Markets flat – Challenger downgrades

James Gerrish

Market Matters

The market chopped around for the session today before closing flat - the ASX200 traded as much as +20 points higher and -10 points lower than the previous close. It was up on employment data, hitting the intraday high shortly after the 11.30AM print but was trading near the lows an hour later.

The employment data was mixed, with unemployment steady at 5.2% and slightly off the expectations of 5.1%. There were 42k jobs created, more than double expectations however much of the difference can be attributed to the election which employs a few thousand over the weeks surrounding the date. Finally the participation rate climbed up to 66% - a new all-time high above last month’s 65.9% and explains the stubbornness in the unemployment rate.

Underlying the miniscule index move were some bigger twists at a stock level. AfterPay (APT) was the worst off, falling -12% thanks to an AUSTRAC investigation into money laundering. Wesfarmers (WES) was also lower, off -5.15%, on news Target will miss sales targets again. The discount department store has been a thorn in the side but was showing signs of some recovery recently until today’s announcement – a soft 2H to blame as comparable sales have fallen 2.3% for the five months to May.

Stockland (SGP) was also punished, off -2.24%, following delays in their Mt Atkinson project, longer settlements and also a move higher in default rates – now above 5% for the current quarter. The biggest concern was that the company revised sales guidance lower on residential lots after reconfirming just 2 weeks ago. Challenger (CGF) also downgraded – a little more detail on this below.

Overall today, the ASX 200 fell -1 point or -0.02% to 6542. Dow Futures are trading down -35pts / -0.13%.

ASX 200 Chart

ASX 200 Chart


Today I sat down with Steve Jacobs, Chairman of BTG Pactual. BTG is a Brazilian-based investment bank & asset management company managing over $55bn in assets. Steve is also on the board of EFG International, and has recently become the Chair of Shaw & Partners.

Steve is an incredibly well regarded international investor and it was great to get his insights about global trends. EFG have recently become the major shareholder in Shaw & Partners and as a consequence, now has an interest in Market Matters. EFG have more than 200 analysts globally and that resource will become invaluable to MM and our subscribers as we roll out international portfolio’s in the not too distant future.

Steve & I discussed trade, Trump, Europe, the positive outlook for Australia and more in a quick 12 min video.

I also had a chat today with Rupert Lowe, who is a member of the BREXIT party in the UK and was recently elected into the European Parliament. Rupert set out the reasons why BREXIT should (& will happen). We’ll share that video in the coming days.

Challenger (CGF) -9.03%; hosted an investor day, normally reserved for talking up performance however Challenger’s came with a guidance revision of “the lower end of previous guidance” for normalized net profit of $545m to $565m. The company also started talking down FY20 before the end of the current financial year which really concerned investors today. The downgrade relates in part to poor investment returns across the business. Just last week the Funds Management chief was moved on, an ominous sign ahead of an investor day. On top of this, the shift to selling more annuity products has created a longer term earnings model, it has also forced Challenger to change its investment mix, moving down the risk curve in more conservative but less lucrative investments.

The forecast for next year was based on lower equity returns, product and marketing, lower rates and a lower return on equity. Challenger are now targeting an ROE of RBA + 14%, down from a flat 18% target which Challenger had fallen short of over the past few years. Not a place we want to be at the moment, and won’t be helped by lower interest rates and higher costs within the business.

Challenger (CGF) Chart

Broker moves: BIN popped +5.1% to close at $2.07 on a broker upgrade. BIN have a site visit on the 26th June which is the next potential catalyst. We own BIN in the Platinum Portfolio

· SCA Property Downgraded to Sell at Moelis & Company; PT A$2.45

· Cleanaway Reinstated Neutral at Evans and Partners; PT A$2.27

· Bingo Industries Rated New Positive at Evans and Partners

· Village Roadshow Downgraded to Neutral at Macquarie; PT A$3.10

· Kogan Rated New Sector Perform at RBC; PT A$5.30

· G8 Education Downgraded to Hold at Morningstar

· Western Areas Reinstated at Goldman With Sell; PT A$1.80

· Independence Group Reinstated at Goldman With Neutral; PT A$4.60

· Michael Hill Downgraded to Hold at Morgans Financial; PT A$0.60

· City Chic Collective Ltd Rated New Buy at Bell Potter; PT A$2.15

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James Gerrish
Portfolio Manager
Market Matters

James is Portfolio Manager & Primary Author at Market Matters, a daily investment report with over 2500 subscribers that offers real market insight. He is also Senior Portfolio Manager within Shaw and Partners heading up a team that manages...

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