Australian Market Summary (Issue 450) – May 26th, 2017
This week, it feels like the penny is beginning to drop.
This week, it feels like domestic Australian investors are beginning to pay attention to the long unfolding secular shifts in the Australian economy and in the resultant impact that is set to be felt on local portfolio’s.
Australian shares again underperformed the global peer group by around 1-2% depending on which market you compared it to.
Australian shares have now underperformed the international indices by 5-6% year-to-date.
PRIME’s International Growth portfolio is up +9% year-to-date driven by strong performance from the funds selected within that.
What’s interesting about all of this is that it is occurring even without assistance from the Australian Dollar, which is up +3.5% since January 1st.
The implication? That it’s a dearth of domestic Australian share-market opportunity that is driving this creeping underperformance.
And this is but the start.
This week we saw the banks and miners both suffering – two sectors that I have mentioned ad infinitum contribute 40% of ASX200 value.
The retail sector continued to fall as well, and is now down -20% year-to-date.
Oh, and it’s not because of Amazon despite what the papers tell you.
It’s because Australia’s retail sales are running at their slowest rate in 3-years and because household cash-flows are fast constricting.
Within the consumer discretionary space, Australia’s two largest auto retailers both profit-warned this week, blaming a cautious consumer for the disappointing year-to-date 2017 car sales.
Banks were rocked a little with the S&P credit downgrade to many of Australia’s second-line banking institutions this week. The ratings agency went with a formal cut from A- to BBB+ to the likes of Bendigo Bank (BEN) and Bank of Queensland (BOQ), a move that will again raise borrowing costs for all of the institutions affected.
In the miners, iron ore inventories continued to climb and iron ore prices are now at their lowest level in 6-months.
But they have more to fall.
Bank dividends – NAB & Westpac set to cut.
I did some work myself this week on the major Australian banks, specifically insofar as their abilities to maintain the currently generous dividend payout ratios on offer.
And the outlook here is mixed.
Australia’s banks, like many of our major corporates, have run inflated dividend payout ratios in the years post the GFC.
The high payout ratios worked well in an environment of low interest rates and shareholders have done well both in terms of the dividends paid, and the resulting performance of the underlying shares themselves.
However, in recent years the banks have been forced to accrue greater capital to conform with more stringent global banking regulation, and this month they were further blindsided by the impost of the governments $6bn+ Major Bank Levy which will likely take around 3% from sector earnings.
Payout ratios are now looking increasingly high and vulnerable.
National Australia Bank (NAB) looks most at risk of a 10% dividend cut given the forecast of a flat $1.98 in annual 2017 dividend implies an 80%+ payout ratio, well above its targeted 70-75% ratio.
Westpac (WBC) are the next highest and will be paying out near 80% in 2017 if they too deliver on the market forecasts of $1.88.
Commonwealth Bank (CBA) look least at risk with a payout ratio nearer 75%, but note that even this number is well above the 60-65% payout ratio that ANZ Bank (ANZ) set when they rebased their dividend by over 10% in early 2016.
The pips are squeaking on the dividend front even with housing still at its highs.
So, let’s take this a step further.
Right now the big 4 banks write-off a little more than $4bn in bad & doubtful debts a year.
Over the GFC the banks wrote off $20bn in an 18-month period, give or take a billion dollars or two, which is 3x the current level of charge-offs.
Back then it was less a housing issue, and much more a commercial property, margin loan and personal loan issue.
If housing starts to roll-back, which I am thoroughly sure of, and we begin to see more housing investors come under pressure from higher interest charges and tighter borrowing standards, then Australia’s banks will surely be forced to take higher charges.
A simple doubling of bank debts will take off near enough to 10% from banking sector profits.
And at that point, the dividends get cut again.
Using NAB as an example, its dividend could conceivably go from $1.98 currently to $1.60-1.70 – a 20% cut ultimately.
AGAIN, NONE OF THIS IS SAID TO SCARE.
