Australian Market Summary (Issue 428) – 02 December 2016
Australian investment markets were interesting this week.
There was a lot of news, many large moves, and many things I think we should be paying attention to.
I am going to try and be to the point this week as there’s a lot to cover.
Rising Australian Bond Yields – negative
First and foremost, the rise in Australian bond yields is a problem for Australia’s economy and share-market.
This week saw Australian 10-year bond yields at 2.90%, up from 1.80% as recently as September.
Where bond yields are rising in other countries on account of an improved outlook for growth, in Australia there is no such evidence. In fact, the rise in global bond yields is likely to have a NEGATIVE impact on domestic Australian growth by raising the cost of bank funding.
Last week’s news that Westpac (WBC) and several non-bank lenders had raised fixed-rate mortgages is a sign of things to come. I would expect the banks to push through variable-mortgage rate rises before Christmas.
With Australia’s household debt-to-income rising to new records by the month (now 186%, was 125% in 2000), any rise in domestic mortgage rates will likely slow household consumption.
Australia’s Economic Cycle out-of-synch with Rest of the World
The chart below is a ripper. It shows the Citigroup ‘Economic Surprise’ Indices for the G-10 biggest nations (in red) and Australia (in white).
The chart clearly shows the divergence in economic momentum between Australia and the rest-of-the-world, with global economic data now with its strongest momentum in nearly 3 years.
Australian growth however remains tepid at best.
The CEO of ANZ (ANZ) Shayne Elliot confirmed this view by commenting this week that ‘there are emerging signs of stress’ in the Australian economy.
Furthermore, October Building Approvals were released and showed a whopping 25% fall year-on-year. The fall in approvals is a forward indicator for construction activity and points to a marked slowing for 2017.
Locally we have higher bond-yields, but no signs of improved growth.
We got the stick but didn’t get the carrot.
Australian Shares look Rich
With the market now 6% higher post-Trump, and lurking around the high end of its 2016 trading range at 5500, we think Australian shares are due a pullback.
The spike higher in bond yields makes shares look infinitely less attractive, and absolute valuations are already on the high-side against the last 20 years.
Australia’s banks in particular have bounced well, and now look fully-valued relative to their earnings prospects and the darkening clouds over house prices.
Having yelled and screamed about investors ‘over-reliance’ on banks in their portfolios for the past 3-years, I never really felt a housing correction was imminent. My concerns were more based upon the unnecessarily high concentration of risk investors seemed to bear to house prices.
Again, I can’t say today that I feel a housing correction is near, but I would definitely say that this rise in global bond yields will definitely elevate domestic borrowing costs.
I guarantee that when we do see the banks raise variable mortgage rates in the weeks ahead we will see a marked step-down in housing activity, by way of clearance rates.
I’m not being chicken little here, it will happen.
The chart below is from RP Corelogic and demonstrates weekly Australian auction clearance rates.
Macquarie Bank (MQG) – a genuine BUY
The MQG call we made this week ticks a lot of boxes, and if you haven’t spoken to an advisor on it this week I would really encourage you to do so.
As per the comments above, we want clients to continue pruning their domestic bank exposures, but we understand the yield comfort they offer investors.
As a 5% yielder, MQG offers a neat income offset to those income-dependent investors, but has less significant housing exposure than the majors. More importantly, it has excellent leverage to new policy in the United States under Donald Trump.
Please ensure you are across this recommendation and have substituted some mortgage bank exposure for MQG.
IOOF (IFL) – rumours of takeover interest
IFL was one of the better performers this week, fueled by buoyant share-markets and a press article suggesting Perpetual (PPT) might be interested in merging with IFL.
It’s an interesting one, and IFL would arguably be less interested in PPT than perhaps PPT would be in IFL to my mind, but the timing of the rumour lends it some weight.
In early 2017 ANZ (ANZ) will begin the process to sell its Wealth Management asset. Whilst it’s unclear whether ANZ will solicit bids for the business as a whole, or in separate ‘wealth’ and ‘insurance’ chunks, IFL will be surely an interested buyer of the ‘wealth’ arm.
We think IFL would be a natural buyer of ANZ Wealth, and though it would clearly involve an equity raising, we believe investors would readily support IFL in any bid given the scale it would give them and the enormous success management have had in acquiring bolt-on wealth businesses in the past decade.
