Weekly Market Update (Issue 499) – 18th May, 2018
18th May 2018, 2.00pm
Forgive my brevity this week, but lots of us are soon heading out of the office to attend PRIME’s annual May Day Charity lunch in town.
To his credit, PRIME’s Co-Head of Advice Cameron Morcher, has been organizing this charity luncheon alongside 10 or so of his closest friends for almost a decade now, and PRIME are thrilled again to be the major sponsor.
The luncheon this year is seeking to raise funds for Very Special Kids, and we wish him and his co-organizers every success.
You’re only as good as your last call
This week was a sad reminder of how quickly the market can remove any sense of invincibility, with Telstra (TLS) warning that 2018 cash profits would likely land at the low end of their previously forecast guidance.
Having been buoyed by the good fortune to see Healthscope (HSO) bid for, and the small-cap picks of Afterpay (APT) and Vocus Group (VOC) up +15-20% in a matter of weeks, it was an unfortunate slap in the face for portfolios, and disappointment that this stock continues to push lower.
I have been way too forgiving of TLS and seen nothing but heartache. Though the headline downgrade to TLS EBITDA this week seemed small, the underlying miss is larger as the headline is inflated by NBN one-off payments.
Competition in mobile remains fierce and unlikely to alleviate anytime soon. Concerns regarding the sustainability of the dividend remain, though I really think this is a mountain out of a molehill and really just an emotional trigger-point for the last remaining core holders of TLS, the mum and dad investors.
I have stuck with it this long, that at $2.85 it now seems silly to bail out now, dividend cuts or not. The TLS balance sheet, for what is still a hugely cash generative utility company, remains perfectly sound, if not under-geared, and the opportunity from 5G’s launch toward the back of 2019 brings with it fresh hope.
I say stick it out, but I fully acknowledge and apologize for my persistence here.
China customs slowdown
Several of Australia’s key China exporters saw share price weakness this week, with Treasury Wines (TWE) and A2 Milk (A2M) both issuing disappointing statements to the market.
TWE management responded to market concerns about an emerging glut in low-end wine imports to China, confidently batting away the suggestions of an oversupply and that any suggestion of such was coming from only a ‘few squeaky wheels’.
TWE bounced on the statement, but is still down -10% on the week.
Interestingly however it would seem that there are industry-wide issues relating to a deliberate slowdown in the clearing of Australian imports into China by Chinese customs officials, with sources seeming to confirm this. The moves seem related to foreign policy issues and Australia’s ongoing condemnation of Chinese foreign policy overreach.
The likes of Bellamy’s (BAL), Blackmores (BKL) and A2 Milk (A2M) all fell over -10% on the week on this theme, although the latter issued a disappointing profit outlook which further contributed to its share price weakness.
In fact, A2M could have been a lot worse.
The company issued a trading statement targeting 2018 revenues that were about 5% below analyst forecasts, despite very strong underlying market share. It seems a classic case of market estimates getting ahead of reality, and so it was perhaps a little surprising that the stock only fell the -10%.
There has been a big re-rating in A2M in the past year, all in anticipation of further upgrades, so when even a fast-growing company starts to miss these estimates its time to take a more cautious stance. Knowing very little about A2M, I still think the stock will trend lower in the months to come as the market re-calibrates its expectations of future growth.
Perhaps one of the over-arching points to take from this however is just the risk that comes to shareholders of stocks with such high ratings. Again, I have made the point that with the lack of earnings growth available to Australian domestic investors, stocks offering genuine growth have been bid to valuations that seem incredibly hard to justify, leaving them prone to disappointment.
Rising interest rates will soon become a problem
US 10-year bond yields finally pushed through 3.00% this week and now sit at 3.11%, their highest level in over 7 years.
Inflation-adjusted interest rates are now pushing to 9-year highs, and this simply tells you that the risk-free rate is now more attractive than it has been in that time. The benchmark for investment is becoming stricter.
Following on from the rise in US interest rates is strength in the US Dollar. This has the potential to be a concern for global growth since so many emerging, export-oriented economies are tied to the US dollar, and its rise has the potential to both hinder growth and raise repayment costs on US Dollar debt.
I would keep an eye on this as I think it will likely become an emerging issue for global growth as the year progresses.
This week Afterpay (APT) surged on its announcement that it was set to commence trading in the United States, having inked a minimum 2-year deal with the largest online fashion brand, Urban Outfitters.
APT also announced it had poached two senior hires from Uber.
I think APT is going a lot, a lot higher.
Oil remains firmly bid on continued Middle Eastern unrest, and I have to say, an increasing likelihood that military action occurs in the Gulf. Israel, the US and Saudi Arabia are all itching to provoke Iran, and it seems inevitable to me that the situation there escalates, leading to a further oil price spike.
Oil Search (OSH) and Woodside (WPL) both remain well-bid, and we will ride these out for the time being.
To finish, I would be taking some profit in Australian equities around current levels. I think the housing slowdown is afoot (2-year low in national auction clearance rates already), and rising bond yields is making local shares less attractively priced.
We are about to head into a period of higher risk on US inflation (call me to discuss), and the threat of military action in the Middle East seems to be rising by the day too.
Time to fix the shed before the rains begin.
Thanks for reading.
Jono & Guy
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Australian Market Index
Friday 10am values
|S&P / ASX 200||6094||-25||–0.4%|
|Property Trust Index||1350||-34||–2.5%|
Key Dates: Australian Companies
|Mon May 21st||N/A|
|Tue May 22nd||Div Pay Date – SUNPD, WBCHB|
|Wed May 23th||N/A|
|Thu May 24th||N/A|
|Fri May 25th||N/A|
International Market Index
Thursday Closing Values
|U.S. S&P 500||2720||-3||–0.1%|
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Disclaimer: This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (“Prime”). Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. Prime is bound by the Australian Privacy Principles for the handling of personal information.
This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (“Prime”). Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. Prime is bound by the Australian Privacy Principles for the handling of personal information.