Australian Market Summary (Issue 455) – June 30th, 2017
So the end of the financial year is upon us which brings with it a great sigh of relief.
All those June 30 deadlines have now come to a close and we can for a moment take a step back and catch our collective breaths.
I thought given it’s the EOFY, I’d write a recap of the weekly events as usual, but would follow with a highlight of the last 6 months of performance of Prime’s Separately Managed Accounts (SMAs)
The ASX200 had a strong week but heavy selling on Thursday night in international markets meant we only ended ~0.3% higher.
Miners led the way this week up 3%, the catalyst being the strong bounce in the price of iron ore which rose 8% and once again pushed above US$60/tonne.
The increase in the iron ore price was a result of Chinese Premier Li Keqiang’s claim that China maintained steady economic growth in the June quarter and his indication that it will continue growing at 6.5% this year.
However, it is the massive oversupply at Chinese ports that continues to concern us along with the increasing use of cheap scrap steel in place of iron ore at Chinese steel mills which we believe will see a further weakening in prices.
Energy stocks were ahead 1.7% following a surge in the price of oil which until now fell week-on-week in June. Having come perilously close to breaching the $42/barrel level it was nice to see some renewed strength.
The last time the banks, miners and energy stocks all posted gains in the same week occurred in mid-February so it is somewhat surprising to see us only post a ~0.3% gain this week.
Investigations & Departures
A Fairfax investigation into retirement village operator Aveo Group (AOG) last weekend saw its share price promptly smashed on Monday, with the stock down 11%.
Claims AOG locked residents into complex contracts and charged excessive exit fees to increase profits saw investors abandon the stock.
The fundamental issue – where does AOGs duty of care lie?
To its elderly residents? Or is the aggressive exit fee structure so profitable that resident turnover is their main focus?
To add fuel to the fire…AOGs chairman and another director may come under investigation following large share purchases the day before the company announced $150m share buy-back.
Changes at the board level in Blackmores (BKL) were viewed negatively with investors sorry to see Christine Holgate announce her departure.
Christine Holgate’s decision to accept the position of CEO at Australia Post saw BKL fall ~4.5% on Tuesday.
However, the stock quickly rebounded in the days that followed and rose 2% for the week.
Whilst Holgate was instrumental in leading BKLs business in recent years, most notably through her vision and achievements of BKL in China, it is a business we continue to remain comfortable with.
We felt it was prudent to call time on our position in IOOF Holdings (IFL) this week.
IFL is a fantastic company and one which we have held in the Separately Managed Accounts (SMAs) for many years.
However, with the stock around 10% off its all-time highs and trading on a 17.5x forward earnings multiple, we decided to put those funds to better use.
You will all have seen the note we sent out this week and we are exceptionally comfortable with the growth prospects of IFLs replacement.
Whilst we are still angling to purchase this stock at limits slightly lower than current levels, we are confident it will get there.
Trading on an FY18 P/E of 16x with a forecast yield of 6.1% we think this is a very strong income producing stock, like IFL but with more capital growth opportunity.
For clients without IFL this new recommendation is a sound addition to portfolios with much of the recent underperformance now fully priced in.
Business wrapped up at Crown (CWN)
Some positive news to come out of Crown Resorts (CWN) relating to the ongoing saga of its employees who have been detained in custody in China since mid-October 2016.
The 16 CWN employees who were fined were also sentenced to periods of incarceration ranging from 9 to 10 months.
No, this was not the good news!
Given that the employees had been detained since October last year, CWN can expect all 16 members back home by late August as the sentence takes into account time already served.
It has been a tumultuous period for CWN but it is nice for the finish line to be only a month or two away.
Still on CWN, the $500m share buy-back is believed to be over, after broker UBS handled four large lines of stock in late Wednesday trade.
If as rumoured UBS was behind the trades which accounted for $136m worth of stock after market on Wednesday, it would be enough to complete CWNs on-market buy-back worth $500m which was announced in March.
SMA Performance to June 30
I said I would provide a snapshot of the performance across our SMAs to June 30 given we are exactly half way through the year.
The Prime Equity Growth SMA looks likely to close out the first half of the year marginally behind the ASX200 Accumulation index.
This actually relates to some minor underperformance in June alone as prior to this the Prime Growth SMA had been ahead of the index from January-May.
On a 3 year annualised basis we continue to outperform the index and it is for this reason we remain unconcerned about some slight underperformance to end of June 30.
We continue to be vigilant in monitoring existing positions and point to changes made earlier this week (and under the recommendations section of this update) as evidence of our continued focus on adding value.
Given the nature of the domestic economy as a whole, it is becoming increasingly more difficult to find undervalued stocks but that does not mean they are not out there.
It just means we have to work harder to find them!
The Prime Defensive Income SMA continues to outperform the Bank bill index.
Given the number of Managed Funds in the defensive SMA that are due to provide capital distributions in the next month, we can confidently expect to continue our recent run of outperformance.
So far this calendar year, the defensive SMA is 1.7% ahead of the index and has not underperformed the index on a monthly basis since November 2016.
Finally the Prime International SMA continues to go from strength to strength.
You may recall our note at the beginning of this year which pushed clients to raise their weightings to international equities and reduce exposure to domestic equities following a more bearish outlook on the Australian economy.
Well to this point the above view has been vindicated.
The International SMA had outperformed the MSCI world ex-Australia index by more than 3% to the end of last month.
I would strongly recommend any of you who have not yet upped your exposure to international equities to have this conversation with your adviser.
Anyways that will do it for this week
I wish everyone a fantastic end to the Financial Year.
It’s always a roller coaster ride getting there but now that we have done it, we can look forward to the second half of the year.
Have a nice few days off and we’ll be back at it next week!
Jono & Guy
Financial Services Guide Update
Our Financial Services Guide has been updated, please click here to download the most recent version.
30th June 2017, 2pm
|S&P / ASX 200||5379||+36||+0.6|
|Property Trust Index||1317||-61||-4.4|
Key Dates: Australian Companies
|Mon 3rd July||Div Pay Date – Aristocrat Leisure (ALL), ANZ Bank (ANZ), Incitec Pivot (IPL), Macquarie Bank (MQG), Orica Limited (ORI)
|Tue 4th July|| Div Pay Date – Westpac Bank (WBC), CSR Limited (CSR), Cimic Group Limited (CIM)
|Wed 5th July||Div Pay Date – BT Investment Management Limited (BTT), National Australia Bank (NAB)
|Thu 6th July||N/A
|Fri 7th July||Div Pay Date – G8 Education Limited (GEM), NABPD|
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