ASX200 Falls 0.50% Amid U.S. Presidential Shuffle and Weak Commodity Prices. BUY Radar: Ampol and Harvey Norman

Ampol Limited (ASX: ALD) offers stable returns, attractive 6.43% dividend yield, low volatility, and consistent performance

Ampol, an independent Australian company in the fuel transportation sector, recently reported its Q1 2024 trading update. The Liquid Refining Margin (LRM) for the quarter was US$11.80 per barrel, down from US$14.90 in Q1 2023. Despite reduced Singapore refined product cracks and production disruptions, higher product freight rates helped offset some challenges.

Operationally, while the refinery experienced a steam outage and supply delays, normal operations resumed in early April. Segment performance showed resilience: Fuels and Infrastructure (Ex-Lytton) maintained earnings, Australian fuel sales volumes were stable, and Convenience Retail saw earnings improve, driven by better fuel margins and increased shop income.

Ampol stands out for its attractive dividend yield of 6.43%, low price volatility, and trading at a low revenue valuation multiple. The company has consistently paid dividends for 15 years and has been profitable over the past twelve months. Given these factors, Ampol is a solid income stock with stability and reliable returns, making it a compelling addition to a portfolio focused on income.

Harvey Norman’s strong financials, strategic growth, and 4.88% dividend yield make it a potentially solid income stock

Harvey Norman (ASX: HVN) has shown resilience despite recent retail challenges. During the first half of FY24, the company’s net assets reached $4.51 billion, supported by a substantial property portfolio valued at $4.14 billion. This strong balance sheet highlights the company’s financial stability and its ability to sustain dividend payments.

Although profit before tax (PBT) dropped significantly by 45.7% in the first half of 2024, largely due to external economic pressures and inflation, Harvey Norman remains well-positioned for the future. The decline in PBT reflects broader market challenges rather than fundamental weaknesses. Excluding property revaluations, PBT decreased by 29.5% from the previous year, yet it still shows a 6.3% increase compared to pre-pandemic levels.

Harvey Norman is also focusing on strategic growth, with plans to expand into new markets, including Malaysia and the UK. These growth initiatives, coupled with the company’s strong financial management, suggest a positive outlook.

Harvey Norman’s robust dividend yield of 4.88% and solid financial foundation make it a strong investment choice for those seeking reliable income and growth opportunities in the retail and property sectors. The company’s strategic expansion plans further enhance its investment appeal, particularly in terms of growth potential.

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Market Movers

Aussie stocks experienced a significant pullback on Monday, unwinding the so-called "Trump Trade" as U.S. President Joe Biden announced he would not seek re-election. The ASX200 fell 0.50%, closing at 7,931.70 points. Most sectors finished in the red, although consumer-related stocks saw gains amidst the broader market decline.

The mining sector, in particular, was under considerable pressure. Copper prices continued their recent sharp losses, and the price of iron ore slipped towards $US100 per tonne. These declines in commodities were largely driven by weak economic data from China, which prompted Chinese authorities to cut loan prime rates in an attempt to support the struggling economy. South32's share price plummeted by 12% following the announcement of a $581 million impairment on its alumina refinery, raising concerns about the refinery's future viability amid stricter environmental regulations. Woodside also saw a 2% drop in response to its $1.3 billion acquisition of U.S. LNG producer Tellurian. The broader energy sector was affected as well, with Whitehaven's shares declining by 4% and Paladin's falling by 1%, despite reaffirming its production guidance.

On a more positive note, Iress emerged as the best performer on the index, surging 10% after forecasting a strong increase in first-half earnings. Similarly, Insignia Financial saw its shares rise by 6% after upgrading its FY24 guidance, illustrating that favourable earnings forecasts can drive stock performance even amidst broader market headwinds.

In the U.S., all eyes were on President Biden’s surprising announcement that he would not seek a second term and his endorsement of Vice President Kamala Harris as the Democratic nominee. This announcement initially led to a rise in U.S. stock futures.

However, analysts pointed out that Biden’s exit had been largely anticipated by the markets. Despite this, U.S. equities had a mixed performance last week. The S&P 500 and Nasdaq Composite fell by 1.97% and 3.65%, respectively, reflecting investor caution and a shift away from mega-cap technology stocks towards smaller-cap names. The Dow Jones edged up by 0.72%, and the Russell 2000, focusing on small-cap stocks, gained 1.7%. This shift indicates investors adjusting their portfolios in anticipation of a Federal Reserve rate cut expected in September. The broader market was also pressured by a global IT outage linked to CrowdStrike, which affected various services from airlines to banks.

Turning to China, the Shanghai Composite index fell by 0.61%, closing at 2,964, while the Shenzhen Component lost 0.38% to 8,870. Mainland stocks struggled to build on gains from the previous session despite an unexpected cut in key lending rates by the People’s Bank of China (PBoC). The PBoC reduced the 1-year and 5-year loan prime rates to record lows of 3.35% and 3.85%, respectively, in an effort to support the fragile economic recovery. Additionally, the central bank lowered the 7-day reverse repo rate to 1.7%, marking the first such cut in nearly a year. These measures aim to provide more financial support following weak Q2 GDP readings and mixed June activity data. However, a policy document released over the weekend by the Communist Party, which reiterated familiar goals without introducing new measures, failed to inspire confidence among investors.

The energy sector in China was also affected, with major companies such as PetroChina and CNOOC seeing declines of 3.4% and 3%, respectively, due to weaker oil prices.

Iron ore prices continued their downward trend, hitting a three-week low of US$108.45 per tonne. This decline is attributed to a rebound in the dollar and an increase in iron ore inventories at Chinese ports, indicating a surplus in supply.

Australian miners reported strong annual production figures for the current fiscal year, bolstered by improved weather conditions, which further contributed to the oversupply in the market.

Crude oil prices opened the week with slight gains, although intraday trading showed a tendency towards the negative side during the European midday session. Prices were initially supported by renewed optimism for a ceasefire in Gaza, but concerns about ongoing supply constraints weighed on the market.

The anticipated increase in oil supply for 2025 and expected stabilization of the market by the fourth quarter of 2024 added to the pressure on crude prices. President Biden’s decision to step down and endorse Kamala Harris has introduced additional uncertainty, as Harris might adopt a more stringent stance on the oil industry compared to Biden.

Gold prices saw a rebound towards US$2,410 per ounce on Monday, recovering from a nearly 2% decline in the previous session.

This rise was supported by a softer dollar and growing expectations for a Federal Reserve rate cut. Investors are now focused on upcoming U.S. economic data, including Q2 GDP growth estimates, personal spending and income figures, and the June PCE price index, which is the Fed’s preferred measure of inflation. The market is also evaluating the broader implications of President Biden’s decision to end his re-election campaign and endorse Vice President Kamala Harris, considering the potential impacts on economic policy and market stability.

Monday’s market moves highlight a period of adjustment driven by President Biden’s unexpected decision not to seek re-election and the resulting changes in investor sentiment. With weaker commodity prices and mixed signals from China, investors are re-evaluating their strategies, particularly in light of anticipated Federal Reserve rate cuts.

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Regards,

Mark Elzayed

Investor Pulse

General Advice only. If seeking personal advice, please consult your financial planner or advisor. Past performance is not indicative of future performance.