The week in stocks: Getting defensive

Worries about the US government shutdown has dominated market sentiment.

The threat of a US government shutdown gripped markets globally on Monday. Congress was not able to reach an agreement so the US government was sent into a partial shutdown, affecting 800,000 workers. The immediate response from markets was not one of concern, even with talk about difficulty in reaching a resolution on the debt ceiling which is approaching on October 17.

Retail Sales

Retail sales grew 0.4 per cent month on month in August, suggesting previous rate cuts and a weaker currency were gaining traction. But the breakdown didn’t offer a compelling outlook for household retailers, with this sector reporting sales 0.6 per cent lower in the month of September.

Although the housing market is picking up, the focus is on existing housing over new housing resulting in consumption falling well below actual housing market activity.

Talks of strengthening house prices had put retailers leveraged to this space, like Harvey Norman and JB Hi-Fi back in the spotlight. But the trend of retail sales versus share price appreciation means earnings per share will need to pick up the pace to justify current prices.

Defensives in the spotlight

While the US government shutdown has been concerning for markets, the looming debt ceiling deadline has sparked a move towards defensive investments. As a result, Real Estate Investment Trusts (REITs) and utilities were the best performing sector of the week. REITs finished flat and utilities only lost 0.57 per cent against a broader index loss of 1.87 per cent.

The move towards more defensive investments was also encouraged by the yield on the 10 year Treasury note falling to 2.6 per cent from 2.64 per cent. If the yield on the Treasury note continues to fall we can expect REITs and property trusts to climb higher for the income offered.

Leighton Holdings

Much to Leighton’s dismay, they were front page news on Thursday over corruption claims that plagued them during 2012 after Leighton first reported the problems in 2012. The final two days of trade for the week saw over 14 per cent sliced from Leighton’s share price.

The Australian Federal Police are currently investigating the allegations of bribery in Iraq. The interest highlights the residual issues that Leightons and investors alike still have to deal with.

Irrespective of corruption claims, the year ahead for Leightons looks testing due to their exposure to the private sector, which is starting to see a decline in capital expenditure. Competitors could steal projects that Leighton’s would ordinarily be in prime position for, reducing their revenue generating opportunities.