Investment Matters

What Matters this week

There was a lot that mattered this week. And most of it had very little to do with the micro and very much to do with the macro.

Well, the micro may have something to do with it, that is, the (electron) microscopic RNA fragments that have put the world at threat of a pandemic. And, of course, sparked a prisoner’s dilemma when it comes to buying toilet paper at your local1.

This week we also saw Biden and Bernie battle it out, with the market clearly rooting for the more moderate Biden - bouncing on Thursday after an impressive Super Tuesday result.

Mix in an unexpected rate cut from the Fed on Wednesday night (50 bps) (paradoxically we found out expected rate cuts = good, unexpected = panic), and a cut from our own economic technocrats (the Reserve Bank) of 25 bps on Tuesday and the net result was: volatility. As seen below:

It has been a relatively quiet financial year...until Monday last week
Source: First Samuel, IRESS

Above: the XVI – volatility index which represents a measure of investors expectations for future market volatility/swings.

However, this volatility was both a blessing and a curse – with companies to be found at a discount for those willing to rummage through the bargain bin.

The casualties over the week were the usual suspects, including travel and education stock (IDP Education: -7.5%, Flight Centre: -11%, Virgin: -14%, Qantas: -13%). The rush to safety crushed bond yields, with the government now effectively borrowing from the market at a diminutive rate of 0.71% for 10 years.

And of course, gold (or the price of gold) made it through the week relatively unscathed (+2.0%).

Furthermore, with the RBA pressing the panic button (and using one of the few remaining arrows in its quiver) Westpac and CBA decided to lead the rate cut race (in passing rate cuts on that is) – with the banks subsequently taking a sharp hit (ANZ: -6.4%, NAB: -7.2%, CBA: -6.0%, WBC: -5.2%).

The positive from this week was: it appears Wuhan is back to work (or at least back to polluting). See below:

Pollution: a sign of economic health



Above: Nitrogen Dioxide (a product fossil fuel burning) levels (micrograms per metre squared) on the 5th of March over the district of Wuhan.

Given this volatility, there was relatively little news flow that came from companies during the week, with reporting season now winding down. Two stood out:

TPG achieved a trifecta – posting higher than expected earnings for 1H-20, upgrading its guidance for the full year and delivering news that ACCC Chairman Rod Sims has let them off the hook (with the regulator deciding it will not appeal the Federal Court’s ruling that supported the merger).

Finally, one of the last cabs off the rank (heralding the end of reporting season is looming) Myer reported on Thursday. Total sales were down 3.8%, with comparable-store sales up a meagre 0.4% (excluding Apple and Country Road Group sales). Net profit after tax was similarly muted, up only 0.4% after a fistful of below the line, one of the costs ($15.2m worth in fact). With margins contracting and the retail sector facing considerable headwinds, cost-cutting did much of the heavy lifting. 

However, the company has worked awfully hard just to stand still - with Myer’s share price now sitting at where it was before its John King (newly appointed CEO) led revival.

1 The Prisoner’s Dilemma is a scenario in game theory in which the outcome of one person's decision is determined by the simultaneous decisions of the other participants, resulting in a bad outcome for all of them if all act in their own self-interest.