Weekly review: RBA says low rates are here to stay as banks take a beating

ASX RBA low rates banks Westpac weekly review November 2019
WEEKLY MARKET REPORT

Commenting on this month’s decision to leave interest rates on hold at 0.75%, Reserve Bank of Australia board members agreed it was reasonable to expect these record low rates would be in place for an extended period.

Additionally, with downside risks remaining in the global economy, the RBA board agreed a case could be made to ease monetary policy further at the November meeting.

Despite this, members decided the best approach would be to maintain the current 0.75% cash rate and make a full assessment once more evidence of the earlier monetary easing had become available.

“Members also agreed that it was reasonable to expect that an extended period of low interest rates would be required in Australia to reach full employment and achieve the inflation target,” the minutes stated.

Underpinning these decisions was slowing growth over the last 12 months for Australia’s major trading partners as a result of declining trade and investment.

Additionally, recent indicators have revealed the weakness is spilling into the services sector for some countries.

Back in Australia, board members noted quarterly GDP growth had picked up “a little” since a low point in the second half of 2018.

According to the board, propping up growth is accommodative monetary policy, the middle-to-low income tax offset, improving conditions in the established housing market, infrastructure spending and a pick-up in mining investment.

However, lagging indicators include a fall in retail sales volumes which suggest consumption growth will remain subdued despite the tax offsets.

Board members also pointed out GDP and inflation over the last 12 months were weaker than forecast in November 2018.

ASX performers

On a positive note, subdued domestic and global economic signals haven’t managed to dampen the taste for some stocks this week, with infant formula company The a2 Milk Company (ASX: A2M) rocketing after it lifted its earnings guidance for the 2020 financial due to stronger sales performance in China and the US.

The New Zealand-based company upped it EBIDTA margin from an expected 28.2% to 29-30%.

a2 attributed this to improved price yield and a decline in costs.

Revenue for the first half of FY 2020 is forecast between $780 million and $800 million boosted by infant nutrition sales in China and cross-border-ecommerce markets.

a2 also impressed investors with news it had extended a manufacturing and supply deal with NZ-based Synlait Milk (ASX: SM1) – which has now increased the minimum contract duration by two years.

All the positive news spurred a2’s share price up more than 16% for the week to close Friday at $13.99.

Another stellar performer was Aristocrat Leisure (ASX: ALL), which reported a 22.7% increase in operating revenue for the FY 2019 compared to FY 2018.

The higher revenue boosted net profit after tax by 22% to $752.8 million.

Investors showed their pleasure with the company’s performance by pushing the company’s share price up 8.12% for the week to $34.49.

Another ASX stock with positive financial performance was ALS Ltd (ASX: ALQ) which revealed an 11.3% rise in operational revenue to $919.1 million for the first half of FY 2020. This led to net profit after tax exceeding guidance for the period and reaching $98.2 million – up 5.3% on 1H 2018 and higher than the guidance range of $90-95 million.

By close of trade Friday, ALS’ share price had risen 5.70% to $8.72.

Iconic brands Coca-cola Amatil (ASX: CCL) and Qantas Airways (ASX: QAN) also enjoy an upward ride, with Coca-cola finishing the week 4% higher at $11.44, and Qantas ending its week similarly with a 4.08% gain to $7.14.

Banks and financials take a hit

Not every stock could enjoy a positive week with Link Administration Holdings (ASX: LNK) and Ausnet Services (ASX: AST) among the worst performers.

Link slid more than 6% to close out a dreary week at $5.62, while Ausnet tumbled 5.54% to finish Friday at $1.705.

Banking and finance stocks didn’t fare much better with Westpac Banking Corporation (ASX: WBC) falling almost 7% to $24.77, Magellan (ASX: MFG) down 3.32% to $49.43, National Australia Bank (ASX: NAB) shedding 4.44% to $26.28, Australia and New Zealand Banking (ASX: ANZ) down 2.51% to $24.86, and Commonwealth Bank Of Australia (ASX: CBA) dipping the least at 0.87% to $79.60.

Westpac sued for anti-money laundering breaches

Westpac lost a lot of ground, or more than $6.5 billion to be exact, after Australia’s financial intelligence agency the Australian Transaction Reports and Analysis Centre (AUSTRAC) launched legal action this week against the bank through the federal court.

AUSTRAC accused Westpac of failing to report more than $11 billion in international funds transfer transactions that were completed through its foreign correspondent banking network.

The agency has also alleged the bank did not carry out appropriate due diligence on customers sending money to known child exploitation regions in South East Asia including the Philippines.

Westpac share price chart Austrac
Westpac’s share price has taken a substantial hit over the past two months.

AUSTRAC has applied for a civil penalty order against Westpac’s contravention of the Anti-Money Laundering and Counter-Terrorism Financing Act on more than 23 million occasions, with each contravention attracting a penalty up to $21 million.

“Westpac has failed to properly resource the [anti-money laundering and counter-terrorism] function, to invest in appropriate IT systems and automated solutions, and to remediate known compliance issues in a timely manner… because Westpac adopted an ad hoc approach to risk management and compliance,” the agency stated.

In response, Westpac’s chief executive officer Brian Hartzer acknowledged the seriousness of the proceedings.

“These issues should never have occurred and should have been identified and rectified sooner,” he said.

“It is disappointing that we have not met our own standards as well as regulatory expectations and requirements.”

Mr Hartzer added the bank was “heavily investing” in strategies to better-manage and detect financial crime risks.

National Australia Bank may also come under AUSTRAC’s eagle eye after revealing it “might have been involved” in a breach of the agency’s laws.

