Changes in the way we pay

Giving a keynote address at Morgan Stanley in June, Reserve Bank of Australia's Assistant Governor Michele Bullock explored the health crisis' disruption of the retail payments system and its implications. 

According to Bullock, "merchants and consumers have changed both their payment preferences and their mode of interaction." 

To support the contention, Bullock presented some staggering statistics that revealed the death of 'paper' payment instruments. 

For instance, use of cheques "has declined from around 50 per capita per year in the 1990s to around 2 per capita in 2019" as many payments became electronic. 

Inevitably, the shift to electronic payments is seeing the decline in the use of cash. 

In fact, Bullock cited RBA's recent consumer payments survey, which found that "a third of survey respondents did not use cash for any payments", although "around 10 per cent used cash for all their payments." 

Importantly, the decline in the use of cash and the rapid acceptance of cards was an "important enabler for online commerce, allowing payments to be made in a remote environment." 

Afterpay, Sezzle, BNPL, and the dash from cash

The dash away from cash, of course, boosted companies like Afterpay, which saw early adoption from online and e-commerce retailers. 

In fact, online sales constitute the majority of Afterpay and Sezzle's revenue pie. For example, in FY19, Afterpay's in-store cumulative underlying sales contributed 18% to Australia and New Zealand's combined underlying sales, which means that the vast bulk of Afterpay's underlying sales for Australia and New Zealand were online. 

But just because more people are making online purchases does not – on its own – mean that more people will make these online purchases using Afterpay and Sezzle. 

However, Sezzle's executive chair and CEO Charlie Youakim certainly drew that conclusion when announcing the company's record 2Q20 in a July 7 update, highlighting the change in consumer behaviour as a factor in Sezzle's performance. 

Youakim wrote that Sezzle's "performance reaffirms our product's utility to consumers looking for a smarter way to budget their personal finances and the overall market shift to eCommerce." 

The Sezzle update further stated that "with nearly 100% of Sezzle's transactions via eCommerce, the Company is well-positioned for the ongoing move to online."

Youakim then noted that Sezzle's strong performance in Q2 is "reflective of an improving consumer profile combined with an accelerated adoption of eCommerce due to the [COVID-19] pandemic." 

The emphasis on eCommerce and the shift to online certainly seemed to benefit Sezzle, as its 2Q20 represented the top 3 months of monthly underlying merchant sales in its history.

In its latest investor presentation, Afterpay echoed Sezzle and stated that "since the impacts from COVID-19 began, we have seen consumers shift further towards online spending."

COVID-19 and the new normal

Even when COVID-19 is contained or a vaccine disseminated, people are now likely to be more vigilant about hygiene and social distancing, cutting down trips to brick-and-mortar stores. 

This will compress discretionary in-store purchases, while boosting online retailers and retailers with a sound online presence. 

The new normal of COVID-19 will see consumers shift even more of their purchases online. 

RBA's Bullock similarly concluded that "the increased use of online shopping, either through necessity or preference during the 'stay at home' period, seems likely to be a permanent shift."

In my view, this shift could increase the volume of transactions that Afterpay and Sezzle process. 

Additionally, more consumers going online may mean more opportunities for merchants to sell more per consumer. This is because the more purchases we make online, the more tailored the recommendations become, and the more likely we are to make add-on purchases or get directed to products we did not realise we wanted. 

In the end, Afterpay and Sezzle seem well-positioned to succeed in the post-coronavirus world.

The post What does COVID-19 and the payment revolution mean for Afterpay and Sezzle? appeared first on The Motley Fool Australia.

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Motley Fool contributor kprakapenka has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended Sezzle Inc. 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.

Sonders recently shared her thoughts on the COVID-19 market performance and outlook via an article on the Charles Schwab website. 

Disconnect between the share market and economy  

Sonders stated that the No. 1 question she is fielding lately relates to the "disconnect between the stock market and the economy." 

Certainly, the disconnect is present in the Australian share market too, with the Australian Financial Review (AFR) reporting on 3 June that the ASX 200 remained "unfazed by recession talk as it hit a three-month high." 

The market participants' rose-tinted outlook prompted JPMorgan Asset Management's Global Market Strategist, Kerry Craig to infer that, "if the economic data remains weak for the moment, markets are likely to continue to discount that as being backward looking." 

However, Craig identified a risk; that markets are "pricing in a lot of good news that might not materialise in the second half of the year." 

Indeed, the S&P/ASX 200 Index (INDEXASX: XJO) is currently trading largely flat, with Victoria reinstating certain restrictions amid second-wave fears. 

Related to Craig's worry, Sonders stated that second half will grant: "clarity on the depth of the economic contraction via both the second quarter earnings season… and the initial read on second quarter real gross domestic product."  

The upcoming earnings season and updated gross domestic product figures may very well send the markets on a W-shaped rollercoaster. 

Shares lead the economy

Investigating recession data post-Second World War, Sonders found that, with the exception of 2001, "the stock market's peaks and troughs have pre-dated the economy's peaks and troughs." 

Sonders further stated that there is a "fairly consistent history of the stock market's peaks and troughs coming at or before the peaks and troughs in the economy." 

This, for Sonders, confirms the view that "the stock market is a leading economic indicator." 

Sonders also mused that she will closely monitor investor sentiment, "near-term market peaks and troughs are often defined more by investor emotions than economic data." 

Takeaways for ASX 200 

NAB's own CEO, Ross McEwan echoed Sonders's thoughts on the shape of the recovery, with the AFR releasing an article titled: "McEwan backs more stimulus, tips W-shaped recovery." 

A W-shaped recovery will require a more circumspect investing approach and a sturdy constitution to handle the likely-lively ride ahead. 

In an important caveat, JPMorgan's Kerry Craig offered the following:

"If we're heading for weaker growth and lower inflation, investors need to look for companies that can protect margins long-term, hence security selection is more important right now than the top down macro narrative."

Sonders herself concluded that "the stock market probably got a bit ahead of itself in pricing in a V-shaped recovery."

The positive news about flattened curves across the globe and encouraging headlines regarding vaccines may have spurred the V-shape recovery thesis. 

Therefore, Sonders thinks that "stocks may continue to be at the mercy of virus-related news — in both directions."

The post Alphabet soup: Is the ASX 200 in for a V-shaped COVID recovery or rolling Ws? appeared first on The Motley Fool Australia.

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Motley Fool contributor Kiryll Prakapenka 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.

A Westpac Banking Corp (ASX: WBC) economic release reported improved consumer sentiment up 16.4% in May. We examine the release and its implications for the  S&P/ASX 200 Index (ASX: XJO).  

The 10 June economic release, penned by Westpac's Chief Economist Bill Evans, reported improved consumer confidence to be back "around pre-COVID levels", having "recovered all of the extreme 20% drop seen when the pandemic exploded in March-April." 

The Westpac-Melbourne Institute Index of Consumer Sentiment recorded the 16.4% gain in May. A rise to 88.1 from the "extremely weak" 75.6 in April.

Evans reported that the Index is now only 2% below the average established in the September-February period. 

However, the release did warn that given the difficult recovery ahead, "it would be surprising if the recent upward momentum continues." 

Further, the release pointed out that while the monthly gain was impressive, the index is still "relatively weak by historical standards — in pessimistic territory overall and down 7% on a year ago." 

COVID recession and 1990s recession: better times ahead

While the release found that the data still suggests families are financially constricted and concerned about the near-term economic outlook, there is "firming optimism around prospects for finances in the year ahead." 

Further, the release found that respondents are "confident that they can see eventual better times ahead whereas in the early 1990s there was a pervasive mood of despair for years." 

ASX 200 and improved consumer sentiment 

Importantly for ASX 200 stocks reliant on discretionary spending, the Westpac release indicated that the largest gains were around views on the economic outlook and "time to buy a major item". 

The 'time to buy a major item' sub-index posted a  strong 10.1% gain in June, on the back of a 26.7% May increase. 

That said, the buyer sentiment is still well below the long-run average. 

Consumer expectations for house prices

Evans reported that consumer expectations for house prices improved. The Westpac-Melbourne Institute House Price Expectations Index rose 10.5%. 

However, the index is still 43% below the cheery readings just before the COVID-19 lockdown. Further, Evans reported that survey results continue to "point to a sharp deterioration… compared to a few months ago."

Finally, the proportion favouring real estate as the answer to 'wisest place for savings' dropped to 4% in March. Evans stated that this suggests "investors look likely to stay away from Australia's housing market near term." 

ASX 200 analysis

Evans concluded the release by noting that "unusually, more respondents nominated shares (11.4%) than real estate as preferred investment options."

Can the currently reported investment preference for shares over real estate, coupled with improved consumer sentiment lift the ASX 200? Will the improved sentiment percolate across the economy? 

The sentiment can certainly impact the discretionary spending sector, at least in the near-term. 

For instance, the S&P/ASX 200 Consumer Discretionary (ASX: XDJ) is up 7% from this time last month. It's also up 4% from this time 3 months ago. 

Additionally, Wesfarmers Ltd (ASX: WES) — a stock that certainly benefits from improved consumer sentiment — is up 12.4% from this time last month. JB Hi-Fi Limited (ASX: JBH) is also enjoying gains — up 11.3% from last month. 

The post ASX 200: improved consumer sentiment to near pre COVID-19 levels appeared first on The Motley Fool Australia.

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Motley Fool contributor Kiryll Prakapenka has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Wesfarmers Limited. 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.

At one point in March, the All Ordinaries (ASX: XAO) was 32.9% lower than the start of the year. Although it has rebounded in recent weeks, it is still 22.7% lower than the start of January (at the time of writing).

The S&P/ASX 200 Index (ASX: XJO) is no different, down 22.1% from the 6,690 points it recorded at the start of January.

The markets have certainly felt the coronavirus impact. 

But how wide is the impact and how long will its aftermath linger?

Let's examine the coronavirus economic impact and how stock markets historically perform following pandemics. 

Depressed investment opportunities following pandemics 

In a recent working paper for the Federal Reserve Bank of San Francisco, 3 economists from the University of California — Sanjay Singh, Alan Taylor and Oscar Jorda — analysed the impact of pandemics on economic activity, including the 1968-69 Hong Kong flu outbreak that killed over one million people. 

As reported by The Age, the research trio found "significant macroeconomic after-effects" from pandemics that lasted 40 years, with "real rates of return substantially depressed." 

