Australian Market Summary (Issue 360) – 3 December 2015
Your calendar isn’t wrong, we’re just a day early this week because we have our Christmas Party this Friday lunch.
Forgive us for the truncated summary.
I should say too that next week’s PRIME Weekly Market Update will be the last of 2015 (hasn’t it flown by), and that the weekly pieces will re-commence on the 15th January 2016.
So the market is up approximately 0.5% for the week, the only positive day being Tuesday. The RBA kept rates on hold once again as widely anticipated and the iron ore price continued to lose ground and now remains slightly above $41/tonne.
Market comment … optimistic for now
Clients of PRIME would have seen our note of a few weeks back where we turned more optimistic on the ASX200.
We continue to feel like the next few months will see a grind higher, and have been particularly encouraged by the move higher in banking shares this week.
Australian banks have bounced well in the last 3 weeks, and have now seemingly broken out of the 2015 downtrend. Make no mistake, there is no new bull story for the banks, but valuations in recent months had begun to factor in an excessive pessimism.
ANZ (ANZ), National Australia (NAB) & Westpac Bank (WBC) all look moderately cheap to fundamental value on a 12-month view, whereas Commonwealth Bank (CBA) STILL remains fundamentally overvalued relative to its peers and its growth outlook.
Commonwealth Bank (CBA) still attracting a disproportionately high premium to peers…
With CBA’s push back into the low-mid $80’s, we are looking at a bank on 15x and with a dividend yield rapidly falling back to the 5% level. I don’t care how good a bank it is, the market is OVERPAYING for the supposed ‘safety/quality’ premium in CBA to the tune of 10% if you ask me.
Flight Centre (FLT) … offering up some value again.
As clients of PRIME will have seen, we turned a BULL again on Flight Centre (FLT) this week in the simple belief that the market was unnecessarily pessimistic in its assessment of FLT’s potential.
All across the market since September, investors have been ploughing in to mid-cap and ‘ex-top 20’ shares.
In doing this, investors are desperately trying to diversify their portfolios away from the large positions held in the banks, Telstra (TLS) and the supermarket groups as the earnings growth in this huge section of the market dries up in 2016.
You have heard me moan about my conservatism in September when the chance was ripe to load up on things like NAVITAS (NVT), QUBE Holdings (QUB), Challenger (CGF) and SEEK (SEK) amongst others.
FLT fits very neatly into this very space, as a company with a market value of around $3.7bn, and falls just inside the ASX100 by size.
FLT regretfully missed earnings guidance twice in the last year, but the earnings downgrades in 2015 were far less onerous than in 2014.
As it stands, FLT now sits on 14x P/E with a nearly 5% fully-franked dividend yield, but more than that, carries with it over $500m of net cash on the balance sheet.
The much maligned Australian travel agency business is holding in there, but the market seems willing to ignore the growth coming from its expansion into the US, UK and global corporate travel.
The stock has been good to us once already this year when it sped up 30% in a matter of months.
Whilst we never have these expectations for a share, we do think the time is nigh to revisit FLT.
Economy & the RBA & the Australian dollar…
This week was a positive one for perceptions of Australia’s economy.
The RBA made it clear in comments after their meeting on Tuesday that they saw ‘prospects for economic improvement had firmed’.
The Q3 GDP figure of 2.5% annual growth was also a shade better than the market anticipated.
Putting all this together, prospects for a further cut in interest rates fell to their lowest level since August, and the Australian Dollar jumped to a 6-week high at 73.30c.
PRIME Separately Managed Account performance for November was good…
The PRIME Australian Equity Growth portfolio rose +1.21% in November, surpassing the fall of -0.68% in the ASX Accumulation index.
It’s the third month of outperformance in a row (touch wood!), and puts that SMA +6.5% ahead of the index on a rolling 12-month basis.
Over 2-years to November the GROWTH SMA is up +10.2% per annum against a rise of +3.1% per annum in the ASX200 Accumulation, and on this front we are quietly satisfied that the longer term track record is increasingly fortified.
The PRIME Australian Equity Income portfolio rose +0.55% in November ahead of the index fall (see above), and is now +1.5% ahead of the ASX Accumulation index for the past 12 months, which to be honest is a pretty sound result given the limitations of this portfolio structure.
Again guys, if you want a simple summary of what an ‘SMA’ is and how it might work for you, please see Mark’s video on it at the link below:
I really wish there was more to discuss, and though I could get nerdy on a few smaller things (Slater & Gordon & Spotless Group), the reality is that we aren’t likely to be playing in either stock any time soon, so why muddy the water with a view or comment.
For now, we continue to pound the table on Woolworths (WOW) and latterly Flight Centre (FLT), and there will be a few potential opportunities to profit-take in a couple of long-standing and well-held positions of ours in the coming week or two we hope, so do stay tuned.
On that front, I’ll end up here – do note, there are a few interesting comments in the ‘International News’ section this week.
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