Rudi's View | May 06 2021
In this week's Weekly Insights:
-The Trend Remains Up
-CSL Optimism Creeping Back In
-Research To Download
By Rudi Filapek-Vandyck, Editor FNArena
The Trend Remains Up
Now that April has been replaced by May, and the share market has put in another strong performance (up 20%-plus since October ex-dividends), investor worries about high asset prices and the risk of a downward correction are once again rising.
While a temporary pull-back does not necessarily need a trigger or a reason, a deeper correction does require a fundamental shift. In the current context, I believe such a shift would either be triggered by sharply rising bond yields in response to the market's changing view on inflation or by corporate profits not living up to expectations.
Bond yields rose sharply during the first quarter of the calendar year, but tensions have subsided and the general view remains that whatever comes our way in terms of consumer price inflation is simply off last year's low base and caused by restrictions on imports and international supply chains that will be resolved in due course.
Last week, economists at Handelsbanken summarised the inflation question as follows: "A spike this year, but the inflation scare is hype". Bond markets can still become more volatile, of course, as short term economic data remain notoriously difficult to predict, but for now the inflation scare has subsided. Bond yields the world around are lower than in March.
And central bankers have kept repeating their mantra that inflation is still ephemeral, and will be, unless labour markets are a whole lot stronger. Another point made by Handelsbanken is the global pandemic is causing long-term damage to employment rates. Both the FOMC and the RBA locally want to see much tighter markets for jobs.
Then again, there is no such thing as 'never' in financial markets. Robert Kaplan, president of the Federal Reserve Bank of Dallas, has become the first to openly disagree with the 'nothing to see here'-message from Fed Chair Jerome Powell. And the Bank of Canada has announced its intention to start reducing the size of weekly bond purchases, otherwise referred to as 'tapering'.
Bonds selling off sharply earlier in the year (yields rising) caused a few ructions here and there, predominantly for quality and growth stocks trading on higher valuations, but it did not pull markets in a downward spiral. Markets merely traded sideways while exhibiting a lot of volatility. Next time may not necessarily be much different.
A much more dangerous threat will come from corporate earnings not living up to expectations. Here the importance of the results released by Australian banks this week cannot be over-estimated.
Westpac In Focus
On Monday, Westpac released interim financials that at first glance look nothing short of phenomenal. Statutory net profit improved by 189%. Cash earnings increased by 256%. Cash EPS of 97c more than tripled from twelve months ago. The half-yearly dividend of 58c compares with the 31c the bank paid out for the full financial year of 2020.
Of course, as we are all too aware, last year's comparables represent a decade low for many companies, including banks such as Westpac, as the global pandemic forced countries into lockdowns and international trade and travel into a halt. So the real question is how these results compare with market forecasts and what is already priced into share prices.
Westpac's financial performance has proved better than expected on key financial metrics, so expect upgrades from sector analysts in the days post the event. In the lead up to this week's results, share prices for the banks had held their own as many in the market were anticipating strong recovery results, supported by reserve write-backs, leading to analyst upgrades and yet another boost to valuations.
Judging from Westpac's release, it looks like those expectations have been vindicated, as was also the case with Bank of Queensland ((BOQ)) in mid-April. The not so good part in this story is that shares in Bank of Queensland are still trading below the level of late February, suggesting the market is not prepared to fully reward the better-than-expected operational performances.
This could be somewhat of a worry, short-term, though Westpac shares rose a full 5% on the day of the results release in an otherwise lacklustre, energy-deficient market.