The trio further found that "following a pandemic, the natural rate of interest declines for decades thereafter, reaching its nadir about 20 years later, with the natural rate about 150 basis points lower had the pandemic not taken place." 

In the working paper, the researchers' results indicated that "pandemics are followed by sustained periods – over multiple decades – with depressed investment opportunities." 

The researchers did qualify their findings with a "major caveat" that past pandemics struck younger populations "when virtually no members of society survived to old age." They ended their paper by saying "this time may be different." 

What does this mean for the ASX and stock markets worldwide? 

The coronavirus has already prompted experts to discuss the possibility of a recession. 

For instance, ABC News recently reported the chief executive of JP Morgan Chase, Jamie Dimon, warning that the US could fall into "a bad recession" in 2020.

The Commonwealth Bank of Australia (ASX: CBA) Global Economic & Economic Markets Research team released an update on 3 April, stating that a "recession is expected" in Australia. 

CommBank's research team thinks the coronavirus will end Australia's 28 years of uninterrupted GDP growth. The team forecasts a "massive contraction in GDP of 7.5% in the June quarter" and negative growth over the year of -3.4%. 

CommBank's team further stated that they expect a recession in the US to be "at least as deep as during the Global Financial Crisis (GFC)." 

If a recession is forecasted, then stock markets will generally fall in the short to medium term as the markets will price in the negative consequences of rising unemployment and lower profits on stock performance. 

Further, uncertainty leads some investors to recalibrate their portfolios in favour of bonds and away from equities. 

For reference, the Dow Jones Industrial Average fell sharply during the 2008/09 recession. The plummet correlated with a fall in the US GDP.

Stock market performance after viral outbreaks

MarketWatch recently reported that stock market reactions to epidemics are "often short-lived."

For example, citing Dow Jones Market Data, Market Watch reports that the S&P 500 gained 11.66% in the 6 months following first reports of the 2006 avian flu virus. In the following 12-month period, the market rose 18.36%. 

Data by Charles Schwab tracking the MSCI All Countries World Index indicates similar buoyant performance from global equity markets. 

On average, the data shows that global stock market performance was up 0.44% a month after an epidemic outbreak, 3.08% after 3 months, and 8.50% after 6 months.

An important caveat is that averages absorb a variety of cases. For instance, the Schwab dataset did indicate that 6 months after each of the HIV/AIDS, pneumonic plague, and Ebola epidemics, the global stock markets were down over 3.25%. 

Another caveat is that not all epidemics are born equal. The unprecedented global shutdown response to the coronavirus may mean the COVID-19 outbreak is an orange to the other outbreaks' apples.

Indeed, it is unlikely that most, if any, of the cited epidemics directly led to recessions in multiple countries like the coronavirus is slated to do soon. 

Foolish takeaway 

A 2006 Fidelity International report on stock markets during pandemics found that in "investment terms, it is hard to mitigate the effects of events such as pandemics." 

However, the report concluded that "at such times, investors should remember the benefits of long-term investing."

The post What is the post-coronavirus outlook for the ASX? appeared first on The Motley Fool Australia.

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Motley Fool contributor kprakapenka 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.

During March, the ASX managed to record its worst session since the global financial crisis (GFC), the S&P/ASX 200 Index (ASX: XJO) recorded its biggest falls in 20 years, and the All Ordinaries (ASX: XAO) managed to record its biggest fall since the 1987 crash. 

Adding to the volatility, March also saw the ASX experience its biggest one-day gain on record. At one point, the VIX volatility index – a popular yardstick for the stock market's expectations of volatility – reached a level not seen in 30 years.

ASIC's equity market resiliency measures

In response, ASIC released a statement noting that Australian equity markets saw "record trading volumes." 

ASIC pointed out that Australia's equity markets "have seen exponential increases in the number of trades executed." While no market disruptions were recorded, "there was a significant backlog of work required to be undertaken." 

ASIC indicated that if the number of trades continues to rise, it will "put a strain on the processing and risk management capabilities of market infrastructure and market participants." 

Importantly, ASIC revealed that it has issued directions under its ASIC Market Integrity Rules to a number of large equity market participants, requiring those participants to limit the number of trades executed each day until further notice.

As a result, ASIC commented it expects high volume participants and their clients to actively manage their volume. ASIC does not believe this directive will impact the ability of retail consumers to execute trades. 

ASIC stated that along with the Council of Financial Regulators agencies, it will continue to monitor financial markets to "ensure they remain fair and orderly". 

To do this, ASIC has suspended a suite of its near-term activities which are not time-critical to afford priority to such things like consumer harm, serious breaches of the law, and of course risks to market integrity.  

ASX supports ASIC's steps to ensure equity market resiliency

In a March statement, ASX Managing Director and CEO Dominic Stevens said ASIC's steps were "sensible and measured." Stevens echoed ASIC in noting that "recent trading volumes on both ASX and Chi-X have been unprecedented", presenting "operational challenges for the industry." 

According to ASX's Monthly Activity Report for March 2020, the average daily number of trades was 96% higher than the previous corresponding period. 

Stevens stated that ASX shares ASIC's determination to maintain confidence in the integrity of Australia's financial markets and will continue to collaborate with industry. 

ASX 'cannot provide unlimited capacity at short notice'

Very importantly, Stevens acknowledged that ASIC's measures are "only the first step." In his view, "more consideration needs to be given to a permanent solution." 

In a significant admission, Stevens pointed out that the "industry cannot provide unlimited capacity at short notice." 

Stevens stressed that regulators, exchanges, and investors alike need to decide "what they want for the future."

But what does the future hold? Can the March madness metastasise to April and upcoming months? 

ASX 200: is stock volatility over? 

The Commonwealth Bank of Australia (ASX: CBA) Global Economic & Economic Markets Research team analysed CBA's credit and debit card spending data, finding that "spending fell over the week ending 27 March 2020 compared with a year earlier." 

According to CBA's research team analysis, household spending falls "may be significantly larger than the rises and so overall household expenditure may contract materially." 

This is important, as household spending is a significant contributor to GDP and economic growth. According to the Reserve Bank of Australia (RBA) household spending "accounts for more than half of GDP" and "almost always makes a large contribution to GDP growth."

The dynamic nature of the global response to the coronavirus and its impact on household spending saw analysts revising their estimates of global GDP growth for the first half of 2020 on a near-daily basis, according to Standard & Poor's. 

So what does a fall in household spending and a contracting economy mean for equities? 

Continued gloomy economic revisions may keep the stock markets volatile. For instance, the VIX Index is down from its mid-March peak but still 256% higher than at the start of the year. 

Morgan Stanley analysts recently told the Australian Financial Review that "we think economic disruptions will intensify and stocks could see further lows in the shorter term."  

The post ASX 200: ASIC and ASX vigilant after March market madness appeared first on The Motley Fool Australia.

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Motley Fool contributor Kiryll Prakapenka 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.

The A2 Milk Company Ltd (ASX: A2M) share price has withstood the coronavirus shocks so far. But long-term, what does COVID-19 mean for a2 Milk's China interests?

Coronavirus and China's economic growth

A few months ago, we reported that one of a2 Milk's upcoming challenges could be a dampened economic outlook in China.

We cited a recent publication by the Reserve Bank of Australia (RBA) that warned exports to China — like milk — "could be affected materially by a negative shock to growth in China."

The RBA went on to say that while the slowing of China's growth since 2010 has been "orderly", "risks remain elevated."

Importantly, the RBA concluded that there was a "broad range of potential triggers for a severe slowdown in the Chinese economy", including an "external demand shock or a financial system shock."

A separate report by the RBA, focusing on China's long-term growth trajectory, concluded that "China's period of 'above-normal' growth is drawing to a close."

Mind you, these were forecasts that necessarily excluded the current coronavirus pandemic and its vast economic impact.

So what is China's economic outlook now following the coronavirus pandemic? And what does that mean for a2 Milk?

China's economic slowdown before the coronavirus

Recently, the RBA's Economic Analysis department extrapolated China's trends estimated over the past 10 years and their results "indicate that, if recent trends were to continue, it is possible that GDP growth could halve from current rates by 2030."

China's consumption growth has also slowed down, in line with household income slowing, too. This led the RBA economists to note that this "slower growth in domestic demand has weighed on imports."

Even if China's GDP growth halves from its current rate by 2030, will that materially impact a2 Milk sales in China?

Why have a2 Milk shares performed so well lately?

Since the start of January, a2 Milk shares are up 14.5% to $16.38 at the time of writing, withstanding the panic-selling of other S&P/ASX 200 Index (ASX: XJO) shares in recent weeks.

It could be that investors think a2 Milk shares are a great defensive play since the company's business is non-cyclical and enjoys strong demand for what many consumers think are essential consumer staples.

a2 Milk 1H20 highlights

a2 Milk recorded strong financial results for the half-year ended 31 December 2019.

Revenue was up a significant 32%, totalling NZ$806.7 million, while earnings before interest, tax, depreciation and amortisation (EBITDA) was up a healthy 21%, reaching NZ$263.2 million. The EBITDA margin was 32.6%, with the company reporting that this was better than expected due to its stronger underlying gross margin.

Infant nutrition was the biggest contributor to sales revenue with NZ$659.2 million, up 33%.

Further, the company reported a robust NZ$618.4 million cash on hand, suggesting it is well equipped to handle any headwinds ahead.

This was further supported by a2 Milk's strong balance sheet and no debt. 

Why is China important for a2 Milk?

a2 Milk's China label infant nutrition products saw large growth in 1H20 with sales of NZ$146.7 million, a staggering increase of 100% and the company's largest product segment increase by region.

Contrastingly, a2 Milk's infant nutrition sales in Australia and New Zealand (ANZ) grew 9.5%.

a2 Milk's China and other Asia regions segment revenue totalled NZ$317.2 million in 1H20, up a massive 76.7% increase. This segment also saw EBITDA up 60.3%.

Compare this with the company's ANZ segment revenue of NZ$460.2 million, up 'only' 10.0%, with EBITDA up 18.7%.

It seems a2 Milk's ANZ segment revenue is maturing, with the China market accounting for a critical portion of the company's revenue growth. Therefore, if the demand from China slows, a2 Milk's maturing ANZ segment will not be able to counterbalance the slowdown in the China market.

a2 Milk's management is aware of China's importance. In its 1H20 results report, the company stated, "following a detailed strategic review in 2019, we stepped up investment in our China label infant nutrition business considerably in 2H19."

