The Australian share market and ASX 200 (ASX: XJO) is set to open lower despite the NASDAQ 100 hitting an all-time high overnight. Here’s what you need to know…
The short squeeze?
The ASX 200 notched up a sixth straight day of gains, taking the run to over 6% as it finished up 2.4% on Tuesday following the public holiday in Victoria. Some experts have suggested it is a ‘short squeeze’ with the likes of National Australia Bank and ANZ Banking Group both up over 5%.
As has been the case during this market rally, the cyclical sectors of energy, financials and consumer/travel businesses rallied the hardest, with healthcare and technology feeling the brunt of the so-called rotation to value.
Wesfarmers provided an update on sales at its ubiquitous Bunnings and Officeworks store network, neither of which closed during the COVID-19 shutdown, with the former seeing sales increase 19.2% and the latter 27.8%. The company has solidified its position as a core long-term holding for portfolios post the outbreak, but we are still waiting on some ideas about its expected acquisitions before making a conviction call.
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Is the dream rally ending?
Overnight, it looks like this incredible stock market rally may be coming to an end, as investors become wary of inflated valuations with an outlook for contracted earnings. The S&P500 fell 0.8% overnight and the Dow Jones (.DJI) 1.1% as consolidation and profit-taking swept the markets.
It was a similar story in Europe with the Euro Stoxx and FTSE 100 falling 1.4% and 2%, respectively.
The global technology sector remains a key beneficiary of the rally with the Nasdaq hitting another record high as Apple added 3.1% after announcing it will be utilising its own chips in future MacBook models. Closer to home and accounting disrupter Xero dropped 6% on expectations its core smaller business market may be hit hardest and take longer to recover following COVID shutdowns.
Revaluation in the face of uncertainty
A simple google of the words ‘ASX’ and ‘cost-cutting’ results in hundreds of updates on ASX-listed companies, each of which will be seeking to reduce costs and staff numbers in an effort to sustain profits post-COVID-19.
Is this likely to be the biggest trend of the recovery? A resetting of costs as companies take the opportunity to remove ‘fat’ and boost operating margins? Take for instance Qantas Airways, which is expected to cut its costs from $4.2 billion to just $2.0 billion in 2021 as it seeks to remain profitable in this ‘new normal’.
Apply a similar cost-cutting policy to the banking and retail sectors as business embrace technology and e-commerce wholeheartedly and it becomes clear that unemployment may be a risk. On this, G8 Education managed to rally another 8% on Tuesday despite the Federal Government removing Job Keeper payments for employees of child care providers in an approved service.
GPT Group downgraded the value of its High Point shopping centre by 13.6% as rent payments remain in arrears whilst Charter Hall has been one of the few companies on the front foot, acquiring an NSW logistics property for $115 million.
Income starved investors looking for yield in property assets need to be selective and our preference would be more of the latter not the former with more pain to come.
This report was written by Drew Meredith, Financial Adviser and Director of Wattle Partners. To get in contact with Drew, click here to visit the Wattle Partners website.