IT IS SAID TO MAKE A GENUINE AND PRAGMATIC POINT THAT MANY DOMESTIC AUSTRALIAN INVESTORS CONTINUE TO IGNORE.
There is a place for Australian banks in portfolio’s.
They are solid institutions and they still pay out sound dividend income.
But bear no false expectation that the banks aren’t set to do it a lot tougher in the coming years, they are, and that means you want to be casting a wider net for your ‘growth’ exposures.
In fact, as a guide, whilst Australia’s banking sector has idled away to be down -3% year-to-date, Korea’s index is up +17%, Taiwan is +10%, NASDAQ is +15%, Hong Kong is +15% and European markets are +10%.
PRIME’s Australian Equity Growth portfolio carries only a 12% exposure to the major 4 domestic banks, and is only half-weighted to the sector when including our Macquarie Bank (MQG) weight.
Contango Global Growth (CQG) – international growth exposure
What a neat segue into the CQG offer we sent out to you earlier in the week!
Though PRIME has its international separately managed account (SMA) which I alluded to earlier in the piece, many investors prefer to hold all of their portfolio positions by way of ASX-listing, and so potentially the new CQG offer could be of an interest to those of you seeking a greater international exposure.
I have added the link to Peter Switzer’s interview with the investment adviser to CQG, the CIO of WCM Investment Management Paul Black.
I’d encourage you to take a peek.
Crown Resorts (CWN) – special dividends set to continue
CWN had another good week, and its renaissance remains a pleasant surprise to us.
This week top-rated analyst Larry Gandler at Credit Suisse wrote of his expectation that CWN would again pay out 83c in special dividend in both 2018 and 2019, as it had done already this year.
This takes the running yield on CWN shares to over 11% and 14% when grossed up for franking benefits.
The dividends are simply born out of a re-gearing of CWN’s balance sheet post the sale of its Macau operations, but all the same, will provide a neat return for shareholders in the coming years.
We think CWN can push towards $14 before we would re-assess our holdings in the share.
Woolworths (WOW) – directors are buying
We were encouraged to see that several of WOW directors had been buying shares in the stock earlier this month.
Well over $600,000 in shares were purchased, which is not small change, and hopefully augers well for further share price upside in the coming months.
The next news we should expect to hear from WOW is from the ACCC who will rule in July on the sale of WOW’s service station portfolio to BP.
Woodside Petroleum (WPL) – investor briefing
WPL updated investors on plans this week, and was notable in the detail it gave on its hopes to tie in substantial stranded gas reserves in the Browse Basin back in to its North-West Shelf infrastructure from 2025.
The cost is seen to be well over $30bn, but will underpin production at that facility for decades to come.
WPL have been a terrific performer year-to-date, recouping some of the losses they incurred in 2016.
Oil prices are still hard to judge, as evidenced by the -5% collapse in oil on Thursday night after OPEC agreed to continue production cuts (!), but we think WPL is worth around $35 or so, and so will continue to hold out for these levels before we would look more seriously at trimming it from portfolios.
That’s it for this week.
I really and sincerely hope everyone is well across our broader views on Australian shares within an international context, and if at any point you would like me to sit down with you individually (or with some friends over a coffee) and walk you through some charts I have that explain perhaps more clearly the reasons for my views, please just shout (either at me, or your adviser).
Have a great weekend.
Jono & Guy
Financial Services Guide Update
Our Financial Services Guide has been updated, please click here to download the most recent version.
Friday 10:30am Values
|S&P / ASX 200||5749||+23||+0.4%|
|Property Trust Index||1399||+30||+2.2%|
Key Dates: Australian Companies
|Mon 29th May||N/A|
|Tue 30th May||Div Ex-Date – AGLHA, WBCPD|
|Wed 31st May||Div Ex-Date – NABPB
Div Pay-Date – SVWPA
|Thu 1st June||Div Ex-Date – NABPB|
|Fri 2nd June||N/A|
This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (“Prime”). Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. Prime is bound by the Australian Privacy Principles for the handling of personal information.