Australian Market Summary (Issue 354) – 5 June 2015

Ugly.

Mid-morning Friday, and the ASX200 is down 5% on the week making it the worst performing developed market this week.

In constant currency terms, the ASX200 is the worst performing major equity market  year-to-date.

It’s normally pretty apparent when investors are net selling of an asset class, as they were this week, since there is very little dispersion in performance across the various sectors of the market.

Though telecoms and healthcare managed to outperform the index fall, the outperformance was marginal. Banks were again the worst sector.

At the moment Australian shares are suffering from the combined effects of being a market that isn’t particularly great value, but also a market lacking fresh impetus for stimulus.

ON THE POSITIVE HOWEVER … we think the market is back within 2% of the low, and WE ARE VERY CLOSE TO RECOMMENDING PUTTING SOME MORE CASH BACK TO WORK.

On the encouraging side, this mini-rout in share values has actually removed some excess valuation in certain areas of the market. In a market where it has been extremely difficult to sniff out value and the potential for upside momentum, the fallout this month is providing opportunity for us to be contrarian.

I’ll give a few brief points on the week gone, and then offer up some thoughts for us moving forward.

THE WEEK JUST GONE…

So the market took a bath.

At the core this week, we could perhaps blame again the absence of support from local interest-rate markets. The RBA announced ‘no change’ in local rates, but more importantly failed to reinstate their ‘bias to future easing’ in the worded document accompanying the release.

I have to be honest here and say that those people looking for the RBA to be more ‘dovish’ in their outlook for local interest rates have a touch of the ‘Pollyanna’s’ about them. It is my firm belief now that THERE WILL BE NO

FURTHER RBA INTEREST RATE CUTS IN 2015.

Whilst the economy is far from firing on all cylinders, there is modest improvement taking place in the service sector.

The chart below demonstrates the uptick in employment momentum within the Australian services sector. The chart comes from the Australian Industry Group May Service sector report, and shows hiring momentum has improved to a 4-year high. The ANZ Job Advertisement figures similarly continue to improve too.

With the service economy comprising 80% of Australian GDP, this is a modestly encouraging sign.

 Chart1_050615

With the RBA offering little impetus for local rates, Australian 10-year bond yields ended the week back near their 6-month highs, north of 3%.

On the economic front we also had both the Q1 GDP figured and April Trade Balance released. Interestingly, GDP bettered expectations, rising 2.3%, but the trade figure was significantly worse and speaks to Australia’s continued ‘overspending’.

I’ll be honest, GDP figures are frankly irrelevant to share-markets as they are often contrived and open to revision. Moreover, they relate to economic data from as far back as 5-6 months ago.

The only time GDP figures can matter, is when they go negative, and the media then chooses to print the data all over the front page. They matter then because the impact of the press focus can actually make the negativity self-reinforcing on consumer confidence.

Anyways, enough about GDP.

On the Trade Balance, April showed a deterioration in our national trade to the worst figure in 25 years. Obviously the fall in metals prices is having a bearing on our exports, however on the consumption side Australians continue to spend.

This figure in particular is worth acknowledging for the medium term, as it demonstrates Australians continued thirst for imported ‘quality of life’. This needs to be paid for, by someone at some point. The greater likelihood is the Australian dollar will continue to fall as demand lessens for our exports, and in turn makes the cost of imported consumption prohibitive.

Simples.

 Chart2_050615

Bond market weakness this week was not confined to Australian shores either, and European government bonds were smashed this week after the release of some European inflation figures that showed prices rising at their fastest rate in a year.

German 10-year bund yields have risen a whopping 0.8% from 0.05% a month back to now be 0.85%.

On the local market, we were encouraged by the performance of several of our key recommendations this week. RESMED (RMD) & Crown Resorts (CWN) both rose 1% against the falling market, whilst all of Carsales.com (CAR), Computershare (CPU) and AGL Energy (AGL) managed to outperform the broader market.

Our Australian equity managed accounts have had a terrific week and have outperformed the ASX200 by 1.0-1.5% this week alone.

This is great encouragement to us since we have regained all of April’s underperformance, and are now back ahead again. But more than this, since we make strong representations that we focus on limiting downside risk in the shares we choose to recommend, outperformance of our portfolios in weakness is of particular encouragement to us as an investment committee.

AGAIN, IF YOU WOULD LIKE TO DISCUSS OUR MANAGED ACCOUNTS & HOW THEY WORK, DO PLEASE ASK.

Amongst these shares, it is worth highlighting Computershare (CPU) again. CPU is right in the sweet spot for improving business momentum as global mergers & acquisitions activity continues to rise. As a share registry, CPU benefits from increased corporate activity. US M&A activity is back at an 8-year high.

We think CPU is worth $15.

Crown Resorts (CWN) has also rebounded nicely, and again we feel this share can be worth $18 in the coming 12 months. Investors seem more willing to believe the Macau casino industry is nearing a bottom, which is certainly a view we ascribe to.

Each of IOOF (IFL), Adelaide Brighton Cement (ABC) and AGL Energy have been outstanding performers year-to-date, and remain names we are focused upon to take profit as and when appropriate.

With the markets fall, we are more encouraged than we have been in many months that we will have the appropriate alternatives to switch into as and when that time arises.

LOOKING AHEAD …

With the fall, we are minded to believe more opportunities to invest are prevalent.

That said, it is vital we all acknowledge that by looking to be more constructive it DOES NOT MEAN we instantly go back to the tried and tested names of the past. In the main here I am referring to banks and miners.

Yes, banks and miners are looking a ‘fairer’ value here than they have in some time, and in fact National Australia Bank (NAB) looks to be an out and out BUY on 12x and a 6% fully-franked yield.

But.

We don’t buy for ‘fair value’. We want to be buying things cheap.

The reality is that in the case of the banking sector, there will be MINIMAL DIVIDEND GROWTH in the coming 2 years, and this means share prices will most likely stagnate.

So what we want to be buying are companies that have genuine capital growth potential.

As it stands now, we are eyeballing companies such as Insurance Australia Group (IAG), Oil Search (OSH), REA Group (REA), Slater & Gordon (SGH), Fairfax (FXJ), G8 Education (GEM) and Fairfax (FXJ), just to name a few.

We are as yet undecided on all, but we are certainly sharpening the pencil.

As it stands, the current crop of recommendations mentioned earlier – CPU, CAR, CWN, NAB – all offer excellent and preferred value for now.

Anyways, that’s enough from me for now. I hope you all enjoy a relaxing Queens Birthday weekend holiday.
Key Dates: Australian Companies

Mon 8th June 
N/A
Tue 9th June 
Div Ex-Date: James Hardie (JHX), US22c + US27c
Wed 10th June 
Div Ex-Date: ANZHA
Thu 11th June 
N/A
Fri 12th June  
N/A

SPEAK WITH US TODAY

A unique and personal service approach and support for all your business advisory and personal wealth management needs

Request a free consultation

A unique and personal service approach to support all your business advisory and personal wealth management needs.

Request a free consultation