Australian Market Summary (Issue 442) – 31 March 2017
This week was a terrific week for the share-market, with the ASX200 +3.3% as I type.
Australia was surprisingly one of the best performers amongst global share-markets too, with very strong underlying demand leading into the end of the March quarter.
Amongst our list of portfolio names we were really impressed to see the likes of Mantra Group (up +12%), QUBE Holdings (+6%), Healthscope (+4%), Sonic Healthcare (+4%), Oil Search (+4%) and Transurban (+3%) performing in line or better than the index.
Macquarie Group (MQG) today is breaking to new highs through $90.
So, a pretty picture right?
Certainly this week it would seem so.
With bond markets managing to recoup the losses experienced after Trump’s election, and with still more encouraging news on US/European/Chinese economic momentum, it would seem that conditions are ideal for equity investors.
Looking at global economies, you would be right to think things look ideal, but closer to home it is and remains a far less clear picture.
Australian Housing Markets just got a wake-up call
Now before you start saying ‘oh here we go again’, ‘Jono is off on another one of his glass-half empty tirades’, lets please consider today’s announcement from the Australian Banking industry’s regulator, APRA (Australian Prudential Regulation Authority).
In a widely anticipated move designed to quell the ongoing fervor for eastern seaboard residential property, APRA today directed Australia’s banks to ‘limit the flow of new interest-only lending to 30% of total new residential mortgage lending’.
APRA also asked the banks to place strict internal limits on the volume of interest-only lending at loan-to-value (LVRs) above 80%, and then reiterated (perhaps more strongly this time) that lending to investors should remain comfortably below the previously advised benchmark of 10% growth.
Using the Commonwealth Bank (CBA) as a bit of a guide here, we know that 42% of all new CBA mortgages written during the 6-months to December 2016 were ‘interest-only’.
From the figure above you can see that 1 in 4 new mortgage applications for interest-only mortgages is now likely to be declined going forward, and this is 1 in 10 of total new mortgage applications.
The marginal new applicant for a mortgage in Australia is now going to have to stump up more each month (predominantly principal), in order to qualify for a mortgage.
This new lending cap is entirely relevant.
What’s also important to understand is that interest-only loan balances at CBA grew +13% in the last 12 months, almost twice as fast as the 7% growth in its total home loan portfolio.
This new cap is also going to have a significant impact on the pace of loan growth at CBA (and the other major banks) since APRA are specifically targeting the areas with strongest growth.
Bank earnings momentum will hence be further impacted.
I have made numerous warnings in recent weeks that the pace of house price growth is set to flatline in the months ahead, and perhaps even go moderately backwards by the Autumn 2018 auction season.
Banks are already raising interest rate charges as I have discussed on several occasions this week.
In fact, it was pointed out this week by brokerage group CLSA that the impact of a seemingly modest 0.10% rise across Australian variable mortgage rates would rob households of some $1.4bn in cash-flow.
To put that in context, this is around 0.3% of Australia’s Gross Domestic Product (GDP).
This stuff is important to understand.
Costs are going up and credit availability is now being limited against the backdrop of near-absent employment and wage growth.
Expect auction clearance rates to fall, and to precipitate weakness in house price momentum.
House price momentum and Australian bank profitability are two sides of the same coin.
For this reason we feel this fortuitous quarter-end rally in Australian bank share prices is once again a gilt-edged opportunity to be taking some profit on your Australian bank sector holdings.
Australian Banks now look very rich
Take a look at the chart below.
It shows the forward valuation for the Australian bank sector.
Australian banks are now as rich as they have been since the early 2015 share-market top, leaving little room for improvement, and arguably plenty of room to consolidate.
This is a good time to trim back your bank sector holdings
Mantra Group (MTR) – some light at the end of a dark tunnel
MTR has been one of our more disappointing recommendations in the past 12-months, and has given me cause for considerable soul-searching in recent weeks.
Fortunately, the stock rebounded +12% this week after several press reports suggested the company was a takeover target for international hotel-chain Marriot International (MAR).
Though it is always hard to establish the veracity of such rumours until after the fact, we do think MTR are an incredibly cheap share in absolute terms and definitely relative to the valuations of their international hotel peer group.
We think MTR is certainly a valid takeover target for any number of international hotel brands, and we look ahead more confidently that investors stand a strong chance of significantly higher share prices in the weeks and months ahead.
Healthscope (HSO) presentation to Prime advisers
Our advisor network was fortunate to be updated on our recent recommendation in HSO by the company’s head of Investor Relations, Anita Healy this week.
We took heart that our motivations for investing in the hospital group were well founded, and that the earnings outlook for HSO post the opening of the under-construction Northern Beaches Hospital in Sydney in late 2018 looks strong.
For those of you willing to play the long game (as we all should!), I think HSO can double on a 5-year view.
Portfolio Considerations – time to start paying closer attention again
With all the remarks I have again made on housing and banks this week, it is timely to have a chat with your advisor to ensure your portfolio is indeed in good shape for the months ahead.
Now is very much a good time to consider trimming some Australian bank positions.
Our PRIME Australian Equity GROWTH portfolio is already significantly underweight Australian banks.
With the ASX200 only 2% shy of its 2015 highs, and our economy continuing to face steeper headwinds, it seems entirely appropriate to consider switching some funds from Australian shares into international markets.
We are also minded to forewarn you that our BUY recommendation in Woolworths (WOW) is slowly creeping up on our target price range of $27-28.
Lastly, for those that haven’t yet established a full position in Blackmores (BKL) now is a pretty good time to be doing so given the change in Chinese regulatory reforms announced last week.
Enough from me.
Wishing all a great weekend.
Jono & Guy.
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