Australian Market Summary (Issue 365) – 21 August 2015

We’re almost there…

What a rubbish week.

In fact, what a rubbish month. Three weeks in and the ASX200 is down 8.5%, making August the worst month for our share-market since the collapse of Lehman Brothers in October 2008.

In US-dollar terms, the ASX200 is now down 28% from its high in September 2014 and at its lowest level since mid-2010.

But can I tell you, I am getting more optimistic than I have been since last spring. In part that’s to do with the market pull-back to fairer levels, but even more than this, I am optimistic that we can add some genuine portfolio value in the months ahead.

Make no mistake, August thus far is a month we would rather forget. Portfolio values have fallen significantly, and our major stock bets have been indifferent relative to the market.

But with this market disarray comes opportunity, and it’s my hope that we can again distinguish ourselves with some outperformance in the months remaining in 2015.

Again with reporting season, there is so much to cover this week. I have a lot to say (‘he says that every week!’ I hear you shout), so I will try and be punchy and to the point. Hence, I will cover a lot of matters in dot point,

THE MARKET… SOME CONTEXT

The ASX200 is down 4% year-to-date. It is down 13% from its peak late April.

Australian shares have underperformed bond-markets by 20% in the last two months. That’s big.

We are almost there…

We aren’t there yet, but we are getting close. Perhaps at a worst case we might see 5050-5100, but that’s only another 2-3% lower.

NOW IS NOT THE TIME TO BE A SELLER.

For much of the last 2 years Australian shares have lived in a bubble of ‘richness’, and this is now eroding. The artifice of ‘invincibility’ in the valuation of many Australian shares – CBA foremost – is now coming back, and that makes for opportunity.

If anything we are moving towards being a little more constructive in time. This isn’t a bull-market, but it’s a market in which opportunity is emerging.

Much of my reason for feeling more constructive is anecdotal – for the first time in some time, I can now see capital upside in some of the banks (NAB and ANZ), the oil sector is now pricing in the lower oil price and balance sheet risks (in the case of SANTOS and Origin Energy).

Miners are now substantially reflecting the deterioration in Chinese industrial activity.

SUNCORP (SUN), a thoroughly boring and slow-moving general insurer has now fallen back 20% and now offers investors a genuine 7% fully-franked yield.

OIL SHARES

Buy OIL SEARCH (OSH). We pulled the trigger a fortnight ago, and it is looking a little ugly, but this additional sell-off is making the opportunity stand out all the more.

OSH has world-class assets, a multi-decade utility-like earnings stream, sound balance-sheet and the opportunity for incremental, high-returning growth.

The time to step up is now, so we chose to ADD to our position in Oil Search this week in our PRIME Australian Equity Growth managed account.

Woodside (WPL) is a similarly high-quality, lowly levered oil asset, and reported excellent profit figures this week in spite of the weaker oil price environment. Our preference right now is for OSH, but WPL is and remains a core recommendation in each of our managed accounts.

RESULTS THIS WEEK

Adelaide Brighton (ABC) posted very sound profit figures that demonstrated how the company was benefiting from increased prices and a favourable cost environment (lower oil).

Analysts have upgraded their earnings expectations by 4-5% and we fully expect to see ABC trade north of $5.00 before we would consider taking profits.

Insurance Australia Group (IAG) delivered profit figures that were a little on the light side of expectations, but all the same, were solid. IAG saw the need to raise claims expenses again for the NZ earthquake, which is frustrating, but ideally one-off.

With the pullback today we would encourage you to be buying IAG here, at a price equal to that of Warren Buffett’s entry level.

Origin Energy (ORG) figures were a little light on, but really remain a sideshow to the oil price for this highly indebted company. ORG says that its APLNG gas project should launch in November, which will help cash-flow, but this company is still over-levered with $11bn in debt – OSH have $3bn in debt as a guide.

Wesfarmers (WES) results were typical of the group, and of a high quality. All of the WES retail businesses, being Coles, Bunnings, K-mart and Target performed well, with only Target under-performing its category. The industrial and resources businesses remain pressured by the weak macro environment.

WES is a high quality business with awesome management and assets, but like a lot of Australian shares, continues to trade quite fully on price. It is a sound stock, but of a full & fair value.

Interestingly, Woolworths (WOW) report late next week. WOW has been incredibly poor this past 12 months, and I continue to expect further deterioration in their core super-market business. Until such time as WOW admit to lost foot-fall and the need to reinvest in price, WOW will remain on the outer for us.

WOW would need to be back in the $24 range to get us to turn more positively towards it.

Beyond the names mentioned above, AMP (AMP), QANTAS (QAN), Brambles (BXB), SEEK (SEK), Challenger (CGF) & Medibank (MPL) were some of the other major corporates to report profits this week. We have been monitoring both Challenger (CGF) and SEEK (SEK) as potential idea’s, but for now still feel minded to sitting tight.

CONCLUSION

This week was a continuation of the ugly market we have seen in the last few months. Shares are now down on the year, and down 13% from the 6000 level we almost reached back in April.

Australia not the only stock-market to be falling, but with the decline in our currency, our asset base in a global sense has been eroded a lot more than our international peers.

Like we said last week, the 3-4 year uptrend is now over, and shares are likely to oscillate in a sideways range from 5050-5600 indefinitely.

Encouragingly, we are closer to the bottom of that range than the top now, and for this reason we are slowly becoming more optimistic.

Equity markets are looking far better value relative to bonds than they have done in some time (in fact Australian and global bonds look increasingly fully priced here and this is perhaps something we will discuss in the coming week), the local and American economies are hitting their straps, and frankly there is still enough to be hopeful for.

If there is anything I can help with, do please call or email.

Key Dates: Australian Companies

Mon 24th Aug Ex-dividend: WBCH, WBCHB, WOWHC
Tue 25th Aug Earnings: BHP (BHP)
Ex-dividend: AGL Energy (AGL), Telstra (TLS), REA Group (REA)
Wed 26th Aug Ex-dividend: Woodside (WPL), QBE Insurance (QBE), JB Hi-Fi (JBH)
Thu 27th Aug Earnings: AMCOR (AMC)
Fri 28th Aug Earnings: Woolworths (WOW)
Ex-dividend: Navitas (NVT)

Disclaimer: The information contained in this presentation is for informational purposes only and is not intended to be exhaustive or complete. This information does NOT constitute financial advice and should NOT serve as the basis for any decision by you. The information does not take into account the objectives and circumstances of the individual investor and we recommend that you consult a financial adviser should you have questions regarding the information contained in this presentation.
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