Further, the company has expanded its team in China and increased distribution to 18,300 stores (up from 16,400 at the end of 2H19).

a2 Milk's FY20 outlook

When A2 Milk released its 1H20 results on 27 February, it did mention the coronavirus (COVID-19) when assessing its FY20 outlook.

The company stated, "there is uncertainty around the potential impact to supply chains and consumer demand in China resulting from COVID-19 and we continue to monitor the situation closely."

When household incomes tighten over the coming months, as they already are with millions losing jobs worldwide, will consumers treat a2 Milk's products as premium luxuries or essential consumer staples?

a2 Milk thinks the latter is more likely, writing, "given the essential nature of our products for many Chinese families, demand is strong, particularly through online and reseller channels."

Importantly, a2 Milk reported that revenue for the first 2 months of 2H20 was above expectations. Could this be attributed to panic-buying and stockpiling?

It will be pertinent to see the revenue results for the remaining 2H20 months, the months that will see the worst economic fallout from the coronavirus.

In any case, a2 Milk concluded, "this is a dynamic situation and at this stage we are unable to quantify the impact, either positively or negatively, for the full year."

A perfect summary of where we find ourselves right now.

The post A2 Milk share price: what does coronavirus mean for a2 Milk's China market? appeared first on The Motley Fool Australia.

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Motley Fool contributor kprakapenka has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. 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.

S&P/ASX 200 Index (ASX: XJO) stocks are down. Market uncertainty abounds. Some businesses are closing or suspending their services. Money is tight.

Given these circumstances, what are people's options who find themselves out of work or having hours reduced?

First, it is important to know that if you are experiencing financial hardship, there is support available to help you during the coronavirus pandemic. The government is announcing new measures to support workers, businesses, and families almost daily.

To read the latest information about these measures, you can visit the Treasury's dedicated coronavirus page.

We've pulled out some of the key points below.

Extra income support payments

There will be a temporary fortnightly $550 coronavirus supplement for eligible people, which is on top of any other income support payments that you are already entitled to. However, this $550 fortnightly payment doesn't begin until 27 April 2020.

There will also be a crisis payment if you are required to self-isolate, are in severe financial hardship, and you cannot receive an income support payment.

Additionally, income support eligibility will be expanded and applications made easier to claim.

For example, you will be eligible for government financial assistance if you are a permanent employee who has been stood down or lost your job; a sole trader, self-employed, a casual or contract worker whose income has reduced; or if you are caring for someone who is affected by the coronavirus.

It is important to note that from 20 March 2020, the JobSeeker Payment has replaced the Newstart Allowance as the main income support payment for recipients aged between 22 years to Age Pension qualification age who have capacity to work.

For more information on income support, please check out Treasury's fact sheet on income support for individuals. 

Household support payments

Services Australia (formerly the Department of Human Services) also reports that if you receive an eligible payment on any day from 12 March to 13 April, you will automatically receive a $750 Economic Support Payment. This $750 payment will roll out from the 31 March 2020 with 'most getting it by 17 April 2020.'

According to the Treasury, around half of those that benefit are pensioners. Further, the first payment will be made out to approximately 6.6 million social security, veteran and other income support recipients and eligible concession card holders.

There will be a second $750 payment from 13 July 2020 if you receive an eligible payment or have an eligible concession card on 10 July 2020.   

The Economic Support Payment is tax exempt.

For more information, you can visit Services Australia's page detailing the financial support measures for those affected by the coronavirus.

For information specifically about the first $750 Economic Support Payment, see this Services Australia page. 

You can also check the Treasury's fact sheet on payments to support households.  

Access up to $20,000 from your super

If you are suffering financial hardship caused by the COVID-19 fallout, you may be able to access up to $10,000 of your super in 2019–20 from mid-April. You can then re-apply to access a further $10,000 from your super in 2020–21.

You can apply for an early release of your super from mid-April by using the myGov website.

According to the Treasury, you "will not need to pay tax on amounts released and the money [you] withdraw will not affect Centrelink or Veterans' Affairs payments."

For more detailed information and eligibility criteria, you can check out the following Treasury fact sheet on early access to superannuation.

Financial support from states and territories

Each Australian state or territory will also have additional support measures in place during the coronavirus pandemic.

For example, if you are in Victoria you can check out the Victorian Premier's Emergency Relief Packages page for further information.

For NSW, the following Services NSW page lists more than 70 rebates and savings the NSW Government is offering to ease the cost of living during the coronavirus.

Foolish takeaway

No one will remain unaffected by the coronavirus. Everyone's daily lives have changed. From social distancing and movement restrictions to business closures and suspensions, every Australian feels the impact of the virus and its health and financial repercussions.

Yet we are all in this together and Motley Fool Australia will always strive to provide the best information and analysis in these challenging times.

The post Coronavirus: what are your financial support options? appeared first on The Motley Fool Australia.

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• NextDC reports 60% increase in contracted utilisation growth and higher capex guidance

Motley Fool contributor Kiryll Prakapenka 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.

Below, we analyse Reserve Bank of Australia (RBA) Governor Philip Lowe's recent (19 March) speech and its implications for S&P/ASX 200 Index (ASX: XJO) and the wider market.

1. COVID-19 market disruption is serious, but temporary

Lowe emphasised that while we find ourselves in a very serious situation, "it is something that is temporary." Lowe implored that we "look to the other side when things recover."

However, he also stressed that reaching the other side will require a bridge. Critically, without that bridge, "there will be more damage, some of which will be permanent, to the economy and to people's lives."

Although Lowe acknowledged that "further help will be required" to support businesses and households, he remains positive. In his view, "Australian public finances are in good shape" and Australia's "prudent fiscal management gives us the capacity to respond now."

2. The big 4 banks have an important role to play

Lowe identified the banks as key players during this crisis, stating that "without their support, it will be harder for us all to get to the other side in reasonable shape."

Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB), and Australia and New Zealand Banking Group (ASX: ANZ) are in a solid position to provide this support, especially considering the recent statement from the Australian Prudential Regulation Authority (APRA).

In the statement, APRA pointed out that the "Australian banking system has built up substantial capital buffers". Further, banks are "typically maintaining capital levels well above minimum regulatory requirements."

APRA Chair Wayne Byres concluded that "even if the banking system utilises some of its current large buffers, it will still be operating comfortably above minimum regulatory requirements."

3. RBA is injecting extra liquidity into the financial system

Lowe revealed that over the past few weeks, the RBA has injected "substantial extra liquidity into the financial system through our daily market operations."

He also revealed that the RBA will conduct one-month and three-month repurchase (repo) operations each day.

In a key statistic, Lowe acknowledged that the Exchange Settlement balances have increased "from around $2.5 billion a month ago to over $20 billion today [19 March]."

The Reserve Bank is also ready to purchase Australian government bonds in the secondary market. Acknowledging that government bonds can serve as pricing benchmarks for many financial assets, the RBA is "prepared to support smooth market functioning".

4. Reduction in cash rate

As has been widely reported, the Reserve Bank recently cut interest rates further. Lowe admitted that "this is a substantial easing of monetary policy," which is nonetheless boosting the cash flow of businesses and the household sector as a whole.

He concluded that the "evidence is that lower interest rates do benefit the community as a whole, although I acknowledge that the effects are uneven."

Importantly, Lowe revealed that the RBA will not increase the cash rate until progress was made towards full employment and inflation was within the 2–3% range.

Crucially, this means that we are likely to be at this level of interest rates for "an extended period". The RBA's expectation is that the cash rate "will remain at its current level for some years, but not forever."

5. Funding facility for the banks, with support for business credit

This funding facility scheme has 2 aims, according to Lowe.

The first aim is to lower funding costs for the entire banking system and thus lower the cost of credit to households and businesses.

The second aim is to incentivise lenders to offer credit to small and medium-sized businesses. Importantly, this is a priority area for the RBA as it recognises that many small businesses will struggle in the next few months.

Lowe stressed that "if Australia lost lots of otherwise viable businesses through this period," recovery will be that much harder and "we will all pay the price for that."

These funding facility measures can also help ASX 200 companies like Afterpay Ltd (ASX: APT), for which relies on these small-to-medium-sized merchants as the hubs that process their underlying sales.

Conclusion

Lowe emphasised that the RBA expects a recovery once the coronavirus is contained. However, the convalescence depends in part on how we, "as a nation, build that bridge to the other side".

In his view, the RBA is doing everything in its power to lower funding costs in Australia and support the supply of credit to business.

Finally, according to Lowe, when Australia, the economy and the ASX 200 do recover, they will be supported by the low level of interest rates, interest rates that will not rise until Australia is once again on a strong footing.

The post 5 vital takeaways for the ASX 200 after RBA Governor's speech appeared first on The Motley Fool Australia.

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Motley Fool contributor kprakapenka has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of AFTERPAY T FPO and National Australia Bank Limited. 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.

The Afterpay Ltd(ASX: APT)share price is plummeting amid coronavirus uncertainty and the general  S&P/ASX 200 Index (ASX: XJO) downturn.

In this article, I will assess the main points from CEO Anthony Eisen's letter to shareholders.

Is the Afterpay share price drop due to general market uncertainty?

Afterpay CEO and Managing Director Anthony Eisen wrote that "we are unaware of any information, outside of the current uncertainty in the market generally, that would have precipitated recent share price performance."

This seems to suggest that Afterpay's share price drop cannot be attributed to anything specific to the company and its fundamentals.

In fact, it is considerations beyond those unique to Afterpay's fundamentals that are causing the drop in the Afterpay share price.

Indeed, Eisen stated that Afterpay's business model, balance sheet and customer base 'create a level of protection in times of economic uncertainty.'

However, I wonder – is Afterpay's management unaware of any information besides doomsday investor sentiment that would cause the share price plummet?

For example, PWC's March 2020 report on the possible economic consequences of COVID-19 pandemic estimated that 'over a year, a coronavirus pandemic could reduce Australia's GDP by $34.2 billion'.

Importantly for companies like Afterpay, PWC also estimated that 'Australia's household consumption will decline by A$37.9 billion over the forecast year.'

For the USA, the decline in America's household consumption is projected to be US$272 billion.

This is not uncertainty in the market generally, but a projected contraction in the economic activity essential for Afterpay.

Additionally, the ASX 200's consumer discretionary sector is currently down 8.3% and even the consumer staples sector is down 4.1%.

