Investment Matters

What Matters this week

The market began the week in a panic – with fears surrounding “The Coronavirus” (though there are in fact many coronaviruses - which are typically associated with the common cold) spreading faster than, well, “The Coronavirus”. 

The Australian market (All Ordinaries Index) took the lead from the US market on Friday and Monday, falling by -1.5% as we returned from Australia Day, although this fall was somewhat muted, relative to the 2.6% fall seen in the S&P500.  

Share prices of travel, education, trade or growth-related stocks bore the brunt of investors’ trepidations. Notable casualties on the day included Qantas (-5.4%), Corporate Travel (-7.2%), Fortescue Metals (-7.6%) and Webjet (-14.9%).

Mixed in with these over-riding macro worries were a handful of company announcements – with news flow somewhat subdued given the upcoming February company profit reporting season (1H-FY20 results).

Following the institution of significant price increases last year (or as the company would put it “adjustments”), waste management company Bingo (-2.5%) announced it, amongst other market participants, is being investigated by the ACCC. However, the market shrugged off this news as the company reaffirmed its guidance for FY-20.

Treasury Wine Estate’s (maker of Penfolds, Wolfblass and others) poor track record in the US market continued. The company downgraded expectations for profit growth in FY20 after challenging conditions in the US (with export restrictions in China and impending divestments of wine portfolios leading to a supply glut) have led to discounting at a time where costs are elevated. The company has subsequently pared its growth forecasts for FY20 and FY21. However, they have made some progress - at least they did not have to resort to destroying millions of dollars’ worth of unsold stock ala 2013.  The subsequent share price drop (-31%), of course, is before the impending disappearance of sales in China (due to, The Coronavirus, of course) has been explicitly quantified.

Virgin Money UK (formerly Clydesdale Bank) has rebounded (+5.7%) after being one of the more unloved stocks in 2019. Post- Johnson election, the company has experienced a parabolic recovery and surprised the market with its trading update on Wednesday, tracking well on several metrics (volume growth in consumer lending, deposit growth, stabilisation of net interest margins).

Lastly, the Commonwealth Bank (+0.6%) this week stealthily launched what is a new addition to the Buy Now, Pay Later (BNPL) space (Afterpay et al.). “Klarna” appeared on customers mobile banking apps on Thursday as CBA looks to roll out the service in Australia. US$5.5 billion Klarna, in which CBA has a 5.5% stake, provides a merchant-agnostic service and will piggyback on the bank’s extensive customer base to deliver an end-to-end online shopping experience. Klarna’s key selling point is, in fact, this “experience” - its ability to take a shopper from item to purchase in a minimal number of clicks and the integration of price drop and out of stock notifications.

This has all come in a week where some of the BNPL industry’s largest participants signed a voluntary code of conduct – capping late fees, increasing the stringency of creditworthiness assessments, restricting the extension of credit to those already behind payments, amongst other things. Self-regulation clearly thought to result in a better outcome than the alternative (actual regulation)….