ANZ share price fell 4.9%, Westpac dropped 5.28%, NAB dropped 4.8%, while CBA declined just 3.33%.
Potentially explaining why Commonwealth fell the least, when UBS and Macquarie analysts came to assessing the potential damage from APRA’s directive – the argument seemed to be that while ANZ, NAB and Westpac may be forced to cull their upcoming dividends entirely – CBA would likely be spared from such a fate.
Indeed, on Thursday UBS revised its interim dividend forecasts for ANZ, NAB and Westpac to zero, and said that ‘This follows our ~35% cut to dividend forecasts yesterday. We have maintained our 50c 2H20E dividend forecast for each of these banks (in Nov) but this is also at risk.’
‘For CBA (June year-end), we have left our 2H20E dividend forecast unchanged at $1.60 (down 30%). However, this is at risk of being cut further or suspended,’ UBS finished.
How to trade local and international markets
What do you make of the current situation: do you see bullish or bearish opportunities? Whatever your opinion, you can trade indices, currencies and equities, like CSL and CBA – both LONG or SHORT – with IG’s easy to use trading platform now.
For example, to buy (long) or sell (short) CSL using CFDs, follow these easy steps:
- Create an IG Trading Account or log in to your existing account
- Enter ‘CSL’ in the search bar and select it
- Choose your position size
- Click on ‘buy’ or ‘sell’ in the deal ticket
- Confirm the trade
The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.
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