'No material impact on business activity to date'

It is important to acknowledge that Eisen stated that "we have not seen a material impact on our business activity and timing of installment repayments or transaction losses to date."

Risking charges of pedantry, how does one define material? 5% drop in sales? 10%? A 5% rise in bad debt?

Further, while there is no material impact, it is implied Afterpay is feeling some impact: at this stage, of the non-material kind.

This relates to the following point: Afterpay has not felt material effects on its business to date. However, to date, jobs are not being lost at a dangerous rate but many forecasts suggest this will not be for long.

For instance, in an interview with Bloomberg, Federal Reserve Bank of St. Louis President James Bullard predicted that the 'U.S. unemployment rate may hit 30% in the second quarter' due to coronavirus shutdowns.

Such high unemployment will lead to a drastic cut in discretionary spending and consumer consumption in general, factors highly material to Afterpay's business activity.

Afterpay's risk mitigation and preparedness

One reason Afterpay says it thinks it hasn't felt any material effects to its business is that "transaction values (average of around A$150) and average outstanding balances (average of around A$211) are low with no material concentration in our portfolio from a merchant or customer perspective."

Secondly, according to Eisen, Afterpay has "put in place the appropriate level of risk mitigation measures into our operating model that take into consideration the current economic environment and continue to monitor this on a daily basis."

Finally, Eisen reports that Afterpay's customer cohort has increased in age and spending power with its Australian customers "over-indexed in middle and high household income brackets and under-indexed in lower-income cohorts compared to the general population."

Wall Street Journal analyst ratings

1 month ago, 7 out of 12 Wall Street Journal analysts rated Afterpay shares a Buy, with 3 thinking it was a Hold and only one analyst deeming it a Sell.

Currently, no analyst thinks Afterpay's shares are worth a Sell rating, with 4 deeming them a Hold and 8 a Buy. However, it will be interesting to see the analyst rating mix after today's plummet.

Business operating update

Many questions will be answered in a business update following the end of the current March quarter. Importantly, the update will include information on how Afterpay performed over the three months ending 31 March 2020.

This information may very well decide whether the next 3-6 months see Afterpay's share price rebound or see it languishing in the bear market's pit.

The post Afterpay share price outlook: assessing CEO Eisen's letter to shareholders appeared first on The Motley Fool Australia.

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Motley Fool contributor kprakapenka has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of AFTERPAY T FPO. 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.

The coronavirus sell-down has prompted some S&P/ASX 200 Index (ASX: XJO) investors to consider adding to their equity portfolios, as the mass sell-offs are revealing potential long-term value plays.

As reported by Bloomberg, Credit Suisse's global chief investment officer Michael Strobaek stated in a recent note that those "whose current equity allocation has declined below the strategic level and who can tolerate the elevated volatility, should begin to build up equity positions."

While some investors are also practising distancing from their shares while on self-isolation, Strobaek's note suggested there are plenty of opportunities to find undervalued plays.

That said, Strobaek cautioned that in this dynamic and precipitous climate, investors should avoid leverage and plays that are too aggressive.

In the note, Strobaek specifically pointed to potential opportunities in the IT and energy sectors. However, from a short-term perspective, the ASX has seen both industry sectors down 9.49% and 8.46%, respectively, at the time of writing.

For example, in today's trade, Australia's IT sector darling Afterpay Ltd (ASX: APT) is currently down a substantial 28% at the time of writing. Xero Limited (ASX: XRO) is down 4.79% and Appen Ltd (ASX: APX) down 4.92%. 

These drops can be partly explained by the return to normal value thesis. Some analysts believe that certain Australian IT sector stocks with great growth trajectories but unproven profitability track records are overvalued.

For example, Fiona Clark from Merricks Capital told ABC News that panic-selling is happening in an already overvalued market. As she is quoted as saying, "part of what we're seeing now is just bringing things back to normal valuations, and then part of that is just the selling for the sake of selling because we don't know where the bottom is and we don't want to be caught holding shares."

ASX 200 industry sectors like consumer staples and utilities enjoyed small gains in recent days but the stricter COVID-19 lockdown measures initiated by the federal government were enough to drag even these sectors down. For example, the consumer staples sector is currently down a significant 8.20% today (at the time of writing). 

At a time when each morning brings developments that trigger historic market moves, short-term plays may be too risk saturated for most investors. If you were to enter the equity market now, it is likely to be with a long-term time horizon that stretches long enough for a robust stock to weather the wider sell-down.

The optimistic and bullish tide that lifted all stocks is now receding fast, leaving stable and robust companies better prepared. 

As Roger Montgomery from Montgomery Investment Management said to ABC News in the same article, those who panic sold at the bottom of the GFC "missed out on essentially a tripling of prices in the market after the GFC."

Foolish takeaway

This bear market may present patient investors whose time horizon stretches beyond 5 or even 10 years with a great opportunity to shore up value stocks dragged down by the general market panic.

As they say, it is not timing the market, but time in the market.

The post Now may be the time to buy shares, says Credit Suisse appeared first on The Motley Fool Australia.

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Motley Fool contributor Kiryll Prakapenka has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of AFTERPAY T FPO, Appen Ltd, and Xero. 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.

As recently as 13 March, Afterpay Ltd (ASX: APT) made an ASX announcement stating that due to the "short duration of our receivables book we are able to manage losses in real time by identifying them early and modifying risk parameters in the system immediately."

The buy now, pay later service provider concluded that "we are well prepared to respond to any changes in customer repayment behaviour, however we have not seen any changes relative to past performance."

What shape a 'modified risk parameter' takes is yet to be seen, but the picture will surely gain focus over the coming weeks.

What lies ahead for Afterpay

An important question is whether Afterpay's purported preparedness for any changes can encompass preparedness for an unprecedented pandemic. Relatedly, Afterpay's past customer repayment behaviour was certainly not influenced by the level of momentous financial changes that has been brought by the coronavirus pandemic.

Interestingly, in its H1 FY20 results announcement, Afterpay stated that in the mid-term, 'short term profitability at the Group level will be impacted by increased investment in accelerating growth in new and developing markets.'

This profitability may be impacted further by the global economic downturn if these investments go ahead. Afterpay did make a loss after tax (statutory) of $31.6 million in H1FY20, up 42% from H1FY19, even without the unanticipated global shock ushered in by the coronavirus. Alternatively, Afterpay may put its expansion and developing markets plans on hold, halting growth that way.

Further, Afterpay reported that the US contribution in H1 FY20 represented more than 30% of its underlying sales. With some of America's major cities in lockdown, this significant contribution to sales may be depressed come next reporting period.

Afterpay also reported that they averaged 16,800 new customers per day in H1 FY20, with a jump to over 22,900 new customers per day in November and December 2019. It will be highly pertinent to see what these averages are for the months of February, March and April 2020.

With crisis comes opportunity

Another thesis is that more consumers will use the instalment payment method to access needed materials (for instance, from Big W – one of Afterpay's merchants) that they cannot afford upfront or cannot access in person.

As the Harvard Business Review reported, global crises like pandemics 'can spur the adoption of new technologies and business models … The SARS outbreak of 2003 is often credited with the adoption of online shopping among Chinese consumers, accelerating Alibaba's rise.'

This potentially bodes well for Afterpay. First, the majority of Afterpay's underlying sales are online, with the H1FY20 channel mix being 76% online and 24% in-store (in its Australian and New Zealand markets).

Second, Afterpay has recently partnered with eBay, writing that their new online retail partner has '11 million unique Australian visitors a month.'

If Afterpay modifies its risk parameters astutely, the economic shock may have some silver linings for the company.

The post Is there opportunity for Afterpay amid the coronavirus fallout? appeared first on The Motley Fool Australia.

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Motley Fool contributor kprakapenka has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of AFTERPAY T FPO. 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.

Michael Burry, the value investor immortalised in Michael Lewis's The Big Short, famously sought stock that had an intrinsic value that outweighed its current price, even if that price reflected short-term scandal or negative publicity.

So, would Westpac Banking Corp (ASX: WBC) be in Burry's portfolio?

Damaged goods?

How damaging are 23 million transactions alleged to have breached anti-money laundering and counter terrorism finance laws to a bank's share price?

In particular, and in Westpac's own ASX announcement, how damaging are its alleged "failings in relation to correspondent banking, risk assessments, customer due diligence, transaction monitoring, record keeping and the passing on of certain data in funds transfer instructions"?

Will the fines and penalties cripple Westpac's operations to the extent it sees its profitability and market share recede?

Or will investors shun Westpac on moral grounds and sell off their holdings for whatever low bid is available? For them, any trading loss is cheaper than a moral failing.

The worst-case scenario for Westpac was outlined by ABC's business reporter Nassim Khadem, who concluded that "the bank's reputation is possibly irreversibly damaged — it will now always be known as the Australian bank that may have facilitated paedophiles."

Echoing this worry, former Labor senator and current Westpac shareholder Chris Schacht interrogated the Westpac board at last Thursday's AGM, asking "What are you going to do to [ensure] the restitution of our reputation?"

Of course, a rejoinder to this could be the distinction between attributing the alleged faults to Westpac itself – its immutable corporate nature – and attributing the faults to its current leadership team.

In the latter case, the departing implicated executives will take the stench with them; in the former case, the stench never goes away.

All this raises a question: what is the biggest risk to Westpac's share price – damaged reputation or the financial punishment the regulators will mete out?

Just today, banking regulator APRA ordered the bank to hold an additional $500 million in capital as a loss safeguard.

Further, will the fine impact Westpac for anything longer than the short-term?

Michael Burry and 'Roadkill' stock

In a letter to investors (as reported by Vanity Fair), Michael Burry explained the term 'ick investing'. Ick investing focuses on stocks that at first glance elicit a reaction of 'yikes' or 'ick'. The company is either suffering from negative press or the market has quarantined it due to its toxic reputation.

In early 2000s, Avant! – a semiconductor company – was accused of stealing software code from its rival, code that was fundamental to its business success. Criminal charges were brought against Avant!'s leadership.

But Michael Burry was not fazed; he decided to research Avant! further. He found that the company had $100 million in cash, still generated $100 million in free cash flow yearly, and had a market value of $250 million.

As the Vanity Fair article reported:

[Burry] was able to see that even if the executives went to jail (as five of them did) and the fines were paid (as they were), Avant! would be worth a lot more than the market than assumed. To make money on Avant!'s stock, however, he'd probably have to stomach short-term losses, as investors puked up shares in horrified response to negative publicity.

