The great thing about working in financial markets is that it’s never dull, and wonders never cease to amaze.
So as I write today, the ASX200 is up almost 1.5%, hot on the heels of a strong performance from the US equity market overnight and a similarly impressive turnaround in European markets during that time zone.
GREECE … the clock is ticking faster.
All of this in spite of a seemingly head long descent into the abyss for Greece, who overnight failed to generate an agreement with their European lenders for an extension of funds aimed at allowing them to both repay the International Monetary Fund (IMF) the $1.7bn owed at end June and to see new bailout funds relinquished to them for ongoing government of the country, also at months end.
Every way you cut it, the lack of resolution overnight was negative. It now seems impossible the Greek government will make that payment to the IMF, opening the question of technical default. Worse still, the genuine lack of finance in Greece without an extension of further capital from the EU/ECB & IMF means the country is slowly grinding to a halt.
And the time is now.
Funds are being withdrawn from the Greek banking system at a faster rate by the day, and the Greek banks themselves can exist only through the good grace of the European Central Bank (ECB), who at this point have over Eur084bn in emergency funding to the Greek banking system. These funds are backed by Greek bonds, which is why the whole issue of Greek solvency matters to the European monetary system. If Greek collateral is rendered worthless or part thereof, then large swathes of capital across the European financial system is similarly eroded.
For now it seems financial markets are prepared to believe that in spite of the chasm that seems to exist between Greece and its lenders, that the lenders are unwilling to let Greece slide into official insolvency, and that another short-term resolution of support will be cobbled together.
Despite the rhetoric, it’s not the silliest assertion given this ‘can’ has been ‘kicked down the road’ too many times to mention. But it’s also a highly dangerous assumption to make when the stakes are this high.
For now, we wait on the ECB meeting to be held tonight in Europe and the full EU leaders meeting that was called abruptly for Tuesday early morning Australian time.
I have to say, I am nervous in the near term as the signs seem to suggest an impasse, but I would stress that I think the fall-out will prove limited over a period of weeks and that it will provide buying opportunities.
AUSTRALIAN MARKETS THIS WEEK …
Beyond the Greek headlines, and looking more locally at our market, there were several things to point out from the week gone.
Firstly, the banks rebounded, and led the market. The major banks are broadly 5% or so off their lows, and this is encouraging. We feel very comfortable with the banks as a source of income and a core component of Australian equity portfolios, but repeat that there will be minimal earnings nor dividend growth in the coming 12-18 months and hence we want to ensure investors are NOT EXPECTING STRONG CAPITAL GAINS.
Be particular about how and where you make your bank buys and sells as this sector will be a range trade for the rest of 2015 and into 2016 without doubt.
We had to chuckle at the news this week that Warren Buffett’s Berkshire Hathaway group had inked an agreement with our recently recommended stock, Insurance Australia Group (IAG), to support its existing Australian insurance operation and to help fund its ambitions for growth in the Asian region.
The timing was unfortunately too close to our recommendation, and meant that many clients weren’t able to react in time to position themselves in IAG. This is unfortunate undeniably, but fortunate for those that were speedy and chose to follow us into this high quality share.
I have to say that sadly this is what happens in the market, and TIMING IS EVERYTHING.
For any of you willing to relinquish the reins on day to day decision making, please call us to discuss our managed equity accounts. Our PRIME Australian Equity Income fund purchased a 5% stake in IAG after the recommendation was sent out to clients for $5.39, and on this occasion, was fortunate to take advantage of the best prices.
The INCOME managed account as we speak has almost outperformed the ASX200 Accumulation by 2% alone this month, and the GROWTH fund is similarly almost 1.5% ahead of the benchmark, which again we are humbly pleased by.
I think if we learn one thing from the IAG investment by Berkshire, it is to prove that we at PRIME strive to ensure clients are invested in high-quality, well managed, liquid and well-research stocks and securities.
IAG follows in lock-step the calls made in each of Cochlear (COH), RESMED (RMD), Computershare (CPU), Magellan Financial Group (MFG), Flight Centre (FLT), Crown Resorts (CWN), Carsales.com (CAR), Adelaide Brighton Cement (ABC), AGL Energy (AGL) and IOOF (IFL), as one such high quality company.
Woolworths (WOW) continued to suffer this week, announcing the resignation of its CEO Grant O’Brien. This is the latest in a string of senior management changes at WOW, that though encouraging in terms of the potential for new strategy, leave the massive group without strong direction in the interim.
WOW has suffered hugely for its strategy of focusing on short-term profitability at the expense of customer experience, and as a result has lost significant foot traffic to both Coles and Aldi.
A change in management is needed, so this is a positive, however the core super-market business is going backwards at an even faster rate – June quarter food & liquor life-for-like sales are down 0.7% quarter to date, and Big W is down a more depressing 12% on the same measure.
We are interested in buying WOW at some point as the franchise is a strong one, but we are extremely wary of buying the company too soon since underlying earnings still need to be downgraded materially.
I would guess we need to see WOW near $24-25 before we would contemplating a more positive change in tone.
Other big moves on the week were TEN (TEN) who actually fell 20% after FOXTEL emerged with a lowly acquired 15% stake in the group, ARRIUM (ARI) who warned on profits and Nine Entertainment (NEC) which fell 7% on ongoing selling post its profit-warning the previous week.
To conclude, more and more opportunities are slowly emerging as the market falls back and the dust settles.
Beyond WOW and Oil-Search (OSH) which I have mentioned in previous missives, the likes of Fairfax (FXJ), G8 Education (GEM) and Slater & Gordon (SGH) are all flashing up as names we might consider in time.
IAG was one such name only a fortnight ago, and when it was time to strike we did, so please stay posted.
Lastly, we were encouraged by the rebound in global bond markets this week, which provided some respite for equity markets. Our 10-year bonds rallied from over 3% on 10-year yields, to close the week today at around 2.85%. It helps.
One final point of administration – I am off on holidays for 10 days and in my absence next week’s weekly report will be compiled by my colleague Guy Silbert. It will likely be an abbreviated report, but any questions please call Guy directly or your advisor.
Have a great few weeks.
Key Dates: Australian Companies
Mon 22nd June
Div Pay Date – ANZHA, ORGHA
Tue 23rd June
Wed 24th June
Div Ex Date – G8 Education (GEM)
Thu 25th June
Fri 26th June
Div Ex Date – Duet Group (DUE), Transurban (TCL)