Australian Market Summary (Issue 421) – 14 October 2016
A pretty quiet week this week, so I can keep it pretty simple for a change.
Markets eased back a smidge, but that was all.
Miners finally started to see a little bit of selling and it would seem that emerged for a variety of reasons.
Both UBS and Citibank downgraded their ratings on the major miners after some exceptional outperformance. Like we have been saying for some time, both banks suggested valuations now look full relative to the outlook for underlying commodity prices.
Miners fell -1.5% on the week.
Domestic Economic Data
On the economic front we saw the release of both the Westpac Consumer Confidence and the NAB Business Confidence indices for September, and both saw moderate month-on-month improvement.
Housing Affordability for the September quarter was also released and showed a modest improvement also.
Rising Bond Yields
Bond yields continued to steadily rise this week both at home and abroad.
It would seem that the chances of a US interest rate hike in December have firmed to an almost 70% chance, and the minutes released this week from the September Federal Reserve meeting also point towards them reaching a tipping point for higher rates.
In Australia, 10-year bond yields have risen to 2.25% and expectations for further interest rate cuts have diminished.
In the last 2 months Australian interest-rate markets have lowered expectations for an additional 25bp rate cut in the coming year from over 80% to 30% currently.
The Treasurer Scott Morrison this week inferred he felt the RBA had signaled they were reluctant to lower interest rates further, and I do tend to agree, however I think the risks of higher domestic interest rates at any point in the coming 12 months are de minimis.
I noted in recent weeks that the progressive move higher in global bond yields had brought about some heavy underperformance from yield-sensitive areas of the market, such as utilities and property trusts.
This week saw somewhat of an amelioration in the selling of these shares, and I think it would be fair to say many are starting to represent a fairer value than they have done so in some time.
We are continuing to look for opportunities in this space to add to portfolio’s, and right now have an eye on both APA Group (APA) and Transurban (TCL) after their recent pullbacks.
Watch this space I guess.
On a separate note, another stock that continues to hold our attention is Magellan Financial Group (MFG).
These guys held their AGM this week, so the annual CEO and Chairman’s address are both well worth a read, but it was the continued growth in monthly funds under management announced this week that took our eye.
This thing is a world-class funds management business operating out of Sydney, and I am sure it is only a matter of time before we get lucky and the stock reaches our level to add the stock back to core portfolios.
Elsewhere on the stock front we continue to have an eye on both ANZ Bank (ANZ) and Wesfarmers (WES) as two well-held stocks that are beginning to look like they have run ahead of themselves.
We have alluded to the material outperformance of ANZ relative to the market and its peer group in the past 3-6 months, and feel much of the valuation ‘catch-up’ has now occurred.
In the case of WES, much of the recent enthusiasm for the shares stems from the rise in both thermal coal (electricity generation fuel) and metallurgical coal (used in steel-making).
China’s continued policy towards reducing excess industrial capacity alongside a desire to improve air-quality has meant significant capacity has been cut across China’s coal-mining industry. This in turn has seen coal prices in both forms jump materially in 2016, leading to the prospect WES coal business (which lost over $300m in pre-tax earnings in 2016) could prove a material catalyst to improved earnings momentum in 2017 and beyond.
North of $45 where WES share price now resides is beginning to look fully-valued, so once again, we are watching this closely with a view to locking in some profit potentially.
It really is that simple this week, so no need for me to pad it out unnecessarily.
There are a few remarks on US interest rates, the Chinese currency and the laughable US presidential debate in the ‘International News’ section.
Enjoy the weekend everyone.
|S&P / ASX 200||5439||-29||-0.5%|
|Property Trust Index||1372||-2||-0.1%|
Key Dates: Australian Companies
Mon 17th October Earnings: James Hardie (JHC), Div Pay-Date: Carsales.com (CAR), Div Ex-Date: TPG Telecom (TPM)
Tue 18th October AGM: Aurizon (AZJ), Cochlear (COH), Div Pay Date: Newcrest (NCM)
Wed 19th October AGM: Ansell (ANN), Bellamys (BAL), Origin (ORG), Div Pay Date: Betashares High Cash (AAA)
Thu 20th October AGM: BHP (BHP), Amcor (AMC), Crown Resorts (CWN)
Fri 21st October AGM: Healthscope (HSO), Insurance Australia Group (IAG), Japara Healthcare (JHC), QANTAS (QAN)
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