In line with this approach, some issues Burry would consider in Westpac's case are its capital raising and ability to pay off a fine estimated to be between $1–4 billion.

Parting gifts

A revealing quote that seems to echo Burry's focus on fundamentals over 'ick' reactions comes from Westpac Group's own Chairman, Lindsay Maxsted.

In a statement to the ASX following the allegations, Maxsted thanked the outgoing CEO Brian Hartzer, saying that "Brian leaves the Bank with a strong balance sheet, with each of our businesses number one or two in their markets."

The emphasis was more on healthy balance sheets and market leadership than probity and moral leadership.

Silver linings

On 1 February this year, the day Hayne's report was set for release, Westpac was trading at $24.05. As of the time of writing, Westpac is trading at $24.59, a 2.2% increase.

As of the time of writing, all of the 'big four' banks – even Westpac – are up, year-to-date. The royal commission's findings did not sour investors' moods.

In fact, some argue the royal commission had a positive effect on the banks' share price, as it forced the banks to improve.

As the UNSW Business School's Associate Professor of Finance Mark Humphery-Jenner said in an article published by The Conversation, "[i]mproving governance and internal controls could in fact ultimately help shareholders. The royal commission could have been much worse for banks. Some of it might actually be good."

In a similar vein, in an address during the recent AGM, acting Westpac CEO Peter King confirmed the implementation of rectifying measures.

These included "closing products and reporting outstanding historical files related to AUSTRAC's IFTI claims", "recruiting an additional 200 people in compliance and financial crime areas", and establishing a Board Financial Crime Committee.

Westpac fundamentals

Acting CEO King described Westpac's FY19 financial performance as "disappointing."

Net profit for 2019 was $6,784 million, which was down 16% compared to 2018. Net interest income increased $402 million, or 2%, from 2018, but this was driven by a reclassification of line fees from net fee income to interest income. Excluding the reclassification, net interest income was flat compared to 2018.

The bank's Australian housing loans category increased by only 1%, while Australian personal loans decreased by 8%, with Australian business and institutional loans down 1%.

Net wealth management fees and insurance income were down a substantial 50%, or $1,032 million, compared to 2018. Westpac attributed this reduction to provisions for customer refunds and associated costs as well as litigation costs worth $531 million.

Operating expenses increased $540 million, up 6% compared to 2018. The main contributor was a $349 million increase in provisions for customer refunds and associated costs.

Further, as acting CEO King admitted, Westpac's exiting the personal finance advice sector "improved the company's sustainability but came at a significant cost to both revenue and expenses."

A question a long-term investor like Burry might ask is: how fixed or common are the costs and factors weighing down Westpac's performance?

Will interest rates be this low in 5 years? Will Westpac have to continue allocating hundreds of millions to customer refunds and litigation costs each year? Will Westpac suffer intense regulatory scrutiny and 10-figure fines yearly?

In other words, is Westpac sailing through a vicious – but temporary – storm, or is it marooned in bad weather forever?  

Outlook for 2020

Westpac's own acting CEO, Peter King, did not sugarcoat matters.

Addressing shareholders, King soberly predicted "operating conditions to continue to be soft, with growth remaining low, interest rates expected to fall further, and regulatory intensity" to persist.

That regulatory intensity soured King's positive forecast of "balance sheet growth without significant deterioration in credit quality", with the acting CEO predicting regulatory intensity to bring extra costs.

Further, Westpac's FY19 report included forecasts by Westpac Economics, predicting Australian economic growth to remain below trend, inflation to rise from 1.6% to 1.9%, and the cash rate to go further down to 0.50%.

There is also the Reserve Bank of New Zealand (RBNZ)'s announced changes to the capital adequacy framework.

According to Westpac's own calculations, on a pro forma basis, Westpac's subsidiary WNZL would require a further NZ$2.3–2.9 billion of Tier 1 capital to meet the new requirements that are fully effective in 2027.

For Westpac Group, the changes are estimated to 'reduce Westpac's Level 1 capital on a pro forma basis as at 30 September 2019 by NZ$1.2–1.8 billion.'

However, the 7-year grace period softens the impact and was enough for Goldman Sachs analysts to conclude the RBNZ changes would not rock Westpac's share price too much.

Foolish takeaway

Currently, the Wall Street Journal (WSJ)'s average stock price target for Westpac sits at $25.80, with a High target of $30.50 and a Low target of $22.40. Of the 15 analysts surveyed by WSJ, 9 rate Westpac a Hold, 3 a Buy, and the remaining 3 a Sell.

As of 6 December, Goldman has a 'Neutral' rating on Westpac, with a 12-month price target of $25.58.

Macquarie is in agreement on Goldman's 'Neutral' rating, but with a 12-month share price target of $26.00.

As for a meticulous value investor like Michael Burry, he would most likely not consider the negative sentiment fatal. However, he would ponder whether Westpac is trading at a significant enough discount.

As ex-CEO Mr Hartzer himself said in a November interview with The Sydney Morning Herald, banks are in a "cyclical downturn … where growth rates are low, credit demand is low and interest rates are very low", all the while "significant investment is required in regulatory and compliance matters."

By and large the market has baked these considerations into the banks' prices so there is little discount room.

While Burry's Avant! had ample cash on hand and surging cash flow even after paying its fines, Westpac's already existing vulnerability to economic downturn, low rates, and flagging credit demand will make resilience to the piling up of penalties and capital requirements much harder.

The post Westpac share price outlook: how would Michael Burry value Westpac stock? appeared first on The Motley Fool Australia.

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Motley Fool contributor kprakapenka 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.

Charlie Munger once said "you must value the business in order to value the stock." His investing partner, Warren Buffett, said that the "key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage." 

When you buy A2 Milk Company Ltd (ASX: A2M) shares, you are buying a stake in a liquid milk and infant nutrition brand with a sound management team, strong financials, and commendable recent growth track record. 

However, even though the premium milk and infant formula industry is growing, especially in key markets like China, what can be said about a2 Milk's competitive advantage? 

Google's early competitive advantage was its superior search engine. Investing in Google then was investing in an unrivalled product. 

But to invest in a2 Milk shares is to endorse a business with a narrow product range that rests on one competitive advantage – the absence of the A1 protein found in most dairy milk. 

Is this strong enough? Let's take a closer look. 

The wonders of A2 protein

The Australian Financial Review's (AFR) recent description of A2 milk contained a common take on A2 Milk's professed edge: "a2's advantage is that its products contain only the A2 beta casein protein type, which is reported to have greater digestive benefits."

Instead of other milk products, which contain both the A2 and the A1 protein, a2 Milk sells products comprising exclusively of the more digestively friendly A2 protein, thanks to a gene-testing procedure patented by the a2 Milk company.

a2 Milk sells its competitive advantage by stating that "there are many people who feel uncomfortable after they drink ordinary milk or lactose-free milk yet they can enjoy a2 Milk without discomfort."

But is this advantage substantiated?

The evidence against

a2 Milk did not always stake its market advantage solely on digestive ease.

In a2 Milk's 2008 annual report (back when it was still a NZAX-listed company), both the Chairman and the CEO wrote about the "growing consumer awareness of the benefits of a2 Milk for medical conditions such as heart disease, autism and the reduction in the incidence of childhood diabetes."

The company even petitioned Australian and New Zealand regulators to put a health warning on regular milk. The petition was denied.

In 2009, the European Food Safety Authority released a 107-page review on the status of A1 and A2 milk. The review found that a cause–effect relationship between the intake of A1 milk and "any suggested non-communicable diseases cannot be established."

As a result, it did not recommend any formal risk assessments of A1 milk products.

Additionally, both the New Zealand government's national food safety authority and Food Standards Australia New Zealand saw no need to distinguish between A1 and A2 milk based on the available evidence.

These findings have landed a2 Milk in hot water with regulators over advertising. In 2004, the Queensland Health Department fined A2 Milk marketers for making false and misleading claims about A2 milk's health benefits.

In 2012, the UK Advertising Standards forced a2 Milk to "remove claims from its A2 milk ads that it was suitable for those with a milk allergy or lactose intolerance."

Dr Nicholas Fuller, Research Fellow at the University of Sydney, concluded that, given the available evidence, "for less than half the price per litre, the [common commercial milk] would be the favoured option."

This is a worrying conclusion for investors thinking about the long-term prospects of a2 Milk sales. 

Supporting evidence

a2 Milk's website contains a page for supporting evidence, including a 2017 systematic review, which surveyed 39 relevant peer-reviewed studies that investigated the gastrointestinal effects of A1 versus A2 proteins.

However, the review of these studies was not a clear slam dunk for A2 Milk.

While the review did find that "the overall evidence … in animal trials and in vitro studies can be considered conclusive," the authors reported that there was a "limited number" of human studies and that "further research is required in humans to investigate the digestive function effects of A1 relative to A2 in different populations and dietary settings."

Additionally, there was a medical trial in China sponsored by a2 Milk that tested 45 participants drinking either regular A1 milk or A2 milk. The study's research team found that participants who drank only A2 milk reported no gastrointestinal disturbance, while those who drank A1 milk reported bloating, inflammation and constipation.

However, CSIRO's Dr Malcolm Riley thought the "randomised controlled trials are showing fairly small differences that one might say are not important enough to matter."

Finally, the previously mentioned Dr Fuller did point out that "for those who self-report an intolerance to milk or are lactose-intolerant, A2 milk may be a suitable selection to prevent commonly reported upset stomach complaints, but so too is lactose-free milk."

However, a2 Milk states on its website that its milk "contains the same quantity of lactose that is found in standard milk and will not resolve any medically diagnosed lactose intolerance."

Intolerant competition

The point about lactose tolerance is important and raises a question: why don't consumers with a self-reported intolerance to milk or lactose abandon A2 Milk for lactose-free milk or milk alternatives like soy or almond?

For example, Liddells Lactose Free 1L Full Cream is retailing for $2.25 at Woolworths Group Ltd (ASX: WOW). Comparatively, a2 Milk's 1L Full Cream is retailing for $3. Woolworths also stocks its own Woolworths' branded lactose free full cream milk for $2 a litre. Both Macro Organic Soy Milk 1L and Almond Breeze's Unsweetened 1L almond milk also retail for $2.

Why do people buy a2 milk?

