Australian Market Summary (Issue 451) – June 2nd, 2017
A lot to get through today.
Australian markets continued to underperform their global peers, whilst the S&P500 made a new high.
Our banking sector posted its first positive week in over a month, iron ore collapsed to an 8-month low and Australian interest-rate markets have begun to price in a modest chance that the RBA CUTS rates in the coming year.
Some interesting stuff.
This week I am going to try and focus particularly on portfolio strategy since I think there are quite a few things on the horizon to be on top of.
But before I do that…
The Australian Dollar is headed into the 60s
I will be curt in my remarks on the economy since I feel like I have been pretty clear on my thoughts and concerns here.
The mainstream press also seem to have picked up on this theme of economic vulnerability, and will no doubt focus on this week’s release of Private Capital Expenditure intentions which were disappointing.
Where businesses expect to spend $126bn on capital expenditure in the year to the end of June 2017, their intention is way down at $88bn for the 2018 financial year.
The ducks are lining up.
As I said earlier, Australian interest rate markets have now swung back to thinking the RBA might be forced to cut interest rates again in the next 12 months, such is the slew of weaker economic data.
The fall in iron ore and coal prices too carries consequences for our trade balance, government receipts and ultimately the Australian Dollar.
The interest rate, trade and economic fundamentals underpinning the AUD are fast diminishing
If there is a surer bet then I can’t see it.
The Australian Dollar is most definitely set for a decline into the 60’s in the months ahead, and we need to be positioned for this in portfolios.
Equity Portfolio Strategy – moving the pieces on the chessboard
So, with our view on the economy being what it is, we have set up our recommended portfolio’s accordingly.
The past month has seen markets seemingly coalesce with our views and fortunately this has led to strong performance.
Whilst we think the impact of a weaker domestic economy still has a long way to play out and our core views remain, there are still moves to be made to be prudent with portfolios.
One major observation to make of recent weeks is the push higher in much of the market outside of the ASX20. With the bank tax, falling commodity prices and concerns over telecoms competition, investors have been ploughing into shares outside of the majors as a means of keeping their exposure to the share-market.
Since the start of the year, Australian mid-cap shares have outperformed the large-caps by 9%.
Blessed by this strong buying, many shares in the mid-cap space are now looking increasingly fully valued, and it’s important that though we all like to hold onto our winners, we do need to rotate the bench as and when appropriate.
This month two of our portfolio stalwarts have ripped to new highs and we are now contemplating just how much more there is to go.
Sonic Healthcare (SHL) has been a tremendous performer over the past 18 months and is up +40% since our recommendation, outperforming the market by around +15% in the past 6 weeks alone.
Crown Resorts (CWN) too has been a jet, rallying strongly on the promise of further returned capital. This theme will underpin CWN for months to come.
But though these themes are good, there is a price for everything.
Equally, though the market is high and the economy weak, there are stocks that we think look good value down at current levels, and whom have the potential to outperform in the environment we envision.
Mantra Group (MTR), Blackmores (BKL), Healthscope (HSO) and Regis Healthcare (REG) have all been mildly disappointing since being recommended, but all have the potential for strong returns.
MTR we expect to be buoyed by ongoing tourism growth as the weaker AUD forces more households to holiday domestically, and attracts more foreigners to our shores.
Blackmores (BKL) too should benefit from being exposed to the ongoing growth in Chinese consumer spend, and being less reliant on domestic discretionary spend. We like the theme and feel like it is set to turn.
Healthscope (HSO) and Regis (REG) are both on the nose due to the government’s recent crackdown on the healthcare system, but both are high quality, long-life assets exposed to the above-average growth offered by our aging population.
The recent weakness in both offers up excellent long-term value and we feel pretty good about where both shares are headed.
Telstra (TLS) has rebounded strongly to be north of $4.50 again. UBS this week published a report talking up the prospect of value accretion from a likely securitization of its NBN government payments.
We think TLS can get back into the $4.60-4.80 range, and we might then be forced to consider our previously optimistic view for TLS shares.
Beyond those names in the portfolio, there are also a couple of shares that seem to be offering up interesting long-term value, and offer exposure to the theme of a falling Australian Dollar.
Watch this space.
QUBE Holdings – announces capital raising
QUB this week announced a $350m capital raising aimed at financing much of the warehouse construction at the Moorebank logistics park, which QUB intends on commencing this year.
QUB raised $122m by way of institutional placement at $2.42 a share and have offered all shareholders the right to subscribe to a 1 for 15 share offer priced at $2.35 – QUB today are trading at $2.68.
We will write a note to you on this next week, but will be encouraging all investors to subscribe.
Technology – opportunity set offshore is enormous
This week we had the good fortune of hosting Northern Trust’s technology guru Neil Campling in the office.
It was standing room only as Neil walked us through his presentation on key tech themes, but in particular Neil remains hugely optimistic on the themes around autonomous vehicles, ‘e-gaming’ and the related semi-conductors needed to enable these technologies.
Neil said he expected a fully-autonomous vehicle to be on the roads in China or California before the end of 2018, fueled by a surge in development that will occur when either (or both) Google or Baidu declare their software open-source.
Neil thinks this news is imminent, and will be akin to the rapid proliferation of Android handsets when Google opened up the software to third-party development.
Amongst many other things discussed, Neil also sees wireless charging coming soon, which should be pretty cool too!
If we all took one major thing from Neil’s presentation, it was simply that the opportunity set for investment in these types of themes is infinitely larger outside of Australia.
His presentation only further fueled our commitment to having more and more of your investment dollars parked offshore.
I’ll leave it there for now.
I expect we will have quite a bit of correspondence to you in the coming week or so, so fingers crossed there will be a few worthy things to do.
Have a great weekend.
Jono & Guy
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Friday 10:30am Values
|S&P / ASX 200||5781||+32||+0.6%|
|Property Trust Index||1418||+19||+1.4%|
Key Dates: Australian Companies
|Mon 5th June||Div Ex-Date – CWNHA, CWNHB|
|Tue 6th June||Div Ex-Date – CBAPC, CBAPD, CBAPE, CBAPF|
|Wed 7th June||Div Ex-Date – James Hardie (JHX)
|Thu 8th June||Div Ex-Date – ANZHA, ANZPG, NABHB, NABPE
DIV Pay Date – AGLHA, WBCPD
|Fri 9th June||N/A|
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