Australian Market Summary (Issue 448) – May 12th, 2017
Interesting and significant week, mmm.
I think it’s far more of a significant week than the +0.7% rise in the ASX200 might imply at a headline level.
Major Bank Levy (MBL) a landmark event
For those of you that haven’t read my Federal Budget piece, I would encourage you to do so, since I think this week’s introduction of a Major Bank Levy (MBL) encapsulates in one fell swoop everything that is problematic in this nation’s economy and share-market.
The link to that note is here:
Like Mother Hubbard’s cupboard, Australia’s bag of financial tricks is bare.
The Major Bank Levy (MBL) is an unashamed grab for cash, and a finger in the overflowing dyke of financial excess that this country has accumulated over the past 10 years.
We have long argued about the risks of having all of one’s eggs in one basket, and that the sheer size of Australian banks as a proportion of domestic superannuation portfolios was cause for concern.
This week’s surprise levy of $6.2bn on the profits of Australia’s 5 largest banks demonstrates precisely these risks, and will strip investors of 5% of their annual income for the coming 4 years.
Worse still, is that now introduced, there is every chance that this levy remains in place long after the initial 4 years it has been slated for, particularly if the Labor opposition win next year’s election.
Think about that for a minute.
Australian Banks comprise around 30% of the ASX200 by market capitalization, meaning that if the average investor mirrored this weighting (and many have much more) then he/she just had 1.5% of their annual income effectively cut.
Not only does the 5% profit impact put at risk future dividends (NAB and WBC in particular; ANZ have already rebased their dividend and CBA is likely sound), it also cuts the bank’s ability to accrue much needed equity capital at a time when banking regulators are continuing to implore financial institutions to solidify their capital bases.
Australian Banks have now reached their zenith, and with housing most certainly on the turn I fully expect this week’s 3-4% falls across the major banks to continue.
The broker UBS seem to agree and published a strategy note this week which detailed just how good Australian banks have been to investors over the past 20 years, and how the tide was turning.
It’s important for context.
They note that Australian banks have returned 12.6% per annum for 20 years, miles in advance of the +3.5% annual gains from their global peers.
The banks have been able to provide investors with these incredibly good returns because Australia has enjoyed a whopping 9% financial system credit growth (over twice the economy’s growth rate, and this is how our debt is accumulating), and within that a phenomenal 11% annual growth for two decades in housing credit.
It is unsustainable.
As a guide for clients, we are currently running significant UNDERWEIGHT positions in Australian banks in our Australian Equity Separately Managed Accounts (SMA’s) and can’t see that changing for sometime.
A further knock to Australian investors this week was the continued collapse in commodity prices, with coking coal falling a further -20%.
Having been rocket-fuel on the upside in 2016, falling iron ore and coal prices now render much of the Australian mining sector prone to earnings downgrades.
When you add the banks, miners and Telstra (TLS) together, you have 40% of the Australian share-market by value.
Looking forward over the coming few years it is hard to be hugely inspired by the outlook.
On the broader economic front, the Budget was constructive on infrastructure. The plan is timely and will go some ways to offsetting the impending residential construction downturn afoot.
Crown Resorts (CWN) – more good news
CWN this week announced the sale of its remaining 11% stake in Macau casino operator Melco (MLCO) for over $1.3bn.
The move is a good one and shores up the CWN balance sheet ahead of its Barangaroo construction.
CWN said they would apply the cash to debt reduction, having already committed $600m in special dividends and $500m in share buybacks earlier this year.
We think CWN are still in a sound position to return further cash to shareholders in 2018, and we are also encouraged by the prospect of a turn in domestic casino earnings, particularly with the opening of the Perth Stadium in 2018 and its likely impact on Crown Perth’s takings.
SEEK (SEK) – to the moon
SEK is now up over 20% since we recommended the share in mid-February and we are thrilled with the bounce.
We think the market is excited by the prospects for its offshore business, notably Zhaopin in China.
We would caution that stocks rarely go up in a straight line, so we wouldn’t be surprised to see SEK consolidate in the near-term, however we fully expect SEK to be knocking on the door of $20 in the coming 12 months.
On the whole markets are looking a little tired and you can’t magic away the fact banks revenues were already struggling well in advance of this week’s tax slug.
Markets are hanging in there on account of continued strength in global economic growth and the unwinding of pessimism relating to adverse French election outcomes.
We feel like there is scant value around in the current market on the whole, notwithstanding the likes of Healthscope (HSO), Blackmores (BKL), Mantra (MTR).
I would expect that the winter months see the ASX200 consolidate 5% or so lower.
Have a great weekend.
Jono & Guy
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Thursday 11am Values
|S&P / ASX 200||5869||+5||+0.1%|
|Property Trust Index||1405||-12||-0.8%|
Key Dates: Australian Companies
|Mon 15th May||Div Ex-Date – NABHA|
|Tue 16th May||Div Ex-Date – Macquarie Bank (MQG), National Australia Bank (NAB)|
|Wed 17th May||N/A|
|Thu 18th May||Div Ex-Date – Westpac (WBC)|
|Fri 19th May||N/A|
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