If there are lactose-free options out there, why do people buy a2 Milk? Who is a2 Milk's target audience?

In ABC's Landline report on A2 Milk, a customer was asked whether they would pay a dollar more for A2 protein milk and responded: "most definitely; health has to come first."

This 'health first' sentiment is key to a2 Milk's success and an understanding of its target market. Do dry scientific findings sway the 'health-first' customers? Maybe they are not purchasing the produce of peer-reviewed studies but the placebo-like peace of mind.

Maybe certain people who experience challenges drinking conventional cows' milk are willing to pay a "may" premium; that is, pay extra for milk that may provide digestive benefits.

This is doubly so when the customers are parents purchasing a dietary staple for children they want to do the utmost to protect.

Take, for example, a recent AFR piece, where A2 Milk CEO Jayne Hrdlicka mentioned a sponsorship with a reality TV show that follows celebrity, first-time mothers. Importantly, Ms Hrdlicka revealed that the sponsorship meant "we were very high profile, targeting our core target consumer."

Consequently, A2 Milk's core target consumer seems to be first time, affluent mothers.

However, the target consumer may not always respond positively. For instance, A2 Milk recently withdrew from the UK liquid milk market. It seems the marketing about the potential health benefits did not cut through. This is interesting, because a product consumers know to be more beneficial to one's health than all its rivals would surely not struggle to find traction.

Foolish takeaway

Milk, a dietary staple, will always seize the attention of caring and watchful parents when it is marketed as less risky and more digestively beneficial than standard milk.

Therefore, I believe a2 Milk's long-term prospects rest on how well it positions itself as a 'health first' hedge against discomfort and more, how the science settles, and how prominently that science is reported in the news and advertisements.

As there is no current evidence to suggest a1 milk consumption is dangerous or leads to elevated incidence of disease, a2 Milk must focus its messaging on the digestive friendliness of a2 Milk instead.

But customers are naturally more incentivised to pay extra to avoid heart disease over tummy troubles. So can the narrowed health advantage of a2 milk over its cheaper rivals ensure continued growth?

Whatever the case, the reining in of A2 milk health benefits means the health-first factor is harder to sell on its own. Marketing will be crucial, and only time will tell if its marketing message can continue to resonate.

The post Does a2 Milk's competitive advantage rest on milky science? appeared first on The Motley Fool Australia.

More reading

• 4 ASX 200 shares newly upgraded this week
• What is Morgans saying about A2 Milk and these ASX shares?
• Should you buy the dip on A2 Milk shares today?
• What is Bell Potter saying about A2 Milk shares after the selloff?
• 5 things to watch on the ASX 200 on Tuesday

Motley Fool contributor kprakapenka has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. 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.

A2 Milk Company Ltd (ASX: A2M) continues to report strong revenue growth in key markets like China and the United States (US). But with China's encouragement of domestic players and emerging competition, what are the long-term prospects for A2 Milk share price?

Financial overview

A2 Milk's full-year 2019 report outlined very strong results. Revenue went up 41.4%, while earnings before interest, tax, depreciation and amortisation (EBITDA) went up by 31.7%.

On a product segment basis, liquid milk revenue increased by 22.8%, contributing 13.4% to total FY19 revenue.

However, by far the largest contributor was infant nutrition – comprising 81.5% of total revenue. Crucially, FY19 infant nutrition revenue jumped a staggering 46.9%.

In the Australian and New Zealand market, A2 Milk boasts a record 11.2% market share. According to A2 Milk's 2019 full year report, it is the "fastest growing major fresh milk brand in Australian supermarkets and remains the leading premium milk brand and the only brand ranged in all major Australian supermarkets."

A2 Milk is also growing its market share in the key China market. The FY19 report detailed an increase in "Kantar Tier 1, Key A, B, C & D cities market value share", up from 4.8% to 6.4%.

This is a positive indicator, considering the fate of other companies wishing to expand in China. The Blackmores Limited (ASX: BKL) share price, for instance, plunged after new regulation made it tougher for smaller daigou traders to buy up Blackmores vitamins.

However, while notching up strong results, many investors were disappointed by A2 Milk's profit margin outlook, leading to a drop in its share price.

According to the Australian Financial Review, analysts were underwhelmed by the trading profit margin outlook, which came "materially below consensus of 31.7%."

Further, it was not a happy growth story for every market A2 Milk operates in, with the company deciding to exit the UK liquid milk market after not gaining traction there.

Premium products and Chinese consumer trends

A McKinsey report surveying 10,000 Chinese consumers found that Chinese consumers are increasingly choosing premium over mass products. In fact, 50% now prefer to purchase the "best and most expensive offering, a significant increase over the previous years."

Crucially, the report found that "foreign brands still hold a leadership position in that premium market."

Not only that, and a boon for A2 Milk, a rising proportion of Chinese consumers "focus on a few brands, and some are becoming loyal to single brands."

For example, 59% agreed with the statement "I would buy more famous-branded products if I had more money", up from 41% in 2011.

If a foreign brand can offer a premium, quality product, the research suggests this brand will likely enjoy both good market share and brand loyalty moats over its rivals in China.

This is especially so for a product like infant formula. As a Deloitte report explained, during China's 2008 melamine scandal, China's top 4 infant formula brands were implicated.

To this day, trust in China's biggest domestic infant formula brands is low, compounding the appeal of foreign-branded premium products. In line with this, an August 2018 report by NZMP forecasted a "five million tonne aggregate rise in dairy product imports projected by 2027" in China, the "largest in any animal protein category."

These Chinese consumer trends may explain why A2 Milk is ramping up its marketing outlay.

The company recently struck a sponsorship deal with a reality TV show that follows celebrities entering motherhood for the first time.

Additionally, as the AFR reported, A2 Milk's second half marketing expenditure was double that of the first half.

This marketing push also explains the NZ$44 million in EBITDA losses in the US market, with A2 Milk attributing the loss to "building brand awareness."

The total FY19 marketing outlay was $NZ135.3 million, or 10.4% of sales. Importantly, this will grow to 12% in 2020.

Challenges

While foreign dairy brands are capitalising on China's distrust of domestic brands following the contamination scandal in 2008, they should consider how long this local distrust will persist.

Chinese dairy brands have had more than a decade to improve their product quality and safety standards.

Indeed, the Chinese government is actively aiming to bolster local investment in dairy products, led by the $1.5 billion takeover bid of Bellamy's Australia Ltd (ASX: BAL).

As Bloomberg reported, China "will support domestic dairy producers in acquiring or setting up overseas bases, encourage foreign dairy firms to invest in China, while tightening regulations on milk-powder imports and online sales platforms."

Additionally, while many have pointed out the China market's regulatory hurdles, fewer mention China's dampened economic outlook.

Recent data revealed China's economy is growing at the slowest rate in almost three decades.

A recent publication by the Reserve Bank of Australia pointed out that exports to China like milk "could be affected materially by a negative shock to growth in China."

The publication notes that while the slowing of China's growth since 2010 has been "orderly", "risks remain elevated."

Summary

A2 Milk is a well-run company with a sound management team and healthy balance sheet. Its recent growth track record is commendable.

Yet there are reservations about competition, regulation, and the market expansion in China, factors on which any significant share price appreciation relies.

Currently, the Wall Street Journal's analyst ratings for A2 Milk have 5/14 analysts rating it a 'Buy'; 6/14 a 'Hold'; 1/14 as 'Underweight'; and 2/14 a 'Sell'.

It seems A2 Milk is in a holding pattern right now, and perhaps its investors should follow suit.

The post Can the A2 Milk share price continue to grow amid China's emerging competition? appeared first on The Motley Fool Australia.

More reading

• 4 ASX 200 shares newly upgraded this week
• What is Morgans saying about A2 Milk and these ASX shares?
• Should you buy the dip on A2 Milk shares today?
• What is Bell Potter saying about A2 Milk shares after the selloff?
• 5 things to watch on the ASX 200 on Tuesday

Motley Fool contributor kprakapenka has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Blackmores Limited. The Motley Fool Australia owns shares of A2 Milk. 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.

Instead of researching and picking individual stocks, institutional and individual investors may instead outsource the exertion of stock picking to others willing to do it full-time and (presumably) with more acumen.

But, more and more, this acumen and its price are coming into question.

Active management actively underperforming

In Australia, a 2015 report by Vanguard Research found "62% of Australian large-cap equity funds underperformed their benchmarks over the ten years ended December 31, 2014."

Further, when adjusted for survivorship bias (properly accounting for the performance of liquidated funds prior to closure), the proportion of underperforming funds went up from 62% to 77%.

In the UK, Neil Woodford – one of the most prominent fund managers in the world – locked investors out of his main fund after a stretch of poor returns. This led two Bloomberg Intelligence analysts to write that the "redemptions freeze by Neil Woodford's fund could further damage the reputation of active management, serving as another catalyst for the move toward passive investing."

Bloomberg also reported that, in the US, about 4 in every 10 dollars are invested in schemes mimicking an index. According to Forbes, since 2006, investors withdrew $1.2 trillion from actively managed US equity mutual funds, pouring $1.4 trillion into equity ETFs and index funds.

Not only that, Moody's reported that outflows from active funds have accelerated. In 2018, active funds saw the "highest annual recorded outflows since data has been gathered."

Most strikingly, Moody's Investors Service predicts that "adoption of passive investing is on track to overtake active investing" as early as 2021.

The downsides of active funds famously led Warren Buffett to enter a bet with hedge-fund manager Ted Seides in 2007. Buffett wagered that a plain S&P 500 index fund would outperform a basket of hedge funds over a decade.

It is a dangerous game to bet against oracles and so it proved for Seides. Buffett's chosen index fund recorded annualised returns of 7.1% while Seides' basket of hedge funds had annualised returns of 2.2%.

Buffett explained his reasoning in a letter to shareholders, writing:

A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors. Investors, on average and over time, will do better with a low-cost index fund than with a group of funds of funds … Performance comes, performance goes. Fees never falter.

While the shift away from active management may seem recent, pointing out the negatives of active funds is not.

For instance, Burton Malkiel, in his 2003 edition of A Random Walk Down Wall Street, wrote that, "for the 20 years ending December 31, 2001, the average actively managed large cap mutual fund underperformed the S&P 500 large cap index by almost 2% per year."  

Successful actively managed funds

Of course, there are successful actively managed funds – after all, without visible winners there would be no sustained willingness to participate in actively managed funds.

