The S&P/ASX 200 Index (Index:^AXJO) started the week on a negative footing. But some ASX stocks have suffered bigger losses after being downgraded by top brokers.
The top 200 stock benchmark fell 0.5% in after lunch trade as negative overseas leads weighed on sentiment.
But the fall is nothing compared to the 6.5% tumble by the Virgin Money UK CDI (ASX: VUK) share price. The UK bank lender is the second worst performer on the ASX 200 at the time of writing with the Unibail-Rodamco-Westfield CDI (ASX: URW) share price taking the wooden spoon.
Negative rates trigger downgrade
Virgin Money is underperforming after Bell Potter downgraded the stock to “hold” from “buy” as the broker warned that storm clouds are gathering.
The Bank of England is likely to use negative interest rate to support the country’s sagging economy. The outlook for the UK darkened significantly as it struggles to contain a new COVID-19 outbreak.
Negative rates could render mortgages unprofitable and that poses a big risk to Virgin Money as these account for 82% of its loan book.
Virgin Money more exposed than peers
What’s more, the lenders more at risks are smaller institutions and those that have greater dependency on retail deposits for funding. Virgin Money fits into both categories!
“While VUK continues to expect a FY20 [net interest margin] of 155-160bp, we feel the overall outlook will be more challenging in FY21 given reduced flexibility to reprice liabilities among other things,” said Bell Potter.
The broker’s 12-month price target on the stock was cut to $1.80 from $2 a share.
Dust yet to settle
Another underperformer today is the DEXUS Property Group (ASX: DXS) share price. Shares in the office property group retreated 3.2% to $8.73 at the time of writing.
The fall coincides with Morgan Stanley’s decision to downgrade the stock by two full notches to “underweight” (or “sell”) from “overweight”.
The broker believes the outlook for the Australian office property market is tougher than it originally thought.
“Office is going through a societal shift, where longer-term decisions are being postponed, as exemplified by tenants requesting shorter-term deals on recent expiries,” said the broker.
“DXS may look good value today, but as we think tenants have yet to work out where they stand on Work-from-Home, a bounce back is unlikely in the next 12 months.”
Cheap but not yet cheap enough
Dexus may be trading at around a 15% discount to net tangible assets, but the stock traded at a 60% discount during the GFC.
Sure, the GFC isn’t quite the same as the COVID carnage, but that experience shows equity valuations can overshoot the physical market in a down- and upcycle, noted Morgan Stanley.
The broker also cut its 12-month price target on Dexus to $8.15 from $10.20 a share.
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Returns as of 6th October 2020
Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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