Australian Market Summary (Issue 439) – 10 March 2017
Tonight is the night they say.
Not to put too fine a point on it, but the market’s reaction to what should be but a formal acknowledgement of the obvious, will shape portfolio performance in the weeks and months ahead.
I am referring to tonight’s release of the U.S. employment data and the likely confirmation of continued strength in underlying jobs growth there.
A stronger number will make next week’s Federal Reserve decision on interest rates a fait accompli, but will likely usher in a new focus from market participants on the pace of US and global economic growth, the ‘right’ level for U.S bond yields, global currencies and in fact whether the U.S Federal Reserve are indeed ‘on the right track’ with their pace of tightening.
This is all rather important to understand because as the world’s largest and most important economy, the knock-on effects to the rest of the world are significant.
Rising U.S interest rates & the Australia Dollar
To recap on my view, it seems more likely than not we see the pace of U.S interest rate tightening increase during 2017, and this will contribute to a weaker Australian Dollar and domestic interest rates on hold.
The combined effect of stronger U.S economic growth ought see the AUD back to 70c or below, which is a significant driver for Australian economic policy and for portfolio allocation.
Already we have made a strong case for increased international equity allocations.
In fact, this week we broadened out our International Equity SMA (Separately Managed Account) fund manager holdings to include the Antipodes Global Fund and the Orbis Global Equity Fund.
But domestically the implications are far-reaching too.
A lower AUD stimulates domestic economic activity by making it more economic to manufacture and service domestic demand locally.
This is a much-needed positive for our highly leveraged economy, and ought to go some way towards ameliorating the negative effects of Australia’s slowing construction cycle.
Having had this view for some time now, our portfolio part reflects this view.
We own Sonic Healthcare (SHL), Mantra Group (MTR) and Macquarie Bank (MQG) for various reasons, but their exposure to a weaker AUD is a key attribute.
Our recent recommendation to purchase a position in SEEK (SEK) is another step towards raising our exposures to a weaker AUD and to the potential for an uplift in domestic business confidence.
SEK ought to benefit from improved global demand due to its strong subsidiaries in both Latin America and Asia, but it should also see improved demand and margin expansion domestically if Australia’s moribund employment market manages to take heart from the weaker AUD.
We feel very optimistic for the SEK recommendation.
It has underperformed the market by 20% in the past 12 months, and it would seem conditions are more likely than not to improve through 2017.
When coupled with this week’s Healthscope (HSO) recommendation, we feel these are two high-quality additions to our Australian equity portfolios.
Counterbalancing this moderate optimism on the impact of a falling AUD, we would expect Australia’s big-4 banks to lose the strong momentum they have had of late.
Once again we are back at our highs for the banks in a relative sense (comparing performance against the market), and all 4 of the major banks again look stretched on valuation.
Notably year-to-date, our preferred bank (NAB) has led the sector, rising +7.5%, but it now trades on the richer side, with a forward earnings multiple approaching 14x and a dividend yield of only 5.7%.
Our two preferred bank bets being ANZ and NAB have handily outperformed their peers Commonwealth Bank (CBA) and Westpac (WBC) by over 10% in the last year, but like the sector, their valuations again look full.
We would expect to see the bank strength of recent months (banks have outperformed the ASX200 by 12% since mid-2016) begin to dissipate as investors conceptualize the implications of a weaker Australian Dollar for domestic interest rates – weaker AUD = higher growth/higher interest rates.
Though domestically I find it impossible to see local interest rates rising anytime ahead of mid-2018 (due to well-worn arguments made in this column on household leverage, wages and pending construction slowdown), investors will be quick to acknowledge the implications of higher rates on housing and house price momentum.
Where the banks have been strong of late, the miners rally has begun to peter out.
Both Rio Tinto (RIO) and BHP (BHP) are down -15% from their highs as optimism on Chinese steel markets finally starts to normalize.
Elevated inventory levels for both finished steel and iron ore are beginning to weigh on prices, but further than that there is emerging evidence of new iron ore supply restarting in China as a means to profit from the price spike.
This weekend’s Western Australian state election will also be an interesting item to watch, particularly given the state National’s desire for the adoption of a higher royalty charge on iron ore.
The sector rally carried on far longer than we or many others anticipated, so we are hopeful that this recent weakness is the start of something more pronounced.
QUBE Logistics (QUB) – some good news
QUB had a great week rising 8%.
The driver for the bounce was news that its competitor on the ports, DP World had notifed customers of a price increase for stevedoring services.
Were QUB to follow suit with a price rise of their own within its recently-acquired Patricks operation, investors could expect to see an earnings uplift of perhaps 6-7%.
We love QUB more for the future value uplift we expect to get from its massive Moorebank development, but we also feel particularly encouraged that QUB should see significant earnings leverage to any uptick in domestic economic activity brought on by a weaker AUD.
Have a great weekend.
Jono & Guy.
|S&P / ASX 200||5759||+40||+0.7%|
|Property Trust Index||1343||-25||-1.8%|
Key Dates: Australian Companies
|Mon 13th March||N/A|
|Tue 14th March||Div Ex-Date: NABPC, WBCPE Div Pay-Date: CWNHA, CWNHB|
|Wed 15th March||Div Ex-Date: ANZPE, ANZPF, Cochlear (COH), CSL (CSL), MBLPA Div Pay-Date: APA Group (APA), CBAPC, CBAPD, CBAPE, Navitas (NVT), REA Group (REA), Tabcorp (TAH)|
|Thu 16th March||Div Pay-Date: Betashares
Cash (AAA), RESMED (RMD)
|Fri 17th March||Div Pay-Date: Crown Resorts (CWN), NABPB|
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