ASX 200 (XJO) Monday – what ASX investors need to know

The S&P/ASX 200 (INDEXASX: XJO) is set to open flat this morning as futures point to a subdued opening for the week. Here’s what you need to know.

Stock market recap

It was another bumpy, albeit positive, week for markets with the ASX 200 gaining 0.4% on Friday and finishing around 2% higher for the week. The primary driver remained Australia’s main recovery hope, commodity exports, with the materials sector finishing up 4.2% as the iron ore price remained above US$115 per tonne. In a sign that investors are once again moving back to traditional safe-haven assets, utilities also recovered, adding 3.1%.

The story was similar overseas with the broad-based S&P 500 improving 1.3% for the week. However, Netflix Inc.(NASDAQ: NFLX) dragged down the FANGs and the tech-focused Nasdaq index fell 1.8% in a rare underperformance.

The Euro Stoxx finished broadly flat, as investors were left disappointed by the ECB’s decision to leave rates on hold and increase bond purchases by ‘only’ $120 billion. Despite this, export-exposed companies including Mercedes Benz owner Daimler AG (ETR: DAI) and BMW (ETR: BMW) finished 4.4% and 1.6% higher. UK’s FTSE 100 also added 0.6% as the Government mandated face masks amid a broad reopening of the economy.

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Netflix shares tumble on earnings miss

BlackRock Inc. (NYSE: BLK), the US asset manager behind Australian ETF issuer iShares, provided a quarterly update on Friday, announcing $100 billion in cash flows, taking assets under management to US$7.32 trillion. The company saw revenue increase 4% despite a slowdown in ETF flows during the pandemic and a 22% increase in earnings for the quarter; the stock finished 3.7% higher.

Netflix reported another 10.1 million net new subscribers to its platform, ahead of its own 7.5 million forecast, but below the 12 million anticipated by analysts. Revenue increased 25% to $6.15 billion but management suggested that COVID-19 has brought forward signups, with just 2.5 million expected this quarter. In my view, NFLX is the most challenged of the FANG stocks by virtue of its reliance on creating increasingly expensive new content and adjusting to each new region it enters. Netflix shares finished the session down 6.5%.

Closer to home, both Rio Tinto Limited (ASX: RIO) and BlueScope Steel Ltd (ASX: BSL) reported on Friday, the former reporting a 4% increase on 2019 production and a 19% increase in shipments from the first quarter of 2020. BlueScope, on the other hand, finished 1.3% lower after reducing the carrying value of its New Zealand operations by $200 million. This is despite second-half steel volumes being in line with the first half.

Generalisation fraught with risk

The technology sector was once again the talking point of the week with a procession of articles either highlighting the opportunities or warning of inflated valuations. As is always the case, this sort of content must be taken with a grain of salt, as any type of generalising or broad-based assumptions in financial markets is fraught with risk. Let’s be clear, there are no simple rules to successful investing and no business is the same.

Adding technology to your portfolio does not guarantee higher returns, in fact it may do the opposite; identifying and supporting quality, growing business with large addressable markets is a far more powerful strategy.

Generalisation and the chase for technology exposure has been behind the incredible run of the latest Betashares Australian Technology ETF (ASX: ATEC), yet the index holds 28% in just two stocks: Afterpay Ltd (ASX: APT) and Xero Limited (ASX: XRO).

Now more than ever, investors should be focused on risk-adjusted returns that account for volatility, rather than investing solely on hope or momentum. This requires a selective and flexible approach to identifying high quality global, not local. businesses.

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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