Global equities were weaker over the past week where strong economic reports, along with speeches by US Federal Reserve Board members, caused a sell-off in US bonds and impacted equity valuations.
The S&P 500 reached its lowest level in three months, with the Dow Jones and NASDAQ also posting significant falls.
Selling was widespread impacting markets globally. Perceived safe haven assets rallied including the Yen and gold futures.
Also impacting equity prices was a speech by US Vice President Mike Pence that suggested the trade war with China may last longer than expected.
This may have prompted further stimulus measures from the Chinese government over the weekend. The rise in US treasury yields to seven-year highs flowed through to other government bond markets.
Higher US bond yields and further trade worries saw the Australian Dollar, Euro and Chinese Yuan depreciate further against the US Dollar.
Higher US bond yields and further trade worries saw the Australian Dollar, Euro and Chinese Yuan depreciate further against the US Dollar.
Domestically, the S&P ASX 200 was not spared from the global rout as significant falls were felt across all sectors over the week. Gold mining stocks were the exception and best performing over the week due to gold’s safe haven status.
Growth stocks with high relative valuations were heavily hit. Notably, technology names including Afterpay Touch (APT), Appen Limited (APX) and Wisetech Global Limited (WTC) experienced significant double digit declines.
Significant M&A activity played out as KKR & Co Inc (KKR) made a takeover bid for cloud based management solutions provider MYOB Limited (MYO). Furthermore, a joint bid by BGH Capital and AusSuper was made for education provider Navitas Limited (NVT).
Further details were released this week regarding Wesfarmers’ (WES) demerger of Coles. Shareholders are expected to receive one Coles share for every share held in WES. Coles is estimated to be an ASX top 30 company once the demerger is complete.
The Independent Experts Report released by WES concluded the demerger in in the best interests of WES shareholders. We note post the demerger WES will become more cyclical in nature. The businesses that remain will be exposed to the consumer and housing cycle (for example Bunnings, Officeworks, Kmart and Target).
Both WES and Coles will each retain a 50 per cent of the Fly Buys business. We have an initial cautious view on the Coles business post the demerger. The key attractiveness of Coles is the relatively defensive earnings and dividend payout.
While Coles target dividend payout is unchanged at 80pc to 90pc, the newly released details of the extra capital expenditure is likely to drag on near term cashflow and the ability of Coles to respond to competitive pressures.
Coles has announced it is building two new automated distribution centres over a five year period (QLD: 2022; NSW: 2023), along with investing additional capital expenditurein its supply chain.
While we have a positive long term view on Coles, we note execution risk is apparent and also its existing strategy of maintaining a competitive price position has not changed and may come under pressure.
- This article does not take into account the investment objectives, financial situation or particular needs of any particular person. Accordingly, before acting on any advice contained in this article, you should assess whether it is appropriate in light of your own financial circumstances or contact your financial adviser. Christopher Hindmarsh is an adviser at JBWere Limited. JBWere Limited is owned by National Australia Bank Limited.
