Merger mania starts earnings month with a bang

An M&A-fuelled frenzy in shares looks set to be a source of support during earnings season.

After breaking well above June-July peaks around 7400, the index is up 14 per cent for the year to date. Pipcture: AAP

An M&A-fuelled frenzy in shares looks set to be a source of support during earnings season.

A record-breaking $39bn scrip takeover bid for Afterpay from NYSE-listed Square, and a $16bn merger of LNG heavyweights Oil Search and Santos – both recommended to shareholders – along with stabilising global markets resulted in the local bourse starting the month with a bang.

After surging as much as 1.5 per cent to a record high of 7506.3 points, as Afterpay initially jumped 29 per cent and Oil Search rose almost 9 per cent, the benchmark S&P/ASX 200 finished up 1.3 per cent at a record-high close of 7491.4 on heavy trading volume worth $7.1bn.

Monday’s rise was the sixth-biggest one-day gain on the market this year. With $60bn of announced transactions, it was one of Australia’s biggest days for M&A in history.

After breaking well above June-July peaks around 7400, the index is up 14 per cent for the year to date, versus 17 per cent for the S&P 500 and 14 per cent for the MSCI World index in US dollars.

Also contributing strongly to Monday’s outsized rise were big gains in the major banks.

Three of the four major banks rose more than 2 per cent – led by a 2.4 per cent rise in NAB.

Morgan Stanley’s Richard Wiles said NAB had “plenty of flexibility on capital” and was likely to launch further share buybacks after the $2.5bn on-market buyback announced last week.

Morgans Financial analyst Azib Khan upgraded the bank to “add” and said buyback announcements from ANZ and NAB – despite the recent lockdown in Melbourne and extension of lockdown in Sydney, and NAB’s Austrac issue – should boost investor confidence in the strength of major bank balance sheets as well as boost confidence in the asset-quality outlook for the sector.

It also came as CoreLogic’s Australian capital city house price index for July slowed to a still-strong pace of 1.6 per cent growth month on month, while accelerating to 16 per cent year on year – the fastest pace in 17 years – with three capital cities recording gains of more than 20 per cent.

CBA’s head of Australian economics, Gareth Aird, subsequently revised up his 2021 forecast to predict a “whopping” 20 per cent rise.

But because house prices fell significantly nationally from September 2017 to June 2019, a 20 per cent rise would leave prices “just” 18 per cent above their September 2017 level, implying growth of about 4.5 per cent a year in the four years, which “looks a lot more modest, particularly when considering the decline in interest rates over that period”.

“Dwelling price growth is expected to moderate in 2022 on affordability constraints, but very low mortgage rates will continue to be a tailwind on the property market,” Mr Aird said.

“NSW is in the midst of a large negative economic shock that will hit the labour market significantly over the next few months. However, we expect the Sydney housing market to be largely unaffected.

“Momentum remains buoyant as evidenced by elevated auction clearance rates and there appears to be a clear sense among households that while the economic shock will be severe, it will be short-lived and activity and employment will bounce once the lockdown is over.

“As such, there is unlikely to be any material shift in the household perception of the property market over coming months.”

Investor support for banks and other consumer-facing cyclicals like Wesfarmers – which rose 1.7 per cent on Monday – came amid expectations of greater policy support after the Greater Sydney lockdown was recently extended through to the end of August and what was initially set to be a three-day lockdown of southeast Queensland announced on Sunday was extended to a full week.

“With lockdowns extending, the policy response is evolving,” Morgan Stanley equity strategist Chris Nicol said.

“Fiscal support was expanded again last week, and this week it is the RBA’s turn.

“We expect a downgrade to near-term forecasts and QE tapering to be delayed until at least November. Medium-term forecasts should only change modestly, though.”

BetaShares chief economist David Bassanese said the Reserve Bank would probably decide to postpone the planned September reduction in weekly bond buying from $5bn to $4bn at Tuesday’s meeting.

“Less likely, although possible, the RBA might even decide to immediately increase bond buying to $6bn per week,” he said.

“In terms of the economy, a further incremental adjustment won’t mean all that much, though it could at least allow the RBA to be seen to be doing something in acknowledgment of the savage Q3 hit to economic growth.”