BFC3540 Stock Debates – Week 2 – NAB & AMP

A quick recap of last weeks discussion points:

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  • AMP has performed horrifically in the past but there is the view that all the bad things are already ‘priced in’ to its share price today
  • In other words, the worst is already behind the company
  • AMP have raised more capital and devised a strategy to point its business in the right direction
  • NAB and ASX Banks are going strength to strength as the property market stabilizes and global economic conditions remain sound
  • The primary risk is if the general market starts to falter – then we will see weakness in financials

For our stocks/index:

  • AMP finished the week up 1.40%
  • NAB was up 1.90%
  • ASX200 up 1.00%

Both AMP and NAB did not release any announcements or news that may have materially affected the share price this week. Please refer to week 1 discussion as we talked more about the company’s FY19 report and its business.

The big news for this week was the release of Australia’s unemployment figures. After hitting a seasonally adjusted decade low of 4.9% in February this year, the unemployment rate has been rising. In August, the unemployment rate continued its steady grind higher, hitting 5.3%.

The Reserve Bank has been adamant to maintain an unemployment figure of around 4.5%. However, this is becoming increasingly unlikely. To add insult to injury, the quality of job creation is an issue with the annual pace of full time job creation slowing back to levels seen at the end of last year, while an increase in employment is skewed to part-time work.

Now here is the weird part – readers might think “oh sh*t, I didn’t know that, it’s definitely time to short the market now because unemployment is increasing which is bad for the economy and will lower the share price”.

W r o n g

Unemployment figures still remain at historically low levels. And I’m sure the market is largely aware of increasing unemployment – there are many leading figures such as job ads that give us a feel for what is to come. However, given the weak result, it is increasingly likely that the RBA will continue to cut interest rates.

Isn’t low interest rates bad for banks?

Yes, but no. Low interest rates will result in smaller margins for home loans as the difference between the interest rate vs. loan rate become smaller. However, low interest rates are steroids for the stock market.

Think about it.

Low interest rates increases the incentive for large capital outlays such as large capital projects and loans – whether that be consumer loans, mortgages, business loans etc. This boosts economic activity.

When interest rates are so damn low, savers will look at their saving account which is generating <1% interest and think “what the hell – I need something that generates a better return”. This not only applies for savers but for institutions as well. This results in a large capital inflow into the equity markets.

That’s why the financial stocks have responded positively to what looks like bad news.

On Friday night, Chinese delegation had cancelled their plans to visit US farming regions. The cancellation came as the US-Chinese trade talks were held in Washington and President Donald Trump said he wanted a complete trade deal with the Asian nation, not just an agreement for China to buy more US agricultural goods.

While a cancellation is not as bad as a full blown trade tariff – it does change the sentiment of the market. You can see that the US markets had started off in positive territory – but upon hearing the news, started plummeting. Capture.PNG

This could potentially derail the momentum and sentiment in the domestic market, especially since the ASX200 has run up so much this week. I would advise students to not take a heavy long position but potentially some short positions to hedge this risk.

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