Weekly Market Update - 18/08/2021

The week that was

Markets were broadly up again, as earnings continued to outpace already buoyant expectations. Even though this reflects past conditions and the delta variant plus a slowing China has cast a shadow over future expectations, the sheer extent of corporate earnings dominated in the Northern Hemisphere which is in holiday trading conditions. While large tech companies' earnings have continued to be strong, the biggest earnings season surprises so far have come from industrial, healthcare and consumer discretionary stocks. This meant that last week, and this month so far, the US Dow Jones Industrial and more industrially focused European markets have led the way (up almost 1% and 2% respectively). Notable mentions include Disney and BioNtech (of Pfizer vaccine fame) who beat already high expectations by some 40% and 50% respectively. This will most likely be the 5th quarter in a row where earnings beat expectations and the second quarter where earnings have been growing at record levels (last year it was more about beating dismal expectations. That means that this will be the quarter where corporate profits are at higher levels than they would have been if COVID never happened, such has been the extent of stimulus, especially in the US.

Financials were also one of the best performing sectors here and abroad, it seems not only because the yield curve steepened, but curiously because the yield curve is expected to steepen more in the future (this is strange because normally that would mean that the yield curve would be steeper now but instead long-term rates remain stubbornly low). We discuss the whys and wherefores of this further below, but it was probably a large part of why the Australian market also hit record highs (again) last week given the weight of financials in the local market. The other related reason would be the fact that CBA just announced a 17% increase in dividends and ANZ and Westpac are expected to do the same this week when they report their results. While local Consumer Staples, Utilities and IT stocks were also up strongly for the week they represent a much smaller proportion of our market and didn’t really move the dial.

The local large miners held their ground, even though iron ore prices were down again last week. Otherwise, commodity markets were fairly flat apart from soft commodities which were up a few percent. Gold prices were more settled, having dropped 5% last week, apparently due to ‘technical factors’ (probably a hedge fund suffering a margin call).

Government bond prices slipped early in the week (yields rose) before edging back to levels at the start of the week. Credit spreads edged out, but again only slightly. While equity markets are making the best of the party, while the low interest rate reflation party continues, the bond markets appear to be in a holding pattern and many wonder whether the annual central bank get together at the end of the month might prove to be a watershed.

?

What we'll be watching this week

As The Economist notes this week, when we don’t really understand something we tend to blame it on so-called ‘technical’ factors. This interesting article was about retail flows and so-called meme stocks but arguably a bigger issue is that many people now maintain that long-term bond rates are being held down by these ‘technical’ factors, one of which could be QE, another could be the regulatory requirement for banks to hold bonds as collateral. This has profound implications for asset pricing, as if current yields are temporarily depressed because of ‘technical factors’ then they one might expect upwards pressure on rates sometime soon. On the other hand, if long-term rates are so low because short-term rates are likely to remain low and below inflation then, theoretically, one should be willing to potentially pay an infinite price/earnings ratio for a stock or any price for a real asset like a house.

Earnings and revenues are at all-time highs. Prices are also at all-time highs, which is probably as it should be. More interestingly though, price/earnings multiples (and revenue multiples for that matter) are also higher, and most especially for certain popular US tech stocks. This is of course where the rubber hits the road for investors and the above table is a useful starting point at this juncture in working through the implications for different equity and real asset investments. \

---------------------------------------------------------------------------------------------------------------Integro Holdings (WA) Pty Ltd ABN 61 612 297 739

AFS License No. 489444

General advice warning

The information, including tax information and any advice provided in this document has been prepared without taking into account your objectives, financial situation or needs. Because of that, you should, before acting on the advice, consider the appropriateness of the advice, having regard to those things. [If the advice relates to a particular financial product: You should obtain the relevant Product Disclosure Statement for any product mentioned and consider its contents before making any decision.]

?