Third Week of July
Friday’s late decline of 0.6% meant that the index shed 2.5% for the week. Pessimistic sentiment drove markets lower on the continued rise of covid cases both locally and globally. Here in Australia we reported a 4-month high of 318 cases on Thursday and the US a record of ~63,000. Fortunately, in Australia, the new cases dropped back down to below 200 the very next day with the clusters still contained within Victoria – the same cannot be said for the US however, reporting an even higher number on Saturday. Scott Morrison also announced a significant cut to the number of international arrivals it will accepts by just over half.
However, the economic pandemic seems to not affect the Buy-Now-Pay-Later Sector, with Zip Co adding 8% and AfterPay hitting an intraday record of $76.62. The Tech Sector added 1.4% for the week with Appen and Xero also joining the BN-PL stocks. It is also important to note that trading volumes were relatively low on Friday, and have been all week. There were also a number of rating changes from the research houses; Goldman Sachs cut both gold miners Evolution (EVN) and Regis Resources (RRL) to a sell with a $4.60 and $4.10 price target respectively. They also rated Temple and Webster (TPW) as a New Buy with a price target of $8.50. Whilst JPMorgan downgraded Treasury Wines to underweight and a $10 price target on the stock.
Top/Bottom Performers (in ASX200)
- Netwealth +18.4% (NWL.AX)
- Perseus Mining +12.3% (PRU.AX)
- St Barbara +10.3% (SBM.AX)
- Corporate Travel -15.2% (CTD.AX)
- Domain Holdings -12.5% (DHG.AX)
- AP Eagers -10.7% (APE.AX)
Over in the US, Covid cases continued to increase, and the fear is that some states will start to rollback their reopening and even go back into shutdowns. Even Trump has gone back on his stance, now following the health experts advice and wearing a face mask in public for the first time. However, this was offset by the positivity that Gilead Sciences’ antiviral Remdesivir reported a reduction in mortality risk in COVID-19 patients by 62%.
On a company specific level, second-quarter earnings season gets underway next week, with updates expected from major US health care companies and banks such as Johnson & Johnson, JPMorgan Chase, Citigroup and Wells Fargo.
Play of the Week – BNPL Bubble?
The Buy-Now-Pay-Later (BNPL) sector was up strongly this week. Sezzle announced a capital raising of $86M to further expand their growth to follow in the footsteps of its competitor Afterpay (APT).
Currently, APT has a market cap of ~$20B,which puts the fairly new company in the Top20 companies in Australia by way of market cap. If you combine that with the likes of ZIP ($2.8B), SPT ($0.5B), & SZL ($0.5B), the total market cap is almost $25B as an entire sector. A similar size to Goodman Group (GMG) – largest real estate company in Australia that has $43B in real assets under management and makes over $1.6B in profits. Compare this to the BNPL Sector which is still yet to make a single dollar in profits between all of these companies combined.
Of course, individuals and institutions are buying on forward valuations sure, this is what makes the market, but the risk is that the sector begins to decrease before these companies even turn a profit. At this stage, buying the BNPL sector is pure speculation, rather than a rationale investment.
Gold improved for the fifth straight week, adding 1.4% to just under $1,800US. This week the commodity hit its highest level since September 2011.
Oil prices remained just above $40US too this week. Increased demand forecasts supported the commodity whilst Baker Hughes Data showed US energy firms have cut their oil rigs operating to a new low for 10th straight week as inventories continue to build.
Iron Ore was boosted this week to $105USD.
Globally, the US earnings season kicks off, followed by their June retail sales. In China, 2nd quarter GDP will be under the microscope as well as June industrial production and retail sales.
We will also gain a read on the local economy. Westpac will release its July consumer sentiment, NAB will outline its figures for business confidence for June and the ABS to publish the labour force survey. Australia lost about 800,000 jobs in April and May, many forecasters expect a rebound in June.