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S&P/ASX 200 morning report – ASX delivers strongest week since April

The S&P/ASX 200 (ASX: XJO) is expected to open lower on Monday according to the latest SPI futures. Here’s your daily ASX morning report.

ASX 200 on the up

The ASX 200 delivered its strongest week since April, finishing 5.4% higher despite closing flat on Friday. It was a similar story in the US, with the S&P 500 adding 0.9% on Friday and 3.9% for the week.

The theme of the week was stimulus, with the Australian Federal Budget delivering big for corporates and President Trump seemingly cancelling and re-engaging on a ‘massive’ fiscal stimulus package every few days. On Friday, Trump boasted of an even bigger package than the Democrats had been proposing.

The ASX energy sector benefitted most from the recovery, finishing 9.0% higher with Woodside Petroleum Limited (ASX: WPL) a standout. Similarly, the more cyclical financials sector added 7% behind a strong week from the major banks, which saw National Australia Bank Ltd (ASX: NAB) shares rise 6.9%.

Meanwhile, the ASX technology sector showed signs of a return to recent highs, adding 7.5% for the week. The ELMO Software Ltd (ASX: ELO) share price was the standout, finishing 25% higher and leading the index.

Financial stability review, Cimic shares rally

If the Federal Government delivered a rosy outlook for the economy, the RBA delivered the difficult truth in its Financial Stability Review. According to the central bank, the $100 billion JobKeeper wage subsidy is estimated to have reduced business failures by 4,600 in the financial year, but the pain isn’t over yet.

The RBA has also suggested business failures will rise as deferrals end, with as many as 15% of small businesses not having enough cash on hand to meet their monthly expenses. Anyone visiting a local shopping strip in Victoria is well aware of the many ‘For Lease’ signs emerging.

Turning to company-specific news, construction and engineering group Cimic Group Ltd (ASX: CIM) reported a stronger than expected $474 million profit for the nine months of FY20. Revenue grew 8% in the third quarter as economic restrictions were loosened around the world. The Cimic share price jumped 9.2% on Friday.

While M&A activity continues to grow in the financial services sector after Morgan Stanley’s decision to purchase Eaton Vance, potential Australian targets Janus Henderson Group CDI (ASX: JHG) and AMP Limited (ASX: AMP) finished 5.6% and 4.0% higher to close out the week.

My key takeaways from the week

It’s becoming increasingly apparent that COVID-19 has created an uneven playing field for businesses around the world. Economic shutdowns are benefitting larger corporates due to their ability to access capital markets, large cash holdings and inability to cut costs with limited penalties. Investors need to understand who the creditors of their companies are before the pressure really hits in 2021.

This uneven playing field is creating a buyer’s market for mergers and acquisitions, with energy, financials and healthcare shares most likely to benefit following an extremely difficult period.

In the IPO world, the opposite is occurring, being a seller’s market, with smaller companies benefitting from huge demand as investors struggle to find any growth amid ASX large-cap blue chips. With a flood of new microcap and smaller cap strategies boasting incredible returns, it’s never been more important to know what you own.

The week ahead sees the beginning of third-quarter earnings reports in the US, an update on Australian unemployment and Cleanaway Waste Management Ltd (ASX: CWY) holding its AGM. I’m expecting fireworks at the latter and a strong update for the third quarter.

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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Disclosure: At the time of publishing, Drew owns shares of Cleanaway.