Australian Market Summary (Issue 372) – 9 October 2015

Some respite this week, with the ASX200 up 4.5% as I type and the market now up 6% for the month of October to date.

Funny old thing about old-wives tales is that much is made of them, but they’re rarely true. Every October a journalist or six reports on the curse of October for global asset prices, citing 1929 and 1987 as cause for fear.

Sure it’s relevant to know about for context, but you don’t set your portfolio up because two major corrections happened in this month in the last 100 years.

For the record, the last 5 years has seen the ASX200 post gains.

Rebounding Oil Prices Important Catalyst

Beyond simply saying we were ‘oversold’ perhaps, the trigger for renewed strength to my mind was the rebounding oil price.

That may sound peculiar, but it’s actually reasonably sensible.

It’s a bit of a walk, but its 100% valid. Follow me.

Earlier this week the OPEC Secretary-General spoke of robust oil demand year-to-date, and that this would assist in clearing excess inventory that has plagued prices for much of 2015. Understandably, with oil prices having halved in the past 12 months, demand for oil and related energy products has surged (I have seen reports suggesting demand is at a 6-year high).

These remarks, alongside some moderate US-dollar weakness, allowed oil prices to jump 10% on the week – making the rise from their lows 25% in 5 weeks.

Why the oil price jump matters for global share prices is related to the fact that US energy companies (particularly high cost shale production) have been some of the biggest issuers of junk-bonds in recent years. The falling oil price has made much of this production un-economic and caused significant pain in junk credit markets.

Roughly 15% of US non-investment grade credit is issued by US energy companies, and a similar amount by other commodity-related industries, making the US junk bond market highly influenced by oil and commodity price moves.

As the closest asset class to equity, the collapse in junk bond markets (alongside commodity prices) this past 12 months has ultimately brought pressure to bear on equity prices. That the oil price bounce has allowed junk bonds to rally, so to the relief can be felt across equity markets as well.

Australian Oil Stocks Leap

In Australia, the rebound this week in oil stocks was huge.

SANTOS (STO) is up 40%, Origin Energy (ORG) +25%, Woodside (WPL) +10% & BHP (BHP) +13% – BHP make over 40% of their EBIT from oil, and a large part of this comes from US shale production.

Oil Search (OSH) rose 8%, and now trades some 3% under the indicative 1 for 4 share offer from WPL (equates to $7.95 at Thursdays close), following OSH’s rejection of the bid.

We still feel pretty confident that having opened a dialogue on OSH, WPL management won’t be so quick to walk away in their pursuit of OSH. For that reason we still feel pretty confident that OSH will see renewed interest that puts the stock in play north of $8.50.

Whilst the rebound in oil prices and shares is encouraging, it opens up the potential opportunity to use this strength to jettison portfolio detritus – Worley Parsons (WOR) & Monadelphous (MND) and any other oil-service related stocks should be on the chopping block to sell into this rally. Simply put, oil and commodity industry capital expenditure is on an extended hiatus that won’t be ending much before 2017.

Market News This Week & Ahead

Beyond the 14% jump in Australian energy shares, miners were also strong rising 10%.

I still think the rally in miners lacks the momentum to continue, and is merely short-covering.

I have opined at length on miners that they have been nearer fair value for some time, but that there wasn’t enough genuine upside to warrant pursuing them for the medium term, and remain minded to continue that view.

We will get dividend cuts in BHP & Rio Tinto (RIO) in the coming 6-9 months that will leave each on 4% dividend yields. Further, the free-cash generation of the stocks is still not strong enough to warrant buying these things again unless you feel strongly that commodity prices are set to rebound. Whilst I think oil can bounce, I am less convinced on iron ore, and hence feel non-plussed.

We were thrilled (and just a little bit relieved) that Crown Resorts (CWN) continued to surge this week on improving sentiment towards Macau gaming revenues.

CWN is up 10% this week, and 17% for the month.

The Chinese Golden Week holiday has just finished, and the early indications of visitation by mainland Chinese to Macau point to a 7% jump on 2014 numbers. Further positive for CWN are rumours suggesting their new Macau property, Studio City, due to launch on October 27th, will receive an allocation of 250 gaming tables (up from the 150 reported previously).

This would be excellent news.

CWN’s Macau subsidiary MPEL is up 40% from its lows, and sentiment seems to be very much on the turn. If so, this leaves CWN with a very strong case to push back into the $13-15 range in the interim, which we fully expect.

The coming weeks should see a renewed focus in the northern hemisphere on quarterly corporate reporting, whilst locally we are running into AGM season.

Telstra kicks off the AGM’s next Tuesday.

Market View & Observation

On the market as a whole, we are now 7% off the lows 8 days ago.

I am pretty happy to see that, as no doubt you all are too, and whilst I guess to some extent we feel vindicated in professing no real concerns for the market when it was on its lows this past month, there is an over-riding annoyance on my part at not having made at least one or two purchases in and amongst the selling through August & September.

We had our eyes on mid-cap companies like Mantra Group (MTR), Veda Group (VED – since bid for), Spotless Services (CPO), Magellan Financial Group (MFG) again, NAVITAS (NVT), QUBE Holdings (QUB) and Challenger (CGF).

On a few we deliberately decided they weren’t for us – Challenger in particular has a balance sheet that would keep me up at night – but on a few others we simply felt we had more time, and were wrong.

It’s frustrating.

All the same, we do feel the opportunities will continue to present themselves and hopefully we will have our catching mitts on to grab them.

I am not convinced the market is back in a bull-phase. This is a bounce back from the low-side of a new sideways range.

The mining rally will peter out soon enough, banks are fine, but uninteresting, and Telstra is not much different. We just covered 40% of the ASX200 in that sentence.

What however will be of interest, will be the likes of the mid-ranking names we raised earlier.

Our economy is doing infinitely better than the naysayers suggest, and with the potential for genuine political debate in this country emerging with the change in Prime Minister-ship last month, a new-found optimism can perhaps prevail – my absolute highlight of the week was a genuine policy proposal on infrastructure from Bill Shorten!!

Who would have thought it possible!

I’m being facetious, but you get the point.

How we feel as a country and as a people and as an economy, is highly relatable to the politics, leadership and expectations we have as a country.

That the negative politics we have come to experience for the last 3 or more years seems consigned to the past can only be a good thing, and should allow our country and economy to raise its eye line to an improved outlook.

On that note, have a terrific weekend – 245am Sunday morning lets watch the mighty Wallaby pack (!) roll the Welsh!

Key Dates: Australian Companies

Mon 12th Oct 
AGM: Transurban (TCL)

Tue 13th Oct 
AGM: Telstra (TLS)

Wed 14th Oct  
Dividend Pay Date: Fletcher Building (FBU)

Thu 15th Oct 

Fri 16th Oct  
Dividend Pay Date: IOOF (IFL)

Disclaimer: This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (“Prime”). Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. Prime is bound by the Australian Privacy Principles for the handling of personal information.


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