Australian Market Summary (Issue 367) – 4 September 2015

Ordinarily a market bottom happens when the true believers finally give in.

This week’s price action was appalling, and it is certainly working towards shaking out the weak hands.

I’m not convinced we are there yet, but we are getting closer.

After last week’s initial collapse and subsequent rally (to close up on the week I might add), the 4.5% fall this week in the ASX200 was something of a truer indication of the genuine change afoot in investment markets.

The continued unwind of risk appetite across the Australian equity market is emblematic of a market in transition

What has added to the unease, is that in the case of the ASX200, it has been a reasonably fully-priced market for some time. Some of the pullback is an un-wind of this excess valuation.

After a very erratic 10 days of trading, single-stocks are starting to settle into a slightly more predictable pattern. A classic example of this is in the energy sector where the performance of the ‘haves’ and ‘have-nots’ was particularly disparate – Oil Search (OSH) is flat on the week, whereas its higher-cost and indebted peers SANTOS (STO) & Origin (ORG) were down 16% and 8% respectively.

WOODSIDE INTEREST IN OIL SEARCH?

Interestingly and encouragingly, one of the major news stories this week centered on speculation Woodside (WPL) were taking a more than a passing interest in Oil Search (OSH) after its recent share price fall.

We think there is sound logic to the idea of a WPL/OSH tie-up given the combination of OSH’s high quality, long-lived, ‘Pacific’ asset base and WPL’s fortress-like balance sheet and Western Australian asset base.

BANKS – STILL NO BUYERS

Commonwealth Bank (CBA) today traded under its $71.50 rights issue – a feat few would have envisaged only a fortnight back. Again, this is entirely reflective of a market that is ‘full to their back teeth’ with CBA shares.

I have spent countless words describing the bank sector in recent weeks, and why it trades as it does.

There is no doubt in my mind that there is genuinely some value emerging in the banks – ANZ and NAB to my mind have over 20% potential upside now, which is not something I would have said in recent years. Even CBA is looking low.

But what is ‘low’? What is ‘cheap’? It’s a subjective thing.

In my previous role as a trader in London, I distinctly remember buying a Kazakh copper miner listed on the London exchange in late 2008 after the collapse of Lehman Brothers when panic ruled.

I did the math, the background, and figured upon a belief that the stock was beyond cheap. Turns out I was both right and wrong (mostly wrong) – when I bought the stock, Kazakhmys (KAZ), it was 500p (down from 1900p 6 months earlier). It then more than halved from my purchase price to trade under 200p that Christmas, before then rising six-fold to 1200p in 2009.

Suffice to say, I wasn’t owning the stock after it initially halved.

Markets are driven by people, human emotion and psychology. The particular market conditions we are facing right now are being highly influenced by ‘self-preservation’.

Investors in Australia already own enough banks, which is why they need to be just that little bit cheaper than before to entice support.

It will happen, but patience is a blessing in times like this.

OPPORTUNITY DOES COME KNOCKING

Speaking of patience – from a positive perspective this time – we are encouraged by the falls taken in quite a few high quality names of late.

We are excited to see quality company’s like SEEK (SEK), Spotless Group (SPO), Veda (VED), Mantra (MTR), QUBE Holdings (QUB), MYOB (MYO) and even NAVITAS (NAV) all come back well off their highs.

We were never able to justify adding them to portfolios in the past because quite simply the risk/return never quite added up. With this substantial de-rating of the aforementioned shares, we are now beginning to take a closer look at all these company’s (and others) with a view to broadening client portfolios with one or more of these names.

SHARE NEWS THIS WEEK

Magellan Financial (MFG) published strong retail fund flow numbers for August. It remains such a high quality company with a very compelling growth profile, so we would love to buy back in at some point, but the valuation to us still needs to be lower.

Myer Holdings (MYR) plummeted 18% this week after announcing a 2 for 5 rights issue to raise over $200m. Ugh.

THE ECONOMY & AUSTRALIAN DOLLAR

Much was made of the Q2 GDP figure rising only 2% annually – less than forecast and toward the lower end of recent growth. There is no doubt our economy is idling away ‘sub-trend’. But every taxi driver and hairdresser knows that.

We are a nation with decreasing ‘global’ purchasing power as the demand for our exported raw materials wanes. The fall in our currency under 70c today, to the lowest level since the GFC, speaks to that.

But on the positive note, the very weakening in our currency is actually helping to self-medicate our ailment.

Elsewhere this week, August data for the service and manufacturing economies demonstrated ongoing improvement. Given manufacturing counts for maybe 6-7% of our economy and services count for a whopping 80%, this is not insignificant.

In fact, the Australian service sector is in rude health – the Australian Industry Group data for August shows sentiment at an 8-year high.

All of this is making me sit up and pay attention to shares that are exposed to the Australian economy.

Can you believe that?

I will pen some additional thoughts on this topic in the coming week or two, but my firm belief is that we should be looking to tilt portfolios toward the potential for a pick-up in Australian growth in 2016 and beyond.

Anyways, that’s us done.

Key Dates: Australian Companies

Mon 7th Sep 
Ex-dividend: QUBE Holding (QUB), Insurance Australia Group (IAG)
Tue 8th Sep 
Earnings: Cochlear (COH), Veda (VED)
Wed 9th Sep  
Ex-dividend: BHP (BHP), Monadelphous (MND), Woolworths (WOW)
Thu 10th Sep 
N/A
Fri 11th Sep
N/A

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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