Australian Market Summary (Issue 362) – 31 July 2015

PRIME are now on FACEBOOK.

Ha-ha. That’s right.

To all clients, partners and friends of PRIME do please take the time to go and have a look at our firm’s new Facebook page.

The significance of this is that you now have an additional hub from which you can access all the educational and investment information you require.

We on the PRIME Investment Committee intend to share all our missives and thoughts on this site, in addition to the usual email and website posts.

Furthermore, to make it a little less formal and a little more rounded in content, I and the other members of the investment committee plan to share broader articles and information that interest us in relation to the economy, investments, new technology, politics and frankly anything we think might pique your interest.

Over the course of the next few weeks, we will slowly begin posting content that we think you might find of interest.

To kick things off this week I have posted a link to a terrific article on the rise of ‘driver-less’ cars and the impact they will have on society in the decade ahead. Take a look.

Do please go to the site and ‘LIKE’ it so that you too can share in the information and discussion.

We really hope you find this useful, and certainly at a personal level I hope it is another means toward creating greater connection between ourselves and yourselves for the better!

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Markets this week…

Well frankly with the Hawks and Tigers tonight, who cares about the stock-market? Right?

It was a good week for the ASX200, with shares rising four out of five days and the index up over 2%.

Iron ore prices jumped, bonds improved and the currency behaved.

Within the broader market, we were encouraged by the strength of several of our ‘core’ holdings, meaning portfolios should have fared well this week and month.

RESMED. Bouncing again…

RESMED (RMD) was the standout for us this week, rising 8% today after a strong set of quarterly profits were announced. RMD beat expectations on sales and profits by around 4-5%, with the key surprise being the 53% growth in its core US ‘flow-generator’ business.

RMD are dominating the market at present with their current sleep-apnea device being the only one with genuine ‘informatics’ capabilities (data reporting on sleep & breathing patterns). ‘Mask’ sales also improved, and are holding market share.

We still think RMD is a great holding, and expect the stock to work its way back towards its highs near $10.00.

Strength this week in oils, IOOF & BHP…

Beyond RMD, we were also pleased to see the likes of Woodside (WPL), Oil Search (OSH), IOOF (IFL) and BHP bouncing this week.

In the oil sector, it was actually a little surprising to see WPL +6.5% and OSH +4.5% since oil prices were largely flat on the week. I guess what is encouraging is that oil share prices are starting to see some support irrespective of crude price moves, which is often a good indication that the market has factored in a lot of pessimism already.

Certainly our thoughts for OSH reflect a belief that much of the commodity negativity is being reflected in the OSH share price near $7.00.

IOOF (IFL) is another name I feel compelled to flag since it has been a volatile one this month. I take some heart that IFL again pushed 5% higher this week, adding to the gains it made last week. IFL is now a solid 12% from its lows, and we think investors are increasingly coming around to the belief that IFL’s compliance woes are more than priced in.

Again guys, IFL offers a 6%+ fully-franked dividend yield for 2016, and is, alongside IAG, a core dividend-payer for our portfolios.

Observations on property & the banks…

A quick remark must surely be made on the moves made by the major banks this week to lift interest rates on both investor loans, and in some cases, on interest-only loans.

I have to say that directionally this is kind of a big deal, since the last 6 months has all been about falling interest rates. I can’t see this as anything other than another a negative for the housing market, the economy and despite what the commentators say, bank profits.

Higher capital charges being forced on the banks will manifest themselves by way of higher interest rates, and ultimately in lower lending volumes. Either investors try to offset the higher interest charges by raising rents, or they wear it. Since I don’t see any material wage growth in this economy for several years, higher rents or lower investor profits are simply another weight on household incomes and the broader economy.

In addition to this, I have to say that I think the ongoing volatility in China’s share-market is really quite unnerving and has the likelihood of dampening inbound demand for Australian property too – at the margin. And remember it’s the incremental changes that we care about in all our market watching.

I’ve said this to anyone who asks, but I don’t see any reason to fear an Australian property collapse since I don’t see the RBA raising interest rates anytime soon. However I do think the euphoric spike higher in major-city house prices this past 2 years is now over and that we are likely to see a pretty flat market in the year or two to come.

Since property is integral to bank profits and more broadly consumer confidence and household perceptions of net wealth, this view is one which reinforces my belief that bank earnings growth will be minimal in the coming 12-18 months.

Looking forward…

I still feel indifferent on broader equity markets, so not much has changed for me here. We seem to be drifting in a range.

On the positive, bond yields have improved and this has provided a degree of relative support that was lacking during much of June.

The AUD at 73c is also a welcome ballast for domestic economic throughput.

On the flip-side, China’s recent stock-market collapse and ensuing volatility has a very real potential to infect the economy there. For the first time in years, I am genuinely a little concerned about how China’s economy performs in the year ahead.

For now we will continue to wait for things to emerge. Like the OSH idea last week, good opportunities always seem to arise when you have the patience to wait for them.

Key Dates: Australian Companies

Mon 3rd Aug
N/A
Tue 4th Aug
Earnings: Cochlear (COH), Downer Group (DOW), Transurban (TCL)
Wed 5th Aug
N/A
Thu 6th Aug
Earnings: TabCorp (TAH), Rio Tinto (RIO)
Fri 7th Aug
Earnings: REA Group (REA)

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