Australian Market Summary (Issue 426) – 18 November 2016
This week we saw some welcome reversion to the past few months prevailing trends in that defensive, yield-sensitive shares managed to post some reasonable relative gains.
Telstra (TLS), and I say this with an embarrassed smirk since I’ve been optimistic on the share for some time, rose 5% and bettered most of big-cap Australia.
Transurban (TCL) rightly rebounded 4% too, and remains good value at $10.
Conversely, Australian mining shares underperformed a flat market by falling 4% on the week. Driving this underperformance was a 12% fall in Chinese steel futures and associated weakness in iron ore.
The fall feels long overdue to me given rising Chinese iron ore inventory and continued pressure on Chinese steel industry margins.
To be doubly clear, I think the spike in Australian miners and ferrous metal prices after the surprise Trump victory to be a head-fake, and as a result I think this week’s softness in miners as a prelude of things to come.
PRIME’s Post-Election Investment View
In fact, for those of you that are interested, I prepared a brief presentation for clients as to my thinking on investment markets in light of last week’s US Presidential election.
The presentation can be downloaded below:
For those that want the 30-second view, my simple observations would be as follows:
- Expect increased uncertainty given policies are still far from fully-formed
- Expected increased volatility in light of this uncertainty, and also because of the shift from monetary policy to fiscal policy as a tool for US economic growth (RIP the ‘Fed put’)
- EXPECT WEAKNESS IN THE AUSTRALIAN DOLLAR TO ESCALATE – this has been a key view of ours for the last few months, but we feel sufficiently more confident in the view post Trump. Expect 65-70c in 2017, with the lower end of that range a genuine possibility
- Rising global interest rates will push Australian mortgage rates moderately higher, meaning the Reserve Bank will still have a bias to REDUCE local rates as an offset
Given much of Trump’s policy platform is built around the idea of ‘putting American jobs first’ it shouldn’t be surprising to anyone to learn that Australia is unlikely to be a beneficiary in the near-term of any policy-change.
In fact, weakness in the Australian Dollar is more likely to bring about short-term caution by domestic consumers before it ultimately benefits the country by way of improved productivity.
The excess capacity in Australia’s domestic economy is far and away more important to our economic direction than what’s going on in the United States, so from that standpoint our portfolio recommendations are unlikely to change materially.
The Australian Dollar
This is the one thing I am most convinced on guys, so it is perhaps worth me laying out my stall here for you all to understand.
This is a core theme of mine for investors for 2017.
The Australian Dollar is going well-south of 70c, and will likely land in the mid 60’s to my thinking.
Firstly, with US fiscal stimulus expected and a rising US government debt pile, it seems almost certain that US and global bond yields have now seen their low.
This hence reduces the attraction of Australian cash to foreign investors (our 1.5% cash rate is still miles above most developed nations).
Secondly, Australia is a country that runs a significant current account deficit, meaning that we buy more from overseas than we sell. This makes us a debtor nation, and by default as bond yields rise so too will the cost of financing this deficit.
Australia’s banks will already be feeling the pinch on their cost of funding, and for this reason you should all expect a 15-30bp rise in your mortgage tracker rates before Christmas.
Regrettably however, the domestic economic outlook remains constrained by lack of stimulus, pressured income (wages, investment income & export income all poor) and the bogey of rising household debt.
China matters infinitely more to our economy than the United States – in fact, we do 4x as much trade each year with China, and even more importantly we net export to China, unlike the United States where we are heavily biased towards imports.
So take it from me, the Australian Dollar is going significantly lower in 2017.
Exposures to foreign equity markets will be important, and I have to say our exposures to companies like Mantra Group (MTR) and Sonic Healthcare (SHL) should outperform.
We have our eye on building out increased exposures to a weaker Australian Dollar, so watch this space.
AGM Season continues apace
Mantra Group (MTR) reaffirmed its 2017 guidance unsurprisingly, but encouragingly demonstrated that trading at its recently acquired Ala Moana property in Honolulu was ahead of expectations and driven entirely by improvements made by MTR management since purchase.
MTR continues to see excellent growth within its Resort portfolio, and it’s for this reason that we continue to favour the name.
A falling Australian Dollar will be a major tailwind for this company so we strongly recommend it in portfolios.
Sonic Healthcare (SHL) also held its AGM this week, though little new information was gleaned.
However, like MTR, SHL is one of our best bets on a weakening Australian Dollar (60% of revenues come from offshore), and management is second to none.
This is a portfolio must have.
Next week sees AGM’s from Woolworths (WOW), QUBE Holdings (QUB), IOOF (IFL) and SEEK (SEK), all of which we will be interested in.
In the case of QUB we are keen to learn on the timing for final investment approvals on the Moorebank intermodal project in Sydney’s south-west, and in the case of Woolworths (WOW), any update on the potential asset sales in petrol or liquor would be appreciated.
Commonwealth Bank (CBA) – near $80 trim it
A small update for many of you who still own significant CBA positions.
I would suggest that up towards $80 in CBA, those investors who have major overweight positions in CBA should consider trimming them down.
Higher global bond yields might be a good thing for banks in the rest of the world, but in Australia it is a far less certain assumption to make given Australia’s significant household debt burden.
Near $80 CBA is back pushing up on 14x P/E and with a dividend yield falling down to the low 5% range again – hardly compelling in a world where global interest rates seem to be rising.
Crown Resorts (CWN) – a quick valuation update
Just a small update for those concerned that although sadly the custody of CWN’s 18 staff in China is yet to be resolved, CWN’s intention to de-merge the Australian gaming assets remains on-track.
Moreover, its Macau casino assets continue to perform well – MPEL shares in which CWN holds a 30% stake have risen 20% in the past month.
The valuation of CWN’s non-Macau assets is now as cheap as it has been in nearly 8 years, and this gives me confidence CWN shares have the ability to rally strongly on any sign of a resolution to the Chinese legal entanglement.
Telstra (TLS) – Investor Day update
TLS provided increased detail to the market on its future capital expenditure plans this week, and also spoke of the potential for $1bn+ of productivity improvements it sought to achieve by 2021 as a means to counteract the negative impact of the NBN rollout.
TLS also announced a review of its capital allocation strategy, with the results of which to be detailed to the market at its half-year results in March.
This is interesting in light of the profile for TLS cash-flows over the coming 5 years, and the long-term reduction in TLS operational earnings of 20-30% wrought by the NBN.
The review could include a securitization of the government subsidies paid to TLS as the NBN rolls past more houses, and if so could finance a material one-off shareholder return.
Clearly if this occurred however, it would likely accompany a permanent reduction in TLS’s 31c+ annual dividend.
A quid pro-quo if you will.
We still see TLS as offering excellent value at current levels, and would be staggered to see it fall further from here given the 6.3% fully-franked dividend and our indifferent outlook for Australia’s economy.
Keep fighting the good fight everyone!
Have a great weekend.
|S&P / ASX 200||5347||+3||+0.1%|
|Property Trust Index||1278||+33||+2.7%|
Key Dates: Australian Companies
Mon 21st November N/A
Tue 22nd November Div Pay Date: WBCHB
Wed 23rd November Div Pay Date: WBCHA
Thu 24th November AGM: IOOF (IFL), SEEK (SEK), QUBE Holdings (QUB), Woolworths (WOW)
Fri 25th November N/A
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