The Australian government's sovereign wealth fund – Future Fund – made a sizeable 11.5% return over the 2019 financial year. As the AFR Weekend reported, a "strong contribution" to these gains came from the Future Fund's allocation to numerous hedge funds.

Two of the chosen hedge funds were Ray Dalio's Bridgewater and the esoteric quant fund Two Sigma. Last year, Bridgewater's Pure Alpha returned 14.6% and Two Sigma's Absolute Return gained 11%.

It is important to note, however, that while these funds recorded strong returns, it was not a good year for hedge funds in general.

As the Financial Times reported, last year was "among the worst for hedge funds since the financial crisis … with the average hedge fund losing 6.7%."

For comparison, according to Stockspot's 2018 Australian ETF Report, Australian shares (broad market) ETFs had an average return of 2.1% after fees with 4% dividend yield. Global shares (broad market) ETFs had a high average return of 12.8%.

Additionally, even Future Fund prefers less exposure to active management. As the AFR Weekend reported, "to gain exposure to equities, the Future Fund does not hire active 'long' only managers, preferring to gain exposure through specially designed indices that aim to track particular factors."

Past successes don't always beget future successes

One may argue that given a large enough distribution of an enterprise like active management, mediocrity is a mathematical certainty. What matters is picking winners and serial winners do exist. 

So, say an investor found a historically successful active fund: can the investor predict the fund will persist to perform well in the future?

As reported by the 2015 Vanguard Research report, a 22-year long study by Nobel Prize-winning economist Eugene Fama found "that it is extremely difficult for an actively managed investment fund to regularly outperform its benchmark."

Worryingly, the report found that an "investor selecting a fund from the top 20% of all funds in 2009 stood a 27% chance of falling into the bottom 20% of all funds or seeing his or her fund disappear along the way" in the subsequent five-year period.

Foolish takeaway

Ever since the founding of the pioneering index fund Vanguard, rumblings about the underperformance and costliness of active funds have grown. These days, the rumblings are loud and clear.

Investors are walking the disgruntled talk and transferring their money from active to passive management. And as long as ETFs and index funds continue to provide very low-cost, robust returns, the march away from active management will continue in tandem.

The post Are ASX 200 investors losing faith in active management? appeared first on The Motley Fool Australia.

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Motley Fool contributor kprakapenka 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.

Mark Twain's quip that during the gold rush, "it is a good time to be in the pick and shovel business" has long ago percolated into an Aesop's fable of investing.

Does the ASX 200 have any sound pick-and-shovel stocks?

What is a pick-and-shovel strategy?

During a gold rush, sourcing and selling shovels is less labour intensive and hazardous than prospecting for gold. Many will venture out, but few will strike it rich. Yet both the lucky and the unlucky alike will need picks and shovels.

It still takes a shovel for a prospector to realise he's out of luck.

Therefore, a pick-and-shovel strategy can grant you a safe steady stream of income from customers who take on most of the risk.

It aims to capitalise on stocks providing necessary inputs for an end product without incurring the risks associated with selling the final product itself.

Examples of pick-and-shovel stocks

Apple has wider brand recognition than a company like Intel. Yet it is Intel that quietly manufactures the processors found in most of the world's personal computers.

While rivals like Apple, HP, Dell, and Lenovo vie for shares of the personal computing market, all of them will have to source their processors from the likes of Intel.

The fortunes of many of these companies will ebb and flow as one or the other releases a hot new product. Yet all the while, Intel will pocket a handy sum from each.

Take Amazon Web Services (AWS). While its name may be unassuming, nothing is modest about its profits. AWS supplies cloud-computing infrastructure to the likes of Netflix, Slack, NASA, and even the CIA. In FY18, it reported a vertiginous US$25.7 billion in net sales. 

However, pick-and-shovel stocks are not always a successful investment play.

In market contexts where there are only one or two buyers, suppliers of necessary tools or services will struggle to leverage that necessity into good profits.

Why? Because the bargaining power will not be with them. That's why you hear reports from disgruntled and struggling suppliers over the Coles Group Limited (ASX: COL) and Woolworths Group Ltd (ASX: WOW) duopoly.

Pick-and-shovel stocks of the tech sector

Australia's tech sector has seen enormous growth in recent years, led by the WAAAX cabal. And information technology will continue to inform the interconnected enterprise of this digital age, so it's fruitful to search for pick-and-shovel stocks in the tech sector.

But are there any to be found in the ASX 200?

Altium Limited (ASX: ALU)

Altium is a leader in printed circuit board (PCB) design tools and its share price is up 50%, year to date. Altium's market leader status in PCB design tools positions it favourably for the explosion in AI and Internet of Things applications.

In its latest investor presentation, Altium reported that the "proliferation of electronics through the rise of smart connected devices continues to drive growth for our business" as PCB are central to the "design and realisation of electronics."

In FY19, Altium reported continued revenue growth, up 23% to $171.8 million with a healthy EBITDA margin of 36.5%.

Dawn Kanelleas and Michael Joukhador of First Sentier Investors (previously Colonial First State Global Asset Management) recently wrote that "for every traditional device that is redesigned to talk to other devices – and for every new device brought to market – there sits an engineer heavily reliant on Altium."

NEXTDC Ltd (ASX: NXT)

NEXTDC is Australia's leading data centre operator, primed to leverage its infrastructure in today's data-hungry world. It already boasts strategic partnerships with leading tech companies Amazon, Microsoft, Google, IBM, Oracle and Alibaba.

A 2018 report by IDC predicted that the "global datasphere will grow from 33 Zettabytes (ZB) in 2018 to 175 ZB by 2025." This will create an exponential demand for storage and data centres like NEXTDC.

The report went on to say that the "responsibility to maintain and manage all this consumer and business data supports the growth in cloud provider data centers."

Not only that, advisory firm Gartner predicts that by 2025, 80% of enterprises will shut down their in-house data centres, preferring to pay specialised firms like NEXTDC for colocation and cloud access.

Importantly, Gartner estimated that only 10% of enterprises have closed their in-house data centres. This means that suppliers like NEXTDC should expect a large flock of new customers over the coming years.

These considerations were enough for Morgans to upgrade NEXTDC shares to an add rating, with a $6.68 price target.

Further, according to the Wall Street Journal's analyst ratings, 10 out of 11 analysts currently rate NEXTDC a buy, with the remaining analyst deeming it a hold.

The post 2 top ASX 200 pick-and-shovel stocks to consider appeared first on The Motley Fool Australia.

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Motley Fool contributor kprakapenka has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Altium. 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.

Telstra Corporation Ltd (ASX: TLS) is the first mobile network in Australia to be 5G ready, made possible by a colossal $8 billion investment over five years to 30 June 2019.

But will Telstra's 5G bet pay off? Can the large investment pale in comparison to its returns?

Contracting telecom industry profits

5G is touted as revolutionary. It is thought that giant industries like gaming can use 5G to augment user experience, while manufacturers can develop the interconnected, automated factories of the future. It is also thought that 5G is the key to making the Internet of Things (IoT) go mainstream.

Yet access to 5G rights is not automatically access to a golden goose.

For instance, 4G mobile operators did not make the same great returns as they did from earlier generations. In some regions, like Latin America and Europe, revenues actually dropped after operators introduced 4G.

A 2012 McKinsey report estimated that in Europe, average revenues from fixed-line customers fell 3% a year and average mobile prices dropped 8% a year.

Astonishingly, the report found that Europe's telecom industry's earnings before interest, tax, depreciation and amortisation (EBITDA) margins declined by 4% a year, even as user population grew. That came to around $5–7 billion euros in lost profits annually.

Telecoms can pay billions for networks that customers end up accessing for paltry sums, yet a new-generation network is central to Telstra's plans.

Telstra2022

In a 2018 announcement detailing the Telstra2022 (T22) strategy, CEO Andrew Penn stated that the company plans to "prepare to lead the market and win in 5G. We will be network ready in the first half of FY19 with full rollout to capital cities, regional centres and other high demand areas by FY20."

He went on to say that "we already have tens of thousands of customers on 4G in enterprise, we have a healthy IoT business and 5G will help accelerate that."

Embedded in that statement is Telstra's pivot to "enterprise" as its big-money earner. Telstra is banking on businesses using its new 5G network as a foundation for their activities.

In light of this, Telstra announced a collaboration with Ericsson and Commonwealth Bank of Australia (CBA) to explore and trial possibilities of edge-computing. Telstra has also partnered with Aldi to develop an integrated freight-tracking platform.

In an article published last month in The Australian, Telstra's Global IoT Solutions executive Gerhard Loots stated that, "from vehicles to machines, infrastructure, smart meters, buildings, and much more, the benefits we can realise from a connected world are now real and attainable."

In the gold-rush world of interconnectivity, Telstra wants to be the one selling the network shovels.

But is 5G essential for the interconnected future? For example, CEO Andrew Penn already admitted that "tens of thousands" of customers in enterprise use existing 4G technology for IoT.

What is currently impossible with 4G that 5G will make possible?

The uses of 5G

Addressing this question, The Economist reported "no device exists that makes a compelling case for 5G."

William Webb, author of The 5G Myth, observed that "5G could end up being like Concorde – a superb feat of engineering but of limited value to all but a small minority."

Even GSMA, a trade body representing global mobile network operators, concluded in a 2014 report that potential 5G use-cases like cloud-based office computing, videoconferencing, and machine-to-machine connectivity are serviced ably by existing 4G and in some cases even 2G technology.

Further, when discussing augmented reality and tactile internet systems, the report stated:

[They] are very much in their infancy and their development will be largely dependent on advances in a host of other technologies such as motion sensors and heads up display (HUD). It remains to be seen whether these applications could become profitable businesses for operators in the future.

Importantly, the report concluded that "many of the services that have been put forward as potential 'killer apps' for 5G do not require a generational shift in technology, and could be provided via existing network technologies."

Summary

A 2018 McKinsey report soberly laid out that "the economics, business model, and ability to monetize [5G] use cases at scale in the near term to justify a nationwide rollout of 5G in any country today remain unclear."

GSMA's report suggested that, "if previous generations of mobile technology have taught us anything, it is it that, as with each preceding generation, 5G will unlock value in ways we cannot and will not anticipate."

Interestingly, this uncertainty was somewhat mirrored by Telstra's own commentary about 5G's potential to shake up entertainment: "the potential for 5G to expand into the broadcasting space is exponential, and if we can inspire the next generation of content creators, who knows what the future of entertainment may be?"

