Australian Market Summary (Issue 350) – 8 May 2015

We had another ropey week, as you all will have seen. The ASX is down a little under 2% again this week, and now 5% lower than its closing high just 10 days ago.

The culprit you ask? The RBA.

RBA & BOND YIELDS

I have to say, that whilst this week wasn’t pretty, it was definitely interesting. The RBA did cut interest rates to record lows of 2%, and yet bonds and shares were aggressively sold off and the Australian dollar surged through 80c.

The simple reason for this seemingly perverse move is ‘expectations’. In their monthly statement, the RBA made it clear it no longer had a ‘bias to ease’, and this disappointed market-watchers like myself because we fear the economy won’t reach take-off velocity without further stimulus.

Having gotten overtly expectant of rate cuts earlier in the year, the market has had to swing all the way back to where we are now, and this has led to disappointment.

As at Thursday night, Australian bond yields have actually been THE SECOND WORST PERFORMING BONDs among globally developed countries in the last month. Only Portugal was worse, and that isn’t consolation.

Fortunately, I think the worst for Australian interest-rate expectations and bond yields is now largely behind us, so this drag from rising yields will diminish.

BANKS

For context, Banks were down another 3% this week. Bank shares have underperformed mining shares by 13% in under a month.

Adding weight to the negativity in banks this week was the disappointing earnings results from each of Westpac (WBC) and Commonwealth Bank (CBA), and the surprise $5.5bn capital raising from National Australia Bank (NAB).

Without going into precise detail on each bank, the broader trends of margin attrition, technology costs, capital retention and a tighter rein on investor lending growth all hindered profits this half. With the banks regulator, APRA, recently declaring that banks must slow investment property lending (IPL) to 10% per annum, the one ‘hot’ area of the market is now capped.

Did you know investment property lending makes up over 46% of Westpac’s mortgage portfolio, and was 52% of mortgages written in the last half?

With that in mind its little wonder the regulators are seeking to cap growth.

NAB proved the real bolter from the pack in announcing a $5.5bn equity raising (2 for 25 at $28.50) to bolster capital, and this coincided with confirmation the group would de-merge their underperforming Clydesdale Bank operation before year end.

NAB remains in a trading halt until Tuesday morning, but should actually trade OK despite the surprise. The raising surges NAB well ahead of its peers in terms of capital backing, putting their core Tier-1 north of 10% – well ahead of the rest who are all in the 8.7-9% range.

This is a considered and pragmatic step by NAB and we feel they will be rewarded for the bold decision. NAB is and remains our preferred bank holding and we feel it will continue its outperformance post raising.

Needless to say we will be recommending all holders SUBSCRIBE to the raising, but a separate note will be sent early next week.

To conclude on banks, they will provide suitable dividend income for long-term investors and are now at the lower end of a likely trading range. But… and this is important… if you are looking for capital appreciation, you are in the wrong sector.

I think we have been pretty consistent here.

WOOLWORTHS

Meh.

Woolies reported their quarterly sales this week and unveiled a strategy update alongside that.

All of it was underwhelming.

Supermarket sales in the last quarter were up a dismal 0.2% (against major competitor Coles +3.4%), and Big W comparable sales fell 7%.

The strategy update did little to suggest aggressive change was coming to arrest the decline in their competitive positioning. That WOW will not pursue an aggressive price discounting strategy is actually a modest positive for Wesfarmers (WES).

The stock isn’t cheap enough to buy if there isn’t going to be any profit improvement. Like the banking sector, WOW lacks any real profit momentum and would need to be significantly cheaper for us to be outright buyers.

BHP, FLIGHT CENTRE, CROWN & OTHER OPPORTUNITIES

As those of you in Flight Centre (FLT) will know, we recommended taking profit in the share after what was a pretty spectacular 30% gain in just over 3 months.

FLT is a company we want to monitor and perhaps even come back to in time, but with the economy spluttering along and the RBA declaring a hiatus on interest rate cuts, we felt the risk/reward had become more balanced.

We would always rather be prudent where at all possible, even if our concerns prove unfounded.

BHP will de-merge its South-32 asset next Friday. We will offer more comment next week, but for now feel entirely comfortable in telling investors to hold onto this security for the interim.

Crown Resorts (CWN) saw its Macau associate MPEL report profit on Thursday night. Gaming revenues in Macau at an industry-wide level remain pressured, down 40% through April. MPEL’s profit figures revealed little new information.

We remain entirely committed to CWN as a long-term BUY and feel that although there is as yet no signs of a turn in Macau, it will come. Moreover, CWN’s Australian assets continue to benefit from the patronage of Chinese high-rollers avoiding Macau, so there is a natural hedge.

To conclude, with the market 5% from its recent highs there are naturally more opportunities emerging and with this we are encouraged.

By no means are these stocks ‘BUY’s, but the likes of Insurance Australia Group (IAG) and SUNCORP (SUN) have now fallen to 3-year lows against the ASX and now offer sustainable yields in the 5.5-6% range. REA Group (REA) has fallen 20%, SEEK (SEK) too has come back a long way. In the internet space to be fair we still feel Carsales.com (CAR) offers the most significant opportunity, but again, falling share prices in the others make our eyes twinkle just a little brighter.

For now, we have nothing new to say on new equity ideas other than that they will come.

We are very hopeful of revealing a new property opportunity to you next week, and expect to see strong interest.

Watch this space.

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