Australian Market Summary (Issue 357) – 26 June 2015

As the financial year draws to a close we had another interesting week in markets, both at home and abroad. It feels as if every week there is something bigger and better to write about and the week gone by is no exception.

Greece once again continued to dominate global markets as we inch towards the June 30 cut-off date. With only days remaining and at present no current solution, negotiations seems likely to carry on until the last minute. Only once an agreement is reached will creditors unlock the final tranche of bailout funds and whilst this seemed possible earlier on in the week, now seems more uncertain.

On the home front, the market is currently down 1% for the week. What positive returns had been generated in the first half of the week turned the corner on Wednesday night when it became clear creditors were unwilling to agree to Greece’s proposed reform policy and as such, our market has shed 2.5% on Thursday and Friday alone.

The Australian dollar has fallen 0.5% throughout the course of the week on the back of inflation figures coming out of the US, which while still muted at 0%, is a step up from the previous two months of negative data.

The Australian bond market was weaker. The initial possibility of a Greek settlement steered investors away from government bonds at the beginning of the week and towards stock markets. However, Greece’s inability to satisfy its lenders on its proposed reforms mid-week left bonds lagging.

As we approach June 30, I thought it might be worthwhile highlighting a few of our successful stock recommendations that have transpired in the past 12 months.

Adelaide Brighton (ABC) has increased nearly 30% from when we recommended it early last July at around $3.60 and still represents a key portfolio holding in our Prime Australian Equities Income Portfolio.

We issued a take profit note in Cochlear (COH) last August at $72 after having sent out a buy note recommending its purchase when the stock was $55.

Finally, our recommendation to buy Magellan (MFG) generated a 50% return and subsequent switch into Flight Centre (FLT) likewise performed exceptionally well.

Which leads me to the local market this week…

AUSTRALIAN MARKET
Australian job ads website Seek Limited (SEK) issued a profit warning on Monday after an error-prone IT systems upgrade by a key client hurt its education business.

As a result, SEK now expects net profit for the second half of the fiscal year through June to be broadly in line with the $94.1M it booked in the first half. On the back of this shares in SEK dived more than 12% on Monday to 16 months lows and have now fallen more than 16% for the week. We are content to simply watch SEK for the time being and will continue to track its progress.

Financial services provider IOOF Holdings Limited (IFL) likewise had to endure negative press published in the Australian Financial Review last weekend, which raised questions over internal compliance issues, claims of misrepresentation and questions surrounding the culture in its research division.

IFL fell 13% on Monday and has continued to fall a further 1.2% throughout the remainder of the week. Despite having to endure a temporary trading halt on Monday, IFL rebounded from a low of $8.44 to close at $9.24.

We still very much like IFL as a company and note these accusations, while damaging to IFL’s reputation do not affect its earnings capacity. We viewed Monday’s sharp decline as an overreaction and still maintain our initial position that the stock is worth $10.50-$11.00.

Flight Centre (FLT) also suffered from a downgrade in its profit forecast and had $600M wiped from its market cap on Tuesday. Citing weaker demand and higher costs FLT’s underlying profit is now expected to be between $355-365M compared to an initial forecast range of $360-390M.

Having been a core holding in our Prime Australian Equities Growth Portfolio just two months ago, we are relieved to have sold down our holding and are reminded that taking profits is never a bad thing. As mentioned in the market update the week we issued the FLT take profit note – “We would always rather be prudent where at all possible, even if our concerns prove unfounded.”

Finally, another company we have been tracking with some interest Slater & Gordon (SGH) arguably faired worst during the past week. Investors dumped the stock on the back of suggestions that it grossly overpaid for its recent $1.3b acquisition of Quindell’s professional services division. This led SGH shares to drop 20% this week.

For now we wait and observe.

GREECE…. HOT AND COLD!

Last Friday The ECB raised the level of emergency funding for Greek banks to 3.3b Euros. This emergency funding has been keeping Greek banks afloat as the stalemate between Greece’s radical left government and the EU and IMF continues.

Greek has until June 30 to settle on its 1.6b Euro loan from the IMF or risk finally being exiled from the Euro. Fears that the ECB would terminate funding of Greece’s banks triggered a run on the banks early this week, with Greeks deciding physical cash stored under their mattresses may be safer than relying on their government to come to terms with the ECB.

The week began with signs of a deal emerging on Monday. Greece’s creditors were positive about a government plan offering concessions on austerity measures, such as tax hikes and pension cuts.

However, by midweek it appeared as if a Greek settlement was less likely as lenders requested a surplus of 1% of GDP this year, 2% in 2016 and 3% in 2017 whereas the Greek government had expressed their preference for a more gradual increase.

In order to meet the creditors expectations, Greece’s tax revenues need to exceed public spending, which is significant because it controls how quickly and radically changes must be introduced.

Given that the Greek government gained power based on its anti-austerity, anti-reform mandate along with its promise that pension payments would not change, any potential deal seemed less likely once Greece refused to agree to the terms on Wednesday night.

As it currently stands Greece continues to walk the tight rope. With time running out, it appears more and more likely that the Greeks will be banished from the Euro. In order for Greece to obtain these bailout funds and remain in the Eurozone, it needs to meet the ECB’s rules and requirements rather than it occur the other way around.

Regardless of the outcome, it still remains that Greece will need to make serious changes to the way they approach many things; such as paying taxes, creating jobs and restructuring to a modern economy.

Key Dates: Australian Companies

Mon 29th June
N/A
Tue 30th June
N/A
Wed 1st July
Div Ex Date: AAA Betashares (AAA)
Div Pay Date: ANZ Bank (ANZ)
Thu 2nd July
Div Pay Date: BTT Investment (BTT), Macquarie Group (MQG), Westpac Bank (WBC) 
Fri 3rd July
Div Pay Date: National Australia Bank (NAB)

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