ASX financials are the worst performing sector on the market this morning as big bank stocks lead the decline.

The Westpac Banking Corp (ASX: WBC) share price tumbled 3.1%, while the National Australia Bank Ltd. (ASX: NAB) share price and Australia and New Zealand Banking GrpLtd (ASX: ANZ) share price shed more than 2.5% each.

The Commonwealth Bank of Australia (ASX: CBA) share price is faring a little better with its 1.7% drop. But that’s still worse than the 1.3% decline in the S&P/ASX 200 Index (Index:^AXJO) at the time of writing.

Borrowers still under pressure

The market is worried that the sector has rallied too far ahead of fundamentals during the recent post COVID-19 re-rating.

This fear was brought home by comments from NAB’s chief executive Ross McEwan comments to ABC Radio National this morning. He said that as many as 90% of borrowers who are on loan deferrals can’t re-start payments.

The bank reached out to business and mortgagees who have been granted temporary repayment reprieve due to financial hardship caused by the coronavirus pandemic.

V-shape recovery a dream

Only 10% to 15% of this group are in a position to resume loan repayments now, which is the half-way mark on the grace period which is expected to expire in September.

“I am optimistic but I’m also very cautious about the underlying signs that are there,” reported the Australian Financial Review when quoting McEwan’s ABC interview.

“You are still seeing an underlying unemployment rate that is greater than Australia has seen in a long time.”

He further cautioned that the recovery could be slower than what many believe and he doesn’t think our economy will fully recover from the COVID-19 crisis until 2022.

I reckon the “V” in the V-shape recovery stands for “vulnerable”.

ASX bank stock re-rating over for now

If you take his comments on face value, there are three key takeaways for ASX investors, in my view.

First is that the sharp rebound in ASX bank shares is likely over for now and that their share prices will need to consolidate before pushing higher.

Investors won’t need to chase these shares higher, although I don’t think we will see a big sell-off in equities unless we get a second wave or a Black Swan event.

More government support

Second, the Morrison government’s steadfast insistence that JobKeeper and JobSeeker support packages will end in September shouldn’t be taken at face value.

If many bank customers continue to struggle to service their loans at that point, the government will have little choice but to keep wage supplements in place. Otherwise, the banking system will come under pressure and that will put the brakes on any economic recovery.

Impact on house prices

Finally, NAB’s comments will further dim the outlook for house prices if we assume the other big banks are getting the same feedback from borrowers.

Forecasts of a less than 5% drop in home values by some experts look too optimistic if the majority of borrowers on loan deferrals still can’t climb back on their horses come September.

More reading

• ASX 200 drops 2%: Big four banks sink lower, JB Hi-Fi to deliver strong profit growth
• 3 ASX 200 shares I’d buy for 2020 and beyond
• What is the ASX impact of a fall in house prices?
• 3 great shares to buy now if you’re an ASX 200 investor in your 20s
• Why do I own this ASX 200 share?

Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, National Australia Bank Limited, and Westpac Banking. Connect with me on Twitter @brenlau.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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In these uncertain economic conditions, it’s fascinating to see which companies have flourished and which have failed. The tourism sector has understandably suffered after governments across the world implemented strict travel bans. Shares of companies like Flight Centre Travel Group Ltd (ASX: FLT) and Webjet Limited (ASX: WEB) are still trading at a fraction of their pre-pandemic levels. 

But the COVID-19 crisis has also produced some unlikely market darlings. The share prices of companies like Australian online retailer Kogan.com Ltd (ASX: KGN) and meal kit delivery service Marley Spoon AG (ASX: MMM) have skyrocketed after demand for their offerings surged during lockdown.

Another niche sector of the economy that has held up strongly throughout the pandemic has been infant formula. Two companies operating in this sector that have seen spikes in demand are A2 Milk Company Ltd (ASX: A2M) and Bubs Australia Ltd (ASX: BUB). The solid performance of these companies throughout the coronavirus crisis have resulted in the A2 Milk and Bubs share prices showing remarkable resilience during this volatile period.

The A2 Milk Company share price

Surprisingly, the A2 Milk Company share price has taken the whole coronavirus crisis firmly in its stride. Despite exhibiting increased volatility throughout February and March, the share price has marched steadily upwards. It eventually peaked with a 52-week high of $19.23 on 20 April. And while it has edged lower in recent weeks, the A2 share price is currently trading at $17.83, as at the time of writing. This still puts it well within striking distance of that high.

In a market update released in late April, A2 Milk stated that revenue for the March quarter had exceeded expectations. This was driven by changes in consumer purchasing behaviour in response to the developing coronavirus crisis. Panic buying saw large numbers of consumers stocking their pantry with basic staples like long-life dairy products and infant formula.

While acknowledging that the future remained incredibly uncertain, New Zealand-based A2 Milk upgraded its guidance for FY20 EBITDA growth to be in the range of 31% to 32%. It expected full year revenue to be between NZD$1.7 billion and NZD$1.75 billion. This represents an increase of between 30% and 34% over the previous year.

