The ASX 200 index is expected to fall today with Temple & Webster (ASX: TPW) and Adairs Ltd (ASX: ADH) in focus.
Bumper results
A record result for retail sales, albeit off a low base, up 16.3% in May, triggered another strong rally in the ASX200 last week. However, it wasn’t enough to offset the threat of more shutdowns with the market finishing up just 0.1% for the day and 1.6% for the week.
Consumer discretionary finished the week up 2.6% but it was the associated IT sector, up 7.8% and the likes of Afterpay and Zip Co that delivered the strongest returns.
In the US, each of the Dow Jones, Nasdaq and S&P500 delivered returns above 1% for the week with what has been termed the ‘mega-cap safety’ trade continuing to pay off. The trade involves buying the largest, most profitable and cash-rich companies like Apple and Microsoft and its strong performance in 2020 reiterates my preference for overweight exposures to global sharemarkets rather than the ASX. You can read my recent analysis on the company: “Microsoft – A Never Sell Stock”
Volatility remains elevated with the Dow Jones up 371 points during the session only to close down 209.
COVID returns but retailers bounce
The Victorian Government announced the extension of existing restrictions amid a spike in COVID-19 cases, placing huge pressure on already struggling businesses, but other than this the news remains positive.
The trend set by Temple & Webster which we covered here continued with furniture retailers Adairs and Nick Scali proving sales. On the one hand, Adairs reported a 92% increase in online sales, whilst NCK confirmed profit would be 15-20% higher than 2019 and reinstated its deferred dividend; the share prices were up 10% and 19% for the day.
Despite the strong results and recovery, I’m continuing to avoid the retail sector as there is simply too much uncertainty associated with the potentially higher returns. Consider that Apple reported the closure of 11 stores across 4 US states as cases reached record levels once again; in light of the events in Victoria this may become the new normal.
Orora coughs up
Orora Australia’s leader in glass bottles and aluminium cans finalized the sale of its Fibre division using the proceeds to return capital to shareholders and become debt-free. The stock dropped 16% on Friday as it went ex-capital return.
Scentre Group fell another 4.7% after QBE Insurance announced they would no longer insure the trade credit of Myer Holdings and David Jones suggesting they are wary of the strength of these businesses. Retail property is likely to remain under incredible pressure for the foreseeable future.
One of the talking points in recent months has been imagining what the global supply chain will look like in 2021 and beyond. As I’ve written previously, COVID-19 will have a huge impact on the way we do business and is offering somewhat of a reset for many businesses from retail to manufacturing as they seek to reduce costs (and risk) in a post-pandemic environment. This will have wide-reaching implications on property valuations, e-commerce, robotics and the embrace of artificial intelligence. In my view, investors have little choice but to be exposed to global leaders in this sector.
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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.
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