Australian Market Summary – 5 August 2016
We took a modest breather this week and within the 1% index fall there was increased evidence of ‘profit-taking’ across many of the market’s recent winners.
Results season is upon us…
Recent market favourites such as Challenger Financial Group (CGF), NAVITAS (NVT), REA Group (REA), Transurban (TCL) and Healthscope (HSO) underperformed the index.
In the case of NVT, the group delivered 2016 profit figures in-line with market expectations and guided to a flat 2017 result. There was nothing untoward in the result nor company guidance, but tellingly after a 50% share price rise in the last 12 months it seemed the market wanted more.
NVT shares are down 8% on the week and it won’t be the last stock to deliver ‘in-line’ profit figures this season and to see its shares sold off.
Expectations are high.
Also reporting this week were Rio Tinto (RIO), Tabcorp (TAH) & Suncorp (SUN).
RIO results were solid, as typically they are. Net debt came in under expectations, but this was largely down to timing of capital expenditures.
The dividend of US45c was a shade higher than most expected, but still likely yields investors a yield no greater than 3% looking forward a year ahead.
RIO remains a stock for selling north of $55 on the basis of our expectations for conditions in the Chinese steel market to worsen as we head towards year end.
TAH results were uninteresting with competition fierce. With a levered balance sheet and a valuation north of 20x forward P/E, it’s not one for our radar up here.
With the SUN results, we got the chance to take a sneak peek at trends in the Australian property & casualty sector, which obviously matters to our recent thoughts on Insurance Australia Group (IAG).
I guess if there was one takeaway, it was that commercial insurance premiums continued to see pressure, which will likely be an issue for IAG in 2017 given this makes up 40% of premiums written.
To recap, we feel IAG stand a very strong chance of special dividend at their full year results, however we think at $6.00 this is being priced in. What perhaps is not, is the threat of underlying earnings pressures from a competitive market and falling investment incomes in 2017.
We stick to our take profit call in IAG.
Next week, reporting season kicks into full swing with results from each of Commonwealth Bank (CBA), Telstra (TLS), Carsales.com (CAR), Computershare (CPU), REA Group (REA), AGL Energy (AGL) and Magellan Financial Group (MFG).
ANZ will have a trading statement released on Monday too.
The following month will see a huge amount of information released as to the relative strength of corporate Australia and with valuations still at a 15+ year high, expectations are clearly elevated.
The RBA cut rates this week…
As we expected, the RBA lowered rates again, this time to 1.5%, but the statement from the central bank hinted at a degree of powerlessness.
The RBA again spoke of the ‘complications’ posed by a rising Australian Dollar and they are right to suggest this.
In spite of the cut, the AUD rallied 2% against the USD to its highest level in almost 3 months.
You have to wonder where the AUD would be had the RBA chosen to hold interest rates steady on Tuesday and this is precisely why the RBA are cutting.
With foreign central banks showing little sign of reigning in their easy monetary policy, the RBA is being forced to lower interest rates to record lows simply to avoid an unwanted spike in the AUD to levels that could likely cause us an Australian recession.
If the US Federal Reserve don’t signal an intent to tighten US interest rates soon, there is every prospect that the RBA will be back cutting domestic interest rates again before Christmas.
The irony in all of this is that the local economic data reported this week was largely positive.
Domestic consumer confidence pushed to just shy of a 3-year high and a gauge of July service sector activity also rose to near a 12-month high. These figures correspond with the stronger domestic business confidence figures seen in recent months and a continued positive trend in employment.
Against this positive tone, Australia’s June Trade Balance blew back out to a $3bn+ deficit, demonstrating just the fine balance our economy rests on.
As the trade balance shows, Australians are back spending significantly more than they earn and alongside this, record low interest rates continue to drive household leverage to ever increasing absolute dollar levels.
It’s with this in mind that the RBA will feel increasingly hostage to the currency, since the threat of damage to our leveraged local economy is too scary to consider.
Stocks on the radar through reporting season …
Without unnecessarily putting the horse before the cart, perhaps a few quick remarks on stocks that our investment committee have more than a casual eye on as we enter reporting season.
Blackmores (BKL) is and remains a name we think has excellent future potential and this week’s bid for fellow Australian vitamin play Vitaco (VIT) reinforces this view.
Mantra Group (MTR) is the operator of over 80 hotel properties in and around Australia and the Pacific region and we think could begin to look interesting in light of its recent share price fall.
Magellan Financial Group (MFG) remains a company linked to the ever-increasing offshore push for Australian retirement dollars and is a share that we would love the chance to add back to portfolios again.
There are additional names in the healthcare and online space, many of which have been owned before, that we feel warrant close attention should their business fundamentals align with the appropriate share price.
AMP Wholesale Australian Property Fund (WAPF)
One final point I feel compelled to mention today is that Guy and I both were fortunate to sit down with Chris Davitt, the portfolio manager for AMP’s WAPF this week.
We have recommended this unlisted property fund for over a year now, but feel increasingly strongly that those seeking sound income should please make the time to talk to us about this conservatively run, sensibly priced property exposure.
We will write more on this next week, but would encourage you to consider the trust’s particularly low gearing, well-diversified portfolio and sound 6.75% current distribution rate.
The AMP WAPF is definitely one to take a look at and so please keep an eye out for a more detailed note from us next week.
In the interim, have a great weekend and buckle yourself in for the reporting season!
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