That is the worry. Who knows?

The post Can 5G elevate Telstra's share price? appeared first on The Motley Fool Australia.

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Motley Fool contributor kprakapenka has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. 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.

The Afterpay Touch Group Ltd (ASX: APT) share price is up around 185% year-to-date (YTD) with top brokers like Citibank estimating a bull target of $44.50 in FY22. It is growing rapidly in key markets like the United States (US) and the United Kingdom (UK).

But where does this leave rivals like Zip Co Ltd (ASX: Z1P) and Splitit Ltd (ASX: SPT)?

A closer look at the BNPL landscape

The danger for an investor is thinking the Afterpay tide will raise all buy-now, pay-later (BNPL) boats.

It's clear the BNPL payments method is definitely not a gimmick and is changing the way many, especially millennials, are paying for low-to-mid value products. But the Internet was also a revolutionary invention, yet did not guarantee every Internet company a safe and happy future. For every PayPal there were dozens of Pets.com.

Similarly, blockchain may well prove to be an impactful technological breakthrough, but it does not mean that every cryptocurrency will be a winner.

So, will there be any winners among Afterpay's rivals?

Splitit

Splitit's share price is currently up 34.2% YTD, but still down from its all-time high of $2.00 recorded in March.

Splitit closed yesterday's trade at $0.51, with a market capitalisation of $150.7 million but only US$798,000 in 1H19 revenue. In 1H19, Splitit made a net loss of US$3.8 million, up a steep 216% from previous corresponding period.

Splitit's revenue came from processing US$34.4 million worth of transactions. Its unique customers grew 228% to total 197,000 in 1H19.

Unlike Afterpay and Zip, Splitit lets customers pay in instalments with their existing debit or credit cards. This risks putting a lower cap on its user base compared to rivals, since most BNPL users are millennials, who are the least likely to own credit cards.

Further, credit card companies may well choose to roll out their own BNPL services, limiting Splitit's growth. Why allow Splitit to pocket merchant fees on purchases processed with their credit cards when they can collect those fees themselves? Visa is already one credit card company intending to enter the sector.

Indeed, in its prospectus, Splitit reported that its key growth strategy was pursuing a commercial partnership with Visa and MasterCard (it does not have any contractual arrangement with either MasterCard or Visa).

Therefore, Afterpay's recently announced partnership with Visa will be a big blow, and a sign the major players rate Afterpay above Splitit.

Zip

Zip is at the front of the chasing pack, with a significant share of the Australian market and a market capitalisation of $1.3 billion.

At the time of writing, Zip's share price is up a massive 243% year-to-date – dwarfing Splitit's 31% YTD growth – but still down 7.8% from its all-time high of $4.10.

Zip processed $1.1 billion in transactions in FY19 and reported 1.3 million active customers and over 16,000 partners (including Kmart and Big-W).

Comparison to Afterpay

In its first ever full-year results since its IPO, Afterpay processed $561.2 million worth of transactions, gained 1 million users, and secured 7,200 retail partners.

Even if Splitit triples its 1H19 active customers in FY19, it will be more than 400,000 customers short of Afterpay's first full-year tally.  

As of 23 August this year, Afterpay has 35,300 active merchants and 5.2 million customers. It gained over 200,000 UK customers alone in the first 15 weeks of launching in that market.

For comparison, Splitit's total active customers as of 1H19 numbered 197,000. Not only that, this total was reached by operating in 27 countries.

Further, Zip's impressive 1.3 million users was 'only' an 80% increase from FY18. I say only because Afterpay saw its customers increase by 130% in its latest full-year results.

Additionally, Zip grew its merchant base by 54% in latest full-year results while Afterpay grew its merchant base by 101% in its latest full-year results.

This suggests that instead of Afterpay's growth maturing, its network effect is in fact compounding that growth.

Foolish takeaway

Afterpay's chasing pack must deal with the danger that Afterpay's large network effect will make it harder to continue incurring losses for the sake of growth. They may find themselves burning cash for a market share already taken by Afterpay.

This is why a global strategy will be vital. Splitit is aware of this, reporting that it operates in 27 countries already, while Zip has announced UK launch plans.

Not every investment has to be a six like Afterpay. You can run up a decent score with ones and twos. However, one shouldn't throw away their wicket for a risky single.  

The post What now for Zip and Splitit after Afterpay's share price surge? appeared first on The Motley Fool Australia.

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Motley Fool contributor Kiryll Prakapenka has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO and ZIPCOLTD FPO. 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.

A study released yesterday by the Australian Institute of Company Directors (AICD) and the Sydney Business School found that short-termism and conservative stances on governance risks are hindering innovation and technological advancement.

What does this mean for the long-term future of Australian companies?

Innovate or stagnate

Stagnant, complacent businesses never last long and rarely enjoy the growth and market share investors desire. At the twilight of the resource boom, Australia must now survey the new landscape and adapt to its contours.

As a 2017 report from Innovation and Science Australia identified, "the biggest growth opportunities will come from knowledge-intensive companies that innovate and export, as they are the most profitable, competitive and productive."

And yet one staggering finding from the AICD study was that only 3% of all AICD members surveyed possessed science or technology expertise. To have over 95% of AICD members have no expertise in the areas defining today's digital era is bewildering.

Not only that, only 35% of AICD respondents thought their organisation's board had the requisite skills to execute any innovation strategy.

Interestingly, about 75% of AICD respondents submitted that their company does have an innovation vision, yet 57% also said innovation was never or only occasionally on their board's agenda.

From this it seems innovation is more buzzword than KPI. Australia should not find itself in a position where directors are more likely to fire the next Steve Jobs than embrace him.

AICD's Managing Director and CEO, Angus Armour prefaced the report by saying "innovation should not be viewed as optional, or just a concern of the black t-shirt millennials of technology companies. It is a central part of corporate strategy and risk management."

Australia lagging behind other countries

The Global Innovation Index's 2019 report ranked Australia 22nd in the world and 6th in its region, behind regional neighbours like Singapore, South Korea, and Japan.

In line with this, the AICD study found that, as a share of GDP, Australia's expenditure on R&D fell in recent years, with Australia's R&D intensity below the OECD average.

What do these figures mean for Australia's investing environment? Quite a lot when one realises that in a business arena more competitive than ever thanks to globalisation, innovation and R&D are strongly linked to business success.

R&D spending and stock prices

New markets, new products, and new inventions hardly ever materialise out of thin air. It takes research and deliberate tilts at innovation to do that.

A 2014 report by Goldman Sachs found "a strong correlation between R&D and Sales Growth (8-year CAGR through 2012; R2 75%) and between the latter and stock price returns over this period (R2 71%)." 

And yet, in his 2018 address, Reserve Bank of Australia's Phillip Lowe cited data revealing that less than 20% of firms ranked R&D a first priority.

It is time that changed.

The post Will the ASX 200 ever have its own Amazon or Google? appeared first on The Motley Fool Australia.

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Motley Fool contributor kprakapenka 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.

Oil shock after attack on Saudi facility 

Crude futures briefly soared almost 20% higher after the news broke of Saturday's drone attacks on Saudi's key oil facility, and Brent futures in London saw the biggest one-day percentage jump since 1988. The sudden halt in oil supply was also the worst in history. 

Worsening matters, Saudi officials poured cold water on prospects of a swift recovery, with Aramco officials telling a senior foreign diplomat they face a "severe" disruption that may last months. 

According to Bloomberg, global spare capacity currently available can only offset 70% of lost Saudi production. 

This is not happy reading for airline companies. 

Indeed, the Qantas Airways Limited's (ASX: QAN) share price finished this Monday 4.5% lower. America reacted to the news in a similar vein, with the world's largest carrier – American Airlines – closing Monday down 7.6%. 

That being said, the Qantas share price has rebounded over the subsequent few days and is currently trading 2.6% higher.

Growing revenues offset by rising fuel costs 

Qantas' recent full-year results showed underlying earnings before interest and tax (EBIT) down 14.9%, even though total revenue was up 4.9% at $17,966 million. Importantly, operating margin was down 18.6%, at a lowly 8.3%. 

Qantas reported that fuel costs rose by $614 million compared to last year, a 19% spike. 

Air New Zealand Limited (ASX: AIZ) saw this year's earnings before tax down from 2018's $540 million to $374 million, a massive 31% drop, even though, similarly to Qantas, operating revenue was up 5.3%. 

In its report, Air New Zealand listed increased fuel prices as a key headwind factor. In fact, it reported a NZ$191 million increase of the price of fuel that saw its total fuel bill jump from NZ$987 million last year to NZ$1.27 billion in FY19.

Following the pattern, Virgin Australia Holdings Limited's (ASX: VAH) full-year results revealed total revenue up 7.6% but an underlying loss before tax of $71.2 million, down a stupefying 210%. 

In its full-year report, Virgin Australia attributed this result to a $158.8 million fuel/foreign exchange headwind. The underlying loss before tax may not be overturned quickly, as Virgin Australia still forecasted $100 million worth of fuel and foreign exchange headwinds in FY20. 

Temporary jolt or long-term shakeup? 

Investors will not only ponder the speed of Aramco's salvage of its Abqaiq plant but also the long-term geopolitical implications of the attack. 

Saudi Arabia came out on Wednesday with a statement that it has partially restarted its damaged facility, yet full output capacity of 12 million barrels a day is still only expected to be reached by the end of November. 

Even in the best-case recovery scenario, investors must now live with the reality that the oil pricing equation has a new, steep variable – geopolitical volatility. 

Speaking to the BBC, Royal Bank of Canada's global head of commodity strategy Helima Croft went so far as to pronounce the drone attacks are a "game changer in the escalating Iranian regional standoff."  

Airlines will have to contend with the material impact on Saudi production but also with the immaterial shift in market sentiment. Many observers will fret that it can only take one drone attack to disable 5% of the world's oil supply. 

The exposed Saudi vulnerability to debilitating disruptions in oil delivery coupled with escalating tensions in the region may manifest as sustained high prices for crude. 

Airlines may very well have to pay an extended and hefty geopolitical risk premium for their largest expense. Airlines with low profit margins and weak fuel hedging will likely suffer. 

Uncertainty is expensive. 

The post What does the Saudi oil shock mean for ASX airlines like Qantas? appeared first on The Motley Fool Australia.

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Motley Fool contributor kprakapenka 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.