Perhaps PPT are running the ruler over IFL in advance of the ANZ Wealth auction for fear of being left on the shelf as a sub-scale domestic funds management group?
Either way, we are pretty happy IFL is back up near $9.00 and more sensibly reflecting its true value.
Oil – big OPEC surprise
On Wednesday night OPEC surprised everybody with its decision to ratify production cuts aimed at bringing global oil markets back into equilibrium.
OPEC confirmed a production cut of 1.2mbpd (million barrels a day) which is about 4% of their daily production. Importantly, Russia (a non-OPEC member) confirmed its intent to reduce output by 300,000bpd too.
Oil analysts see this as a very positive step towards reducing the record oil inventory we now have, and returning stocks back to average levels by mid-2017.
Oil prices rose 10% on the week, but ironically Oil Search (OSH) and Woodside (WPL) are flat on the week.
There are more gains to be had here, particularly as oil stabilizes in the mid-$50’s we think.
More mid-cap disasters – Vocus (VOC) and Bellamys (BAL)
The list continues to grow of high-priced, broker-favourite mid-cap shares exploding on impact in 2016, with VOC and BAL collapsing on profit short-falls this week.
VOC fell 25% this week after guiding 2017 profits lower by 6-8%.
Like its competitor TPG Telecom (TPM) a month ago, VOC have confirmed the migration of customers to the NBN was proving to be less profitable than analysts thought, and though this was not the specific cause for the lowering of profit guidance, it was disclosure around NBN economics that caused the market to sell the stock down so far.
Bellamy’s (BAL) is down 37% as I type this today, having released a trading update and materially reset market expectations for sales.
The distance between hope and reality here is astonishing.
Much like Blackmores (BKL) before them, BAL have been impacted by the channel de-stock that has occurred following the changes to Chinese import regulations. Where BKL has announced and taken its medicine, BAL has now followed.
However, the scale of the downgrade is enormous.
BAL have guided to $240m in 2017 revenue, a staggering 35% below market expectations. Moreover, margins will obviously be lower too, and as a result profit expectations are now being rebased at HALF their previous level.
Anyways, we won’t be going near BAL anytime soon. The Chinese milk-powder market is renowned for the intensity of competition there, so much so that Danone (the largest dairy player in the world) sold out of its milk powder interests a decade ago specifically because they couldn’t make a buck.
The upshot for our investors here is that BKL again looks cheap, having been hit alongside BAL today.
We like BKL a lot and genuinely think it is turning a corner on sales momentum into China.
Medibank (MPL) – sell this thing if you have it
We were never a big fan of MPL from the time of its IPO, and given its rise, would concede that was a mistake.
However, I would point out now that at $2.61 the stock looks expensive and at risk.
Firstly, MPL now trades on 18x P/E and with barely over a 4% dividend yield, this is an expensive price for a company offering ZERO earnings growth.
Secondly, the company remains highly levered to government policies aimed at reducing excessive healthcare spending.
Pathology and aged care providers have been specifically targeted, and one of the main hospital providers (Healthscope) has even confirmed the success of the policy action by pointing to slowing treatment volumes.
With the slowdown in growth in healthcare services it seems entirely appropriate to believe that medical insurance providers will be forced to slow the growth in health insurance premiums, which up until this year have been tracking at a very healthy 4-6.5% per annum.
It seems impossible to think these price rises can continue if the insurers claims experience is slowing alongside the slowdown in patient treatments.
There is no attraction in being in MPL here, but a whole load of regulatory risk piling up in 2017.
Before I close, there are quite a few points of note from international markets to take a look at in the ‘international news’ section.
Have a terrific weekend all.
|S&P / ASX 200||5486||-8||-0.1%|
|Property Trust Index||1292||-17||-1.3%|
Key Dates: Australian Companies
Mon 5th December N/A
Tue 6th December Div Ex Date: CBAPC, CBAPD, CBAPE, IANG
Wed 7th December Div Pay Date: MQGPA
Thu 8th December Div Ex Date: AMPHA, NABHB Div Pay Date: AGLHA, WBCPD
Fri 9th December
AGM: Westpac (WBC) Div Ex-Date: ANZHA, ANZPG
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