As a result, National Australia Bank has AUSTRAC with information and documents for evaluation.

Small cap stock action

The Small Ords index closed the week down a major 1.9% on 2883.3 points.

November 2019 ASX 200 vs small ords chart
ASX 200 vs Small Ords

Small cap companies making headlines this week were:

MetalsTech (ASX: MTC)

Battery mineral explorer MetalsTech entered the gold space this week with news it had secured an option to acquire an advanced gold project in Slovakia.

The project known as Sturec hosts 2004 measured and indicated resources of 1.01Moz gold and a historic reserve of 873,000oz gold.

If MetalsTech elects to proceed with acquiring Sturec after due diligence, it will issue the vendors $450,000 in cash plus a further $300,000 cash in six months.

The vendors will also receive a royalty upon certain milestones being met and within a two-to-five-year time frame.

Prescient Therapeutics (ASX: PTX)

Adelaide-based Carina Biotech is teaming up with Prescient Therapeutics to develop new targeted cell therapies to destroy solid cancers.

The duo plans to develop new Chimeric Antigen Receptor T-cell (CAR-T) targeted cell therapies, which use a patient’s own immune system to target and attack treatment-resistant cancer.

Both companies are confident they can evolve CAR-T therapy to attack difficult solid cancers.

The technique has already been proved effective against various blood cancers including B-cell malignancies but the impact on solid tumours has been far less.

Vault Intelligence (ASX: VLT)

Workplace software company Vault Intelligence has secured a multi-million deal with SurePlan New Zealand.

Under the deal, SurePlan has committed to using Vault’s SoloDrive for five years which equates to about $12.4 million over the contract term.

Vault anticipates the contract will boost its contracted annual recurring revenue for FY 2020 to $11 million.

SoloDrive uses a smartphone app to monitor individual driving behaviour. The app then provides data to the individual and employer to manage performance and mitigate risks.

Lithium Australia (ASX: LIT)

Lithium Australia had a bit of news this week kicking off with an announcement it has agreed to sell the non-lithium rights of its Emu Creek tenement in WA to upcoming ASX debutant Metal Hawk.

Subject to a successful ASX listing, Metal Hawk will issue Lithium Australia 300,000 shares at $0.20 each in consideration for the asset.

Lithium Australia also revealed this week its strong belief that lithium ferro-phosphate batteries should be the battery of choice for energy storage systems.

The batteries can be made from mine waste and spent lithium-ion batteries and have the added benefit of lower cost, no thermal runaway, and high temperature range operation in addition to deep discharge and high recharge rates and power delivery.

Lithium Australia managing director Adrian Griffin said the company had developed its technology for creating these batteries from waste products in order to improve resource sustainability, supply chain security, while also reducing costs and environmental footprints.

HeraMED (ASX: HMD)

The US FDA has granted HeraMED approval for its HeraBEAT foetal ultrasonic heart rate monitor, paving the way for the device to be sold throughout the country.

HeraMED has been carrying out a pre-market review for the device over the last six months and now plans to sell it into the US “as quickly as practicable”.

The company claims its device is “revolutionising the pregnancy experience” by giving pregnant women continuous and proactive home monitoring.

This has the advantage of reducing stress and anxiety for expecting mothers while also enabling early detection of potential risks.

HeraMED has also secured a cooperation agreement with a German midwife service provider Kinderheldin GmbH where the midwife provider’s online service will be added to HeraBEAT in Germany.

Esports Mogul (ASX: ESH)

Esports Mogul has gained Canva co-founder Cameron Adams as a non-executive director to provide specialist advice on assisting the company with establishing high-profile, revenue generating partnerships.

The company claims Mr Adams’ experience in scaling technology businesses and developing billion-dollar digital products will be a significant asset as it seeks to become the premier online eSports destination.

Esports Mogul said its talent recruitment drive would not stop with Mr Adams and that further appointments were anticipated in the near future.

The company also announced it was hosting the upcoming SEA Games Esports Online Challenge in conjunction with Razer.

Buddy Technologies (ASX: BUD)

Buddy Technologies has entered a 10-year licencing agreement with China’s Eastfield Lighting (Hong Kong) Co. Ltd.

The deal allows Buddy to supply its Powered by LIFX platform to Eastfield.

Eastfield’s customers will have the option to have their products controlled by LIFX mobile apps or pay an additional fee to white-label the app with their own branding.

Buddy chief executive officer David McLauchlan described the agreement as “big win” for the company and Eastfield’s customers.

“Having spent a lot of time at Eastfield’s factory in Shenzhen and seen the vast scale at which they manufacture lighting products, [we’re] delighted to have the opportunity to work with them to make their products smarter and deliver even greater value to their customers globally,” he added.

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 company to make its way onto the ASX this week was:

KKR Credit Income Fund KKC IPO ASX

KKR Credit Income Fund (ASX: KKC)

One of the year’s larger ASX floats was KKR Credit Income Fund, which began trading on Thursday.

The company raised $925 million via the issue of 370 million shares at $2.50 each.

KKR was established as a managed investment scheme and is an affiliate of Kohlberg Kravis Roberts & Co and KKR Credit Advisors (US) LLC.

The scheme aims to provide Australian and New Zealand investors with attractive, risk-adjusted returns and access to a diversified portfolio.

KKR closed out its first week at $2.48 – down on its $2.50 offer price.

The week ahead

There’s another quiet week ahead on the economic front with new home sales and private spending the key things to look out for.

Over in the US, GDP growth data is due out, as are personal income and spending numbers for October.

While in China manufacturing numbers for November will be worth keeping an eye on.

This week’s top stocks