Market wrap: financial sector down as royal commission dust settles

Takeovers where the hot topic this week with Wesfarmers proposing a $1.5 billion takeover bid for rare earth miner Lynas Corporation (LYC).

The unsolicited cash offer to purchase the stock at $2.25 per share was made at a 44.7% premium on the share price.

However, the Lynas board rejected the offer due to the conditional aspects of the proposal and the belief that the company can deliver better value for its shareholders.

On news of the takeover, Lynas shares jumped 38% rising to a high of $2.17 before closing slightly lower.

The troubled miner's processing plant faces closure in September if the company cannot come to an agreement with the Malaysian Government about toxic waste removal from its operations.

As a consequence, prior to the takeover announcement Lynas shares were down 45% from its high in May last year.

While the move by Wesfarmers is timely and in line with its objective to acquire businesses with unique characteristics that will deliver value to shareholders, there is no value in buying or holding Lynas right now unless you believe Wesfarmers will significantly up its bid, which may or may not happen any time soon.

In another big move, Challenger Limited (CGF) jumped 9% on news that it would receive extended funding for reinsurance-based products from Japanese Insurance group, MS&AD.

The group also intends to acquire a position on the board and increase its 15% stake in Challenger, which could lead to an acquisition down the track.

Shares in IPH Limited also rose around 4% this week after the ACCC stated that it wouldn't oppose the takeover of a smaller competitor, Xenith.

Taking a look at the sectors, communication services and materials were up around 1% this week, while Energy and Information Technology were down around 3.5%.

Financials have continued to slide down around 2% at one stage before rising slightly.

In the past month, we have seen the big four all fall, with ANZ hit the hardest down around 7% and CBA down 4%. AMP also continued its fall, down around 11% for the month, reaching a new all-time low of $2.07.

While the financial sector rose after the royal commission report was released, with investor's hopeful the run would continue, we are now starting to see the dust settle and the sector is not looking all that strong.

Therefore, I still believe this sector should be avoided in the short term, and that investors wait until the second half of the year when the banks are likely to perform better.

What we expect in the market

With all the bearish news around, the All Ordinaries Index is continuing to surprise me by remaining so resilient.

It was down over 1.5% at one stage earlier in the week and investors were wondering if it was time to jump ship, but it clawed back much of the fall.

In fact, the market has performed strongly this year given that it has traded higher for 11 out of the 13 weeks and for nine of those 13 weeks it closed higher than it opened.

Once again, I don't believe the market has not fallen far enough in price, therefore, we may see it fall another 1 or 2%, with the fall being very short term.

That said, if it takes off from its current levels, it just means a larger fall is expected either late in the third quarter or early in the fourth quarter of 2019. Overall I believe the market is bullish and we should see some smooth sailing ahead

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