The Bubs Australia share price

While the share price of ASX organic infant formula company Bubs hasn’t performed quite as well as that of A2 Milk, it has still managed to keep long-term shareholders happy throughout the health crisis. After falling to a low of just 40 cents in mid-March, the Bubs share price has rebounded strongly, climbing all the way back  up to $1.04 at the time of writing.

Revenues for the March quarter were the highest on record at $19.7 million. This is an increase of 36% over the previous quarter. Growth was driven by a surge in demand for its infant formula, which made up 58% of gross sales for the quarter. Sales volumes were up across all regions, particularly in China and Vietnam.

The company has been resilient throughout the pandemic in part due to its vertically integrated supply chain. In December 2017, Bubs acquired goat milk powder producer NuLac Foods, which operates a farm in Victoria’s Gippsland region. NuLac also operates a processing plant in the Melbourne suburb of Keysborough. This means Bubs has exclusive supply of the key ingredient in its goat milk infant formula. It also means the company is insured against supply-side disruptions caused by COVID-19 lockdowns and travel restrictions.

Should you invest?

The key issue for companies like Bubs, A2 Milk and even Marley Spoon, is whether this increase in short-term demand will persist over the longer term. Panic buying and lockdown restrictions have been unprecedented but are now starting to ease. This means there is the potential for sales to slump in subsequent quarters as things gradually return to ‘normal’.

A2 Milk has long been a market darling. But what I believe the crisis has really revealed is the strength of Bubs’ vertically integrated supply chain. Bubs has remained robust throughout the crisis and has ensured that its production can meet demand. Plus, the company also recently announced a new local supply agreement with Coles supermarkets. This means it could potentially emerge from this crisis in an even stronger position. I would definitely be putting the Bubs share price on my watch list heading into results season.

More reading

• Why Aventus, Kogan, Newcrest, & Northern Star are pushing higher
• 2 ASX shares I’d buy if the ASX crashes again
• ASX growth companies including Zip Co cash in on the rise of e-commerce
• Why the Kogan share price jumped 11% to a record high today
• Afterpay share price up 7%, ASX 200 edges higher

Motley Fool contributor Rhys Brock owns shares of BUBS AUST FPO and Kogan.com ltd. The Motley Fool Australia owns shares of and has recommended BUBS AUST FPO, Kogan.com ltd, and Webjet Ltd. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended Flight Centre Travel Group 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.

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At lunch on Thursday the S&P/ASX 200 Index (ASX: XJO) is out of form and sinking notably lower. The benchmark index is currently down 2% to 6,024.8 points.

Here’s what is happening on the market today:

JB Hi-Fi guidance.

The JB Hi-Fi Limited (ASX: JBH) share price is trading lower despite the release of a very positive update this morning. The retailer revealed that it has experienced very strong sales growth in Australia during the second half. In light of this, it has reinstated and upgraded its guidance for FY 2020. It expects net profit after tax in the range of $300 million to $305 million. This will be a 20% to 22% increase year on year.

Gold miners jump.

It has been a very positive day of trade for ASX 200 gold miners such as Newcrest Mining Limited (ASX: NCM) and Northern Star Resources Ltd (ASX: NST). They are both up significantly today after the gold price jumped higher overnight. The price of the precious metal rose after the U.S. Federal Reserve revealed that it plans to keep interest rates at zero until 2022. The S&P/ASX All Ordinaries Gold index is up 4.5% at lunch.

Big four banks tumble.

The big four banks have come under pressure on Thursday and are acting as a drag on the ASX 200. All four banks have followed the lead of U.S. banks and are in the red at lunch. The worst performer in the group has been the Westpac Banking Corp (ASX: WBC) share price with a 4.5% decline.

Best and worst performing ASX 200 shares.

The best performer on the ASX 200 at lunch is the IPH Ltd (ASX: IPH) share price with a gain of over 6%. This morning analysts at Morgans upgraded the intellectual property company’s shares to an add rating with an $8.69 price target. The worst performer on the index has been the Computershare Limited (ASX: CPU) share price with a 6% decline. This is after Citi downgraded its shares to a sell rating this morning.

More reading

• ASX bank share prices tumble as they aren’t out of the COVID-19 woods yet
• Why Aventus, Kogan, Newcrest, & Northern Star are pushing higher
• 3 ASX 200 shares I’d buy for 2020 and beyond
• 3 great shares to buy now if you’re an ASX 200 investor in your 20s
• JB Hi-Fi share price higher after upgrading profit guidance for FY 2020

Motley Fool contributor James Mickleboro owns shares of Westpac Banking. 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 post ASX 200 drops 2%: Big four banks sink lower, JB Hi-Fi to deliver strong profit growth appeared first on Motley Fool Australia.

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