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S&P/ASX 200 morning report – 3 things to watch this week

The S&P/ASX 200 (INDEXASX: XJO) is set to open flat Monday morning. Here’s what you need to know, including why I’m avoiding ASX shares like Insurance Australia Group Ltd (ASX: IAG).

Around the grounds

The ASX 200 finished last week down 0.2%, with the renewed confidence following the extension of the JobKeeper program offset by China’s growing combativeness and weakness in the US technology sector. The IT sector was again the strongest, adding 1.9%, with e-commerce focused consumer discretionary companies adding 1.2%; it very much remains a company-specific market. Confession season continued with QBE Insurance Group Ltd (ASX: QBE) finishing up 11% despite announcing weaker than expected profits.

After months of outperformance the Nasdaq, -1.5%, underperformed the S&P 500 which fell just 0.3% for the week. The primary driver was an unexpected announcement from chipmaker Intel Corp. (NASDAQ: INTC) that it would stop producing its own chips. The Intel share price fell 16.5%, dragging the market down with it.

Despite increasing rhetoric and a tit-for-tat with the US, Chinese imports from Australia surged 7% in June and now represent 39% of all exports; clearly a growing risk for the economy but a boon for the Federal Budget.

Why I’m avoiding the ASX insurance sector

As highlighted last week, my view remains that insurance companies should be avoided at all costs. The unique combination of unexpected claims, natural disasters and the reliance on generating returns from their premiums simply introduces too much uncertainty.

It was Insurance Australia Group Ltd (ASX: IAG)’s turn to disappoint on Friday, management announcing a dividend would not be paid in the second half, along with $100 million in provisions for more claims and a $600 million reduction in profit. The IAG share price fell 7.8% for the day.

Meanwhile, second-tier Bank of Queensland Ltd (ASX: BOQ), spruiked for its strong dividend, has continued to ‘defer’ its decision after announcing a $61 million increase in bad debt provisions. Capital adequacy may also be an issue with $112 million loans past 90 days due and Common Equity Tier 1 Capital of just 9.8%, well below the majors.

Finally, Vicinity Centres (ASX: VCX), the owner of Chadstone shopping centre, announced an 11% or $1.8 billion devaluation of its retail properties due to recent rental waivers. The share price dropped 2.5% on Friday.

Three things to watch in the week ahead

On the economic front, investors face a barrage of economic growth data, including the US on Thursday, Europe on Friday and Chinese PMI’s on Friday. Experts are expecting a 34% quarter on quarter contraction in the US and 12% in the EU, with most lockdowns beginning to ease around the end of May. Whilst they offer little insight, given the worsening sentiment last week, expect any negative surprise to push markets sharply lower.

Geopolitical risk continues to increase, but particularly for Australian investors, as the world’s leaders continue to push back against an increasingly aggressive China. Whether it is action in the South China Sea, Hong Kong or the scrutiny on Chinese technology providers, investors should consider the exposure of Australian-listed companies to the growing spat.

The one thing I’ve learned this week is that this is not a market to seek discounts. As a bargain hunter by nature, I can’t help but be attracted to a beaten-down but ‘quality’ company, yet this week offered a clear reminder that the strategy is fraught with risk and identifying bargains is only going to get harder.

The sectors of most concern are anything exposed to property, think Vicinity, Unibail-Rodamco-Westfield (ASX: URW) or Lendlease (ASX: LLC); travel and tourism exposed, think Qantas (ASX: QAN) or Flight Centre (ASX: FLT); and finally, banks and insurance companies as earnings and dividends will only get worse.

This article was written by Drew Meredith, Financial Adviser and Director of Wattle Partners. To get in contact with Drew, click here to visit the Wattle Partners website.

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Are you stuck wondering where to invest right now? Have you got cash 'sitting on the sidelines'? Are you looking for dividend income AND growth but don't know where to start? Rask's expert ASX analyst team has just released a full report, detailing where we'd invest $10,000 right now.

Not only are we offering these 11 investment ideas completely FREE, we've also released an in-depth podcast to go with the report!

So, whether you have $2,000 or $50,000, our brand new analyst report could help transform your watchlist. Right now, you can get the full analyst report emailed to you for FREE by CLICKING HERE NOW.

Drew Meredith is the author of this post. He may maintain positions in the securities mentioned.

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