The S&P/ASX 200 (INDEXASX: XJO) is heading for a negative open on Monday. Here’s what’s making headlines across local and global markets.
ASX 200 finishes in the red
The ASX 200 dropped 1.3% on Friday, sending the benchmark to a 0.2% loss for the week despite a strong series of company reports.
Friday’s weakness was driven by the energy sector, which fell 3.6%, and mining, down 2.4% with the likes of BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO) giving back some gains from earlier in the week.
Investors are clearly still coming to terms with what the economy looks like post the pandemic and the potential impacts of massive fiscal stimulus.
Across the week it was Coles Group Ltd (ASX: COL) and Netwealth Group Ltd (ASX: NWL) among the biggest laggards, falling 9.6% and 13.8%, respectively, due to pessimistic comments on the near-term outlook.
Cochlear Limited (ASX: COH) was the report of note, announcing a 4% fall in revenue to $742.8 million, but reporting a 50% profit increase on the back of a number of one-off gains. The Cochlear share price finished 8.4% higher upon news the dividend would be reinstated amid signs that hearing implant surgeries were slowly returning to normal.
QBE Insurance Group Ltd (ASX: QBE), on the other hand, reported a full-year loss of US$1.5 billion down from US$550 million in the year prior. This came despite the group seeing premium income increase 10.4% and renewal rates growing 9.8%; the dividend remains cancelled.
I’ve regularly highlighted the challenging nature of insurance for investors, something reiterated by the significant cost increases for policyholders, but significant losses due to ballooning claims.
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Online sales booming at Shaver Shop, Cleanaway resilient
Shaver Shop Group Ltd (ASX: SSG) reported an 85.5% increase in profit to $14.2 million, powered by a 102% increase in online sales in the half. The company is clearly benefitting from two trends: the renewed popularity of facial hair and improving male hygiene brought on by the pandemic.
Revenue increased 15% with the profit margin adding 3.4% to 44.7% due to an increasing level of low cost, online sales. The dividend was increased by 52.4% on the news and management confirmed no JobKeeper was received. Despite this, Shaver Shop shares finished the day down 2.1%.
After a difficult few months for the company, Cleanaway Waste Management Ltd (ASX: CWY) reported a somewhat straightforward finish to the year, announcing the largest dividend since 2008, up 12.5% on the previous year.
Cleanaway’s revenue improved slightly by 2.2% to $1.17 billion, with personal waste collection offsetting weakness in city and industrial collection in the middle of Melbourne’s lockdown. Cleanaway shares fell 3.4% on the news.
US markets finish flat, global smaller companies outperform
US markets closed reasonably flat on Friday, the Nasdaq up just 0.07% and the S&P 500 lower by 0.2%, sending the weekly losses to 1.6% and 0.7%, respectively.
Once again it was increasing bond rates, which moved to 1.34%, that are putting pressure on markets, with the bond proxies including consumer staples and utilities among the hardest hit.
At the same time, Treasury Secretary Janet Yellen continues to advocate for significant stimulus to support failing small businesses and struggling families despite the threat of this overheating the economy.
One of my preferred asset classes, global smaller companies, continues to outperform, with the sector more connected to the real economy and less to the global tech giants.
My 3 key takeaways from the week
Profit margins surprisingly resilient
The surprise takeaway for the week was the resilience of profit margins across Australia’s largest businesses. In the case of the big four banks, the expectation that near-zero interest rates would result in a further contraction in their net interest margins has not come to fruition.
A number of central bank policies, including the Term Funding Facility (TFF), have ensured their cost of capital remains incredibly low, offering huge amounts of capital and powering the lending boom.
The case is similar for the likes of Wesfarmers Ltd (ASX: WES) businesses Bunnings and Officeworks, or for Shaver Shop as highlighted above, with the forced adoption of online sales offering lower-cost fulfilment and inventory turnover, delivering significant operating leverage.
Dividends but not as we know them
Whilst dividend announcements from the banking sector are another quarter away, they remain very much in focus during reporting season.
Each of the major mining companies delivered record dividends, whilst a series of smaller, e-commerce powered companies also joined the club.
Valuations in the spotlight
Finally, the question for investors as we move forward into 2021 is what is actually priced into company valuations today. I’m not suggesting a bubble is building, but rather assessing the appropriateness of current valuation on what are cyclical companies.
Whilst the short-term history has been strong for the likes of Domino’s Pizza Enterprises Ltd (ASX: DMP), ARB Corporation Limited (ASX: ARB), and JB Hi-Fi Limited (ASX: JBH), each is trading at a valuation that suggests current conditions will continue for the foreseeable future.
Looking ahead, Bingo Industries Ltd (ASX: BIN), Tyro Payments Ltd (ASX: TYR) and Lendlease Group (ASX: LLC) are expected to report today, as per Rask Media’s ASX reporting season calendar.