Weekly review: RBA leaves cash rate on hold, downgrades economic growth forecast

RBA leaves cash rate on hold downgrades economic growth forecast 2019 November
WEEKLY MARKET REPORT

Australia’s Reserve Bank decided to leave the cash rate at 0.75% on Tuesday.

Commenting on the decision, Reserve Bank Governor Philip Lowe said although the global economic outlook remains “reasonable”, risks are tilted to the downslide due to ongoing US-China trade and technology disputes which have impacted trade and investment.

The Australian economy is now predicted to expand 2.25% this year and reach 2.75% over 2020.

This is below the bank’s 2.4% forecast for 2019 back in August.

Wage growth has also been lowered – now anticipated to increase 2.2% this year and a mere 2.3% over the next two years.

Inflation remains subdued with CPI inflation of 0.3% in the September quarter and 1.7% over the year. The bank pointed out faster wage growth would be needed for inflation to remain within its 2-3% target range.

Despite lower growth forecasts and subdued inflation, in Tuesday’s statement, Dr Lowe noted a “gentle turning point” had been reached in the Australian economy after a soft patch in the second half of last year.

He added that the Australian Government’s tax cuts, combined with low interest rates, ongoing infrastructure spending, an upswing in housing prices and a brighter outlook for the resources sector are expected to shore up economic growth.

However, if these positive signals fail to lift the economy, the Reserve Bank claims it is prepared to cut interest rates further.

Trade surplus

Dr Lowe’s cautious optimism was boosted by Australian Bureau of Statistics trade figures that were released this week which revealed a larger than expected surplus of $7.2 billion in September (seasonally adjusted).

Analysts had been predicting a $5 billion surplus. The previous month’s figure of $5.9 billion was revised up to $6.6 billion.

However, September and August were both down on June’s record $8 billion surplus.

Retail lags

Despite some positive signals, retail sales failed to impress this week with ABS numbers coming in lower than expected.

It appears tax cuts have failed to boost domestic spending as much as the government had hoped.

For September, Australia’s retain turnover lifted 0.2% (seasonally adjusted) – lower than the 0.4% rise in August.

ABS director of quarterly economy wide surveys Ben James said the largest falls came from clothing, footwear, personal accessories, department store purchases and household goods.

Queensland experienced a 0.1% contraction in retail turnover, while Victoria remained stagnant at 0%.

Tasmania led the country with a 1% increase in retail turnover with sectors such as cafes, restaurants and takeaway services expanding 0.6%.

Major banks take a hit

Meanwhile, after the recent royal commission Australia’s banking sector has taken another hit with both Westpac Banking Corporation (ASX: WBC) and National Australia Bank (ASX: NAB) revealing cuts to FY 2019 profit and dividends.

For FY 2019, Westpac reported a 16% fall in profit to $6.78 billion with the bank’s full year dividend dropping to $1.74 per share – down from $1.88 in FY 2018.

Impacting profit were $658 million in customer remediation costs following the royal commission and a $172 million realignment of Westpac’s wealth business.

The bank went out to investors seeking to raise $2.5 billion in a share placement and purchase plan to enhance its balance sheet and underpin future growth. Of which $2 billion was successfully raised via the placement.

NAB reported a 13.6% decline in net profit for FY 2019 to $4.8 billion, from $5.5 billion in the previous corresponding period.

The bank’s chief executive officer and chairman Philip Chronican attributed the fall to a challenging year as the bank continues to deal with the fall out of the commission and remediation requirements.

Alone, NAB has $1.1 billion in remediation payments to make to customers relating to wealth, insurance and personal banking. However, the full remediation sum won’t be known until all customer payments have been calculated and completed.

The bank’s final franked total dividend for 2019 was $0.83 per share bringing the total FY 2019 dividend to $1.66 per share – down 16% on the previous period.

NAB and Westpac’s results showed bigger falls than Commonwealth Bank (ASX CBA) and ANZ (ASX: ANZ), which revealed their full year results earlier this year.

Commonwealth Bank’s statutory net profit after tax declined 8% to $8.571 billion in FY 20109, however, its full year 2019 dividend remained the same as FY 2018 at $4.31 per share.

ANZ released its FY 2019 at the end of October and revealed an after tax profit drop of 7% to $5.93 billion.

Similar to Westpac, ANZ’s full year dividend remained the same in 2019 at $1.60 per share.

Small cap stock action

The Small Ords index closed up 0.47% to finish on 2901.8 points, despite being down the same 0.47% on Friday.

ASX 200 XJO November 2019 stocks
ASX 200 vs Small Ords

Small cap companies making headlines this week were:

ECS Botanics (ASX: ECS)

Hemp grower and product producer ECS Botanics will see its hemp oil sold across 850 Australian Woolworths stores early next year.

