Australian Market Summary (Issue 441) – 24 March 2017
We saw the first signs of the market tiring this week, with global markets a touch weaker.
Australia’s ASX200 softened up a little over 1% by Thursday’s close, with the large-cap banks and miners reversing some of their recent strength and lagging the market.
Thursdays decision to delay the vote on legislation repealing so-called ‘Obama-care’ caused the markets a little nervousness. The Health Bill amendments are seen as a key litmus test for Trump’s negotiation skills, and some in the market are beginning to concern themselves that much of the Trump deregulatory agenda may struggle to pass mustard with members of his own party.
For now however it’s unknown, and though international share-markets are high and prone to profit-taking, on the positive front global growth continues to excel.
In Australia, our economic momentum lacks the vigour of the US or China.
This week’s ANZ Consumer Confidence figures dropped to a 12-month low.
Blackmores (BKL) gets a boost
This week was a good week for portfolio’s with BKL surging +19% on news China would allow cross border e-commerce imports of vitamins and related health items as ‘personal goods’, meaning these products will not require official Chinese ‘registration’ which can take several years in some instances.
In lay terms this frees up BKL’s ability to sell its in-demand products into the Chinese mainland via free trade zones, without additional tax burdens since ‘personal trade’ is deemed tax-free up to a certain level.
This is genuinely good news for BKL and will put a fresh boost in mainland demand for its products.
We acknowledge we were early on buying BKL, but have felt the whole way along that the company has real potential from the Chinese market, and that the recent impact of inventory de-stocking would prove to be a good time to buy the share.
The jury is still out on that, but we remain confident BKL is closer to earnings upgrades than it has been in well over a year, and that the BKL share price is set for stronger days ahead.
Remember too, that BKL has virtually no debt, so as cash-flow and inventory issues normalize, and Chinese growth continues to rise, BKL will be in the enviable position of being able to significantly raise dividends or undertake share buybacks with the added profits.
SEEK (SEK) has a strong week
SEK was pleasing this week as well, rising +7% after it confirmed it would increase its stake in its Online Education Services business from 50% to 80%.
The deal was well priced, costing SEK only $119m, which is around 15x current earnings for the division. More encouragingly, in moving to a majority holding SEK consolidate the $60m in cash held by the division, effectively funding half the purchase price from its own cash.
The more we look at SEK the more we like the story.
Unlike most large-cap Australian companies in recent years, SEK is continuing to heavily invest in future earnings growth, driving its online job portals to dominant market positions in key economies such as China, Brazil, Mexico, Hong Kong, Singapore and Malaysia.
Encouragingly, with global growth now improving, earnings from SEK’s offshore assets look set to improve markedly in the coming 12-18 months.
SEK make half of their earnings from their international division, which is a terrific effort given this division was loss-making only 6-years ago.
Furthermore, in its domestic Australian jobs market SEK delivered 13% revenue growth last year in spite of negative full-time employment growth.
SEK is a standout portfolio BUY for the medium term in the low $15 range as recommended.
Banks & Miners – a quick update
Banks and Miners have led markets for much of the last 6 months, and this has allowed the ASX 20 Leaders to outperform the ASX Small Ordinaries by almost 20%.
That is a huge move, and a significant reversal on trends seen in the previous year.
This trend now looks done as the weight of iron ore inventory in China begins to pressure miners, and as the noise surrounding mortgage lending curbs rises.
We have zero weights in the mining sector in our PRIME Australian Equity Separately Managed Accounts (SMA), and we have significantly pared back our weightings in Australian Banks too – we are now 30% underweight in the PRIME Australian Equity Growth SMA.
Australian Banks look fully priced again, and it would seem that just like the way Australia’s energy crisis quickly hit the front page of national newspapers, housing affordability is increasingly an important political and social issue.
I firmly believe we are set to see tighter regulations forced on the banks mortgage lending practices, particularly in the area of investor loans.
This will curtail profitability.
I am 100% convinced the house price boom has peaked, and that by Spring 2017 and Autumn 2018, auction clearance rates will have fallen back, bringing prices back too. The absence of wage growth in Australia’s employment markets means that large chunks of Australia’s housing investor sector will struggle to push rents up to accommodate the higher borrowing costs and more stringent loan-to-value terms.
Bank credit quality will deteriorate on this.
Guys I’d like to apologize for the quality of the charts I included in last Friday’s weekly.
They didn’t come out nearly as well in the final edition as we had hoped, so this week I thought I would include some more, in a larger format, to help you see what I am seeing and what it is that is shaping my views.
Click here for the March chart pack hopefully you will find these pictures and remarks useful.
Have a great weekend.
Jono & Guy.
No comment this week.
Thursday closing Values
|S&P / ASX 200||5785||-78||-1.3%|
|Property Trust Index||1351||-3||-0.2%|
|U.S. S&P 500||2346||-35||-1.5%|
Key Dates: Australian Companies
|Mon 27th March||Div Pay-Date: AGL Energy (AGL)|
|Tue 28th March||Div Ex-Date: SEEK (SEK)
Div Pay-Date: BHP (BHP), Wesfarmers (WES)
|Wed 29th March||Div Ex-Date: NABPD
Div Pay-Date: ASX (ASX), Ramsay Healthcare (RHC), Woodside (WPL)
|Thu 30th March||Div Pay-Date: IOOF (IFL), Oil Search (OSH), WBCPG|
|Fri 31st March||Div Pay-Date: AMP (AMP), Bendigo Bank (BEN), WBCPC|
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