Australian Market Summary (Issue 419) – 30 September 2016
Well the week and the month are likely to be flat as a tack.
It was another week (this is a theme) that left me scratching my head again.
Outside of the first US election debate, which I’ll address in the International News section, the main event of the week was the surprise OPEC decision to curtail production.
Oil – some positive news
OPEC agreed to a plan to cap production in the range of 32.5-33m barrels a day, which was a nice surprise for a market in which expectations had really deteriorated.
The naysayers will remark that OPEC’s adherence to production targets in the past has been poor, however the significance of the decision is the demonstration by the Saudi’s that they are again prepared to take a hands on approach to supporting the market, and this is a good thing.
Oil jumped $3 on the week to be just under $48 a barrel, and it would seem likely that this new agreement within OPEC should see oil prices push back into a new equilibrium range of $50-60.
This is an expectation we have had for some time, and this should auger well for holdings in each of Oil Search (OSH) and Woodside (WPL) in the coming months.
Both OSH and WPL have been frustrating shares in recent months, particularly since much of the rest of the commodity sector has been trading strongly.
Pleasingly however OSH rose 12% on the week and is now back above $7, and WPL rose 4% to be north of $28.
We have been fortunate to have traded our position in OSH in the PRIME Australian Equity Growth portfolio well in recent months, having sold stock north of $8+ in December 2015, and then buying more back earlier this month at $6.60.
We feel confident that OSH is worth well over $8.00 in a $50-60 oil environment, and similarly that WPL is worth north of $30.
AGL Energy – a nice surprise
AGL Energy (AGL) this week delivered a neat surprise for share-holders in announcing both a 5% share-buyback and a revision higher to its planned dividend payout ratio.
With eastern seaboard wholesale electricity prices up 40-60% in the past year, AGL is in a strong position to start harvesting cash-flow from its substantial generation business.
AGL rose 9% on the week, and we are pleased that our PRIME Australian Equity Income portfolio recently acquired a small stake in the share under $17 to replace the balance of our previous Flight Centre (FLT) holdings.
AGM Season ahead
AGL certainly won’t be the last company to update the market with profit guidance and/or capital management plans in the coming month, since we are about to enter AGM season, and with that comes management’s ability to address the market.
Of particular focus to me in the coming month will be the Q1 trading updates from both Woolworths (WOW) and Blackmores (BKL) which are due towards the end of October.
WOW has been frustratingly soft since its full-year results in late August showed a surprisingly strong set of July super-market sales. We expect the July trend to have continued through the balance of the quarter and for this to be well received by the market.
WOW is also likely to confirm to the market its plans to sell its portfolio of service stations, in a deal analysts see being worth $1.5bn+.
We firmly believe WOW is heading in the right direction and that this stock is soon to begin its push towards $30.
In the case of BKL it is likely a little trickier.
The stock was battered last month after disclosing that September quarter sales would be down year-on-year, in a frank admission that its distribution channels were grossly over-stocked leading into the Chinese regulatory changes announced in April.
It is difficult to know how long the de-stock will last and if in fact it drags into the Q2, but what we are entirely confident of is that the medium-term trend towards improved health and wellness in China is a secular one.
For this reason we are sitting comfortably with our recent recommendation to BUY Blackmores (BKL), and should the de-stock persist into Q2 then we will look to ADD to positions in the stock around $105-110.
Why am I scratching my head?
Well, this one isn’t a major conundrum, but it’s one of a list of inconsistencies that the market is currently throwing up on account of the world’s continued push into unchartered monetary policy waters
This week I couldn’t understand why, what with all the excitement around OPEC and the resultant spike in oil prices, bond yields didn’t push higher and in fact fell further.
If oil really is set to move into a new and higher range as I and many expect, surely you would expect bond yields to rise accordingly given the knock-on effects this would have on inflation and living costs?
Again, I can reconcile that Quantitative Easing and Zero Interest Rate Policy (ZIRP) is making all asset classes infinitely richer than they otherwise would be, but it doesn’t mean the logic of it all sits well with me.
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.