Monthly Wrap July 2020

Jessica Amir
July 31, 2020
The Aussie share market rose for the 4th month, up 33% from its COVID-19 low. We saw Australia slip into deflation, while on the commodity front, all that glittered was gold.
In this week’s wrap, Jessica covers:
  • (0:16) Star stocks: ALS (ASX:ALQ) +34% & Orocobre (ASX:ORE) +33%
  • (0:45) Stocks to consider as the gold price glistens
  • (1:55) Inflation hits rock bottom – biggest fall in history
  • (2:25) Rent takes a plunge: also a historical record
  • (2:56) Inflation rebound themes to consider: childcare & fuel/oil
  • (3:57) Rio Tinto (ASX:RIO) & Fortescue Metals (ASX:FMG) results
  • (5:30) Next week: Resmed (ASX:RMD) reports, RBA meets
  • (6:17) Retail stocks to watch: Temple & Webster (ASX:TPW), Michael Hill (ASX:MHJ) & Harvey Norman (ASX:HVN)
Read Transcript

Welcome to the monthly wrap for July, I’m Jessica Amir, a market analyst with Bell Direct.

The Aussie share market is tracking high for the fourth month in a row up 2.6% in July and is up 33% from the COVID-19 low.

Outperforming stocks for this month in the ASX200 include testing giant ALS (ASX:ALQ) up 34%, Orocobre (ASX:ORE) rising 33% and Fortescue Metals (ASX:FMG) rising 26%.

As for underperformers, Avita Therapeutics (ASX:AVH) fell 32% but it’s still up 852% year-to-date, while cement and lime business Adelaide Brighton (ASX:ABC) fell 28% after losing U.S. giant Alcoa as a client.

On the economic front, inflation hit rock bottom falling through the floor, while on the commodity side all that glittered was gold.

The gold price soared to a brand new record high of US$1,980 an ounce, gaining 28% this year.

If you compare that to the average return of 16 gold stocks up 81%, it’s indeed something for you to think about.

Gold stocks can produce an income stream and pay out profits as dividends, while physical gold cannot.

A study by Oxford Economics showed if investors have 5% of their portfolio in gold, their overall portfolio volatility reduces, while returns increase.

But consider UBS only values gold now at US$1,900, so it could be worthwhile looking at undervalued gold stocks.

Regis Resources (ASX:RRL) and Oceana (ASX:OCG) are two gold stocks trading at significant discounts, both are UBS buys.

Newcrest Mining (ASX:NCM) is also a UBS buy, Saracen (ASX:SAR) could be worth a look too, as it has a strong growth path with five-year production growth, 5% ahead of its peers.

While Bell Potter this week reiterated Westgold Resources (ASX:WGX) as a buy.

Now moving to inflation, hitting rock bottom Australia slipped into deflation with Australia’s consumer price index (CPI) falling 1.9% year-on-year in the June quarter to -0.3%, that marked the biggest fall in history.

It wasn’t too surprising though, as the cost of child care fell 95% due to Government initiatives, preschool costs down 16%, petrol prices losing 19% due to oil price falls and rents fell for the first time in history down 1.3%.

And it’s the first time since 1972 that 0.

But excluding these categories, CPI would have risen 0.1% in the year.

It’s expected CPI will also rebound next quarter with child care prices up 87% and Citi expects petrol prices to rise following a fall in oil supply in the third quarter.

So to potentially invest in these themes, for childcare companies you could look at G8 Education (ASX:GEM), it’s back to their old payment method and children occupancy is now at 65% with physical attendance up 20% from April lows.

GEM is also the largest provider of early education, has very little debt and if employment conditions improve in the coming months, it could see a stronger recovery, with opportunity to gain greater market share.

Its shares are already up 70% from their COVID-19 low.

GEM is backed by UBS as a buy with a $1.40 target.

Another child care provider to think about is Think Childcare (ASX:TNK).

And if you wanted to consider an oil recovery stock, consider Santos (ASX:STO), it’s the second largest Australian pure oil and gas company.

Following Santos’ stronger operational second quarter results, with production up 15%, Citi maintained Santos as a buy with a $7.32 target.

And reporting season kicked off this week, Rio Tinto (ASX:RIO) Australia’s third biggest miner reported half year earnings fell 6% to US$9.6 billion, noting falls in Aluminium and Copper and the U.S. dollar played a part.

What was key though was the earnings result beat expectations and Rio Tinto increased its half-year dividend by 3% to US$1.55 to be paid in September.

What was interesting was group revenue from China increased 5% to 55%, supported by pickup in China’s industrial activity.

Morningstar says everything being equal, Rio Tinto is overvalued.

Goldman Sachs, Citi, UBS and Morgan Stanley all have the stock as a hold.

Fortescue Metals (ASX:FMG), a pure focused iron ore company, in fact the world’s fourth biggest exporter of iron ore, handed down their June quarter results with exports hitting another record high.

FMG’s riding high on China’s demand for steel, which hit record highs, supply on the other side is constrained as Vale the world’s biggest producer is not going to ramp up production for six months at least.

FMG’s CEO says the iron ore price should be supported to move higher given the strong v-shape recovery in demand and industrial production.

UBS maintained FMG as a buy, Citi says it’s a sell, Goldman’s has it as a hold.

Now what to watch next week, well firstly earnings results will be out for ResMed (ASX:RMD), BWP Trust (ASX:BWP) and ALE Property (ASX:LEP).

Secondly on the economic side, on tantalising Tuesday the RBA meets. Rates are expected to remain on hold at 0.25%, with the focus being on when bond buying and if it will kick off again.

And Retail Trade is out for June on the same day, expected to show sales rose 7.1% from an almost 17% lift in May.

And you’d think retail spending could continue to rise until at least the end of March next year, which is when the Government’s $88 billion support via JobKeeper and JobSeeker along with the $2 billion support for apprentices and school leavers comes to an end.

So if retail numbers rise in line or are better than expected in June, stocks to watch include online furniture business Temple & Webster (ASX:TPW), which hit a record high this week and is up 183% this year, it’s backed by Bell Potter as a buy.

Bell Potter also backs City Chic Collective (ASX:CCX).

Also look out for Citi’s buy rated stocks like Michael Hill (ASX:MHJ), Nick Scarli (ASX:NCK) and Premier Investments (ASX:PMV), which is the owner of Peter Alexander for your pyjamas if you buy them from there.

Harvey Norman (ASX:HVN) and Myer (ASX:MYRE) are both UBS and Citi buys.

As well as Coles (ASX:COL) and Rebel and Macpac owner Super Retail Group (ASX:SUL), which both Citi and Goldman Sachs agree are buys.

So there’s plenty to consider.

On behalf of everyone here at Bell Direct, have a happy and safe weekend.

I’m Jessica Amir, see you next week.

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