Takeovers, downgrades and the NASDAQ effect

It was another volatile day for the ASX 200 (ASX:XJO), with the market finishing 0.6% higher, as a weak lead from the US impacted on confidence. The only two detractors were the property and staples sector, with materials and mining once again a highlight, driven by BHP Group Ltd (ASX:BHP), +2.2%, and Rio Tinto Ltd (ASX:RIO), 3.3%. Afterpay Ltd (ASX:APT) continues to break records, increasing another 11.4% to $73; it seems the company has become the Australian version of the Nasdaq 100, attracting every investor seeking growth despite its sky high valuation. I’m calling it the NASDAQ effect, as whilst I believe the company has some value, it’s simply moved beyond any realm of understanding. Speaking of the NASDAQ effect, it finished another 0.5% higher whilst the S&P 500 and FTSE 100 both fell 0.6% and 1.7% respectively. Wells Fargo (NYSE:WFC) was a major detractor, down 2.2% after announcing wide ranging staff cuts to deal with the aftermath of COVID-19.

Consolidation and synergies

The superannuation platform space, which offers outsourced administration for financial advisers, remains one of the hottest sectors in the market, after Praemium Ltd (ASX:PPS) announced it was acquiring Powerwrap Ltd (ASX:PWL) for around $55.4 million. PWL increased 65.7% and PPS 23%, in clear sign that investors expect to see real synergies extracted from this deal. The combined company will have around $28 billion in assets under administration, but a market capitalisation of just $230 million. As a comparison, the leader in the independent platform space, Netwealth Ltd (ASX:NWL) has around $32 billion but is valued at over $2 billion; in my view there is serious value in the smaller players for those with an appetite for risk. On a more sombre note, Australian home loan applications disappointed, falling 10.2% from April with investment lending down a further 15.6%. When combined with the extension of loan repayment holidays the signs are not good for property or bank profits in 2021 and beyond; my preference is to limit exposure to the embattled sector.

Global earnings

As we move closer to the most anticipated earnings season in over a decade, Treasury Wine Estates Ltd (ASX:TWE) offered a precursor into what investors should be expecting. The company announced weaker sales in all major markets, but particular the US, down 37%, Asia, down 14% and Australia, down 16%, with profits expected to fall 21% to $530 million. On the other hand, SAP SE (ETR:SAP) which offers enterprise software and systems, announced a stronger than expected recovery in Asia and confirmed its full year outlook, adding 4.6%, but the Eurostox 50 finished 0.8% lower. German trade appears to be rebounding, with exports improving 9% but imports remaining subdued, growing just 3.5%. Recce Pharmaceuticals Ltd (ASX:RCE) was one of the biggest domestic winners, the $100 million company spiking 54.4% after the CSIRO selected their compounds for upcoming COVID-19 treatment tests. In a sign of the froth building in Chinese markets, a new IT security company, QuantumCTek Co, turned into a ten bagger immediately upon listing on the speculative exchange, up 924% on day one of trading.   The daily report is written by Drew Meredith, Financial Adviser and Director of Wattle Partners.