ECS Botanics’ 250ml hemp oil will be available on Woolworths shelves from 13 January 2020.

However, anticipated revenue from the agreement was not disclosed with ECS Botanics claiming it was “uncertain at this time, with no minimum volumes guaranteed”.

Once ECS Botanics has firm sales and revenue figures, the company said it would announce them to the market.

Plukka (ASX: PKA) and Tesoro Resources

Via a reverse takeover, former Australian jeweller Plukka plans to acquire 100% of unlisted Tesoro Resources which owns the El Zorro gold project in Chile.

The combined entity will be known as Tesoro Resources and plans to raise $4.5 million via the issue of 150 million shares at $0.03 each.

Re-listing has been planned for early December and the company’s ASX ticker code will change to ‘TSO’.

Tesoro has interests in two gold projects in Chile’s Coastal Cordillera region, including the right to secure 80% of its currently 51%-owned El Zorro.

Via its local subsidiary, Tesoro completed a 16-hole diamond drilling program at the Coquetas prospect last year, which uncovered 10m at 4.53g/t gold and other mineralised intersections.

Northern Cobalt (ASX: N27)

Alaskan focused Northern Cobalt revealed a 7,500m drilling program will begin during the first quarter of next year at the recently acquired Goodpaster gold project.

Northern Cobalt has the right to secure an 80% stake in the asset via a US$20 million binding term sheet with Canadian-listed Millrock Resources.

Goodpaster is adjacent to Northern Star Resources (ASX: NST) Pogo mine, which has produced more than 4Moz gold at 13.6g/t.

Site works are underway at the project in readiness for the drilling campaign.

Independence Group (ASX: IGO) and Panoramic Resources (ASX: PAN)

WA nickel miners Independence Group and Panoramic Resources made headlines this week after Independence Group bypassed Panoramic’s board with a $312 million takeover bid.

Independence Group followed up the bid with a media and investor session where managing director and chief executive officer Peter Bradford explained Panoramic’s board had been bypassed due to “a number of unsuccessful attempts” to discuss the proposed amalgamation.

Mr Bradford told shareholders it was a “win-win scenario” for holders of both companies with an amalgamated company to unlock the value of Panoramic’s Savannah nickel mine and take advantage of the nickel market which is reaching critical supply conditions.

Independence Group’s all scrip offer valued Panoramic at $0.476 per share which was a 42% premium to its previous closing price of $0.335.

Panoramic’s board responded with a “take no action” statement and said it would evaluate the offer and provide shareholders with a recommendation in due course.

Impression Healthcare (ASX: IHL)

Medicinal cannabis focused Impression Healthcare has added another experienced heavyweight to its management team with John Michailidis now installed as chief executive officer of Impression’s Incannex division.

Mr Michailidis is a former executive of Roche Holding and managing director of Teva Pharmaceuticals.

Impression claims Mr Michailidis has extensive real work experience in all facets of pharmaceutical development, strategic planning, execution of trails, IP protection and product launches.

The appointment coincides with Impression formalising a research services agreement with Cannvalate, which is Australia’s largest medical cannabis clinic network.

ASX floats this week

Small Caps readers who want to view upcoming IPOs or see the performance of stocks that have listed in 2019 can now do so.

The latest companies to make their way onto the ASX this week were:

Cronos Australia (ASX: CAU)

Cronos Australia made its ASX debut on Thursday after raising $20 million via the issue of 40 million shares at $0.50 each.

The company plans to enter Australia’s medicinal cannabis market with THC and CBD products including distributing the Peace Naturals brand that is currently sold in Germany and Canada.

Cronos will also be developing its own Australian-branded medicinal cannabis products for distribution throughout Australia and New Zealand.

With the medicinal cannabis market taking a hit at the moment, Cronos didn’t fare so well – closing its first week down 28% at $0.36.

Primewest Group (ASX: PWG)

In its initial public offering, Primewest Group raised $100 million via the issue of 349 million fully paid stapled securities at $1 each.

A private real estate funds management firm, Primewest was established in 1995.

The company manages about $3.9 billion of property assets across 76 unlisted funds and seven different asset classes.

During the 2019 financial year, Primewest generated $25.6 million in net revenue.

Funds raised from the IPO will give Primewest enhanced financial strength and flexibility to facilitate ongoing growth.

Primewest opened its first day on the ASX on Friday at $1.11 and climbed further to close out its first day and week on the ASX at $1.18.

The week ahead

A fairly quiet week coming up, at least on paper.

Employment numbers out for the month of October will give a more complete picture of the health of Australia’s economy, which at present isn’t exactly looking the best.

In the US, inflation and retail sales numbers are ones to keep an eye on.

While in China, auto and retail sales will give investors a picture of how Asia’s leading economy is performing.

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