Australian Market Summary (Issue 381) – 11 December 2015

This is the last PRIME Weekly Investment Update for 2015.

It will be a door-stopper to some degree, since there is a lot to cover.

I have endeavoured to break it into parts. The broader discussion topics this week are:

a) 2015 – an equity market review (and some unflinching self-analysis!).
b) More evidence Australia’s economy is on the up
c) Why the ASX200 continues to struggle
d) The need to sell & ‘freshen’ a portfolio
e) Flight Centre (FLT)
f) Oil Search (OSH)
g) Commonwealth Bank (CBA)


Some fast facts on 2015.

The ASX200 is down -7%, the ASX200 Accumulation index is down -2.6% on the year to date – meaning the difference of 4.4% is the dividend yield of the market.

The S&P500 is down -1.4%, the Eurostoxx is +4%, the Nikkei +9% and Shanghai is +2.5%.

Australia underperformed marginally, but with the weakness in the AUD this year, the underperformance was magnified – as a guide, Australian equity underperformed US equity by about 17% when currency adjusted.

Within our market, Utilities (+14%), Healthcare (+11%), Industrials (+10%, which includes winners in infrastructure and QANTAS) and Consumer Discretionary (+7%) were the winners.

On the nose this year were Energy (-34%), Miners (-23%) and Consumer Staples (-11%, and weighed down by Woolworths).

We had our share of winners this year, with Magellan Financial Group (MFG), AGL Energy (AGL), Flight Centre (FLT), and (CAR, and my favourite!) the standout trades.
And we had our one or two that didn’t work so well, notably Woodside (WPL) and Crown Resorts (CWN) – though I remain entirely committed to CWN, just as Mr Packer does too (recognizing last month’s increase in his holding).

Both of our Separately Managed Accounts (SMA’s) have beaten the ASX200 Accumulation comfortably – the GROWTH portfolio in particular ahead at the end of November by 6.5% and now 7% per annum the last two years – but I still feel like this year was perhaps only a solid B or B+ for us.

I think we have a lot more to do in 2016, and I have to tell you, that missing some of those opportunities in early September still sticks in my craw.

I tell you this because I want you all to know that we really mean it when we say we want to outperform and provide you guys with genuinely superior performance.

I know I can come across as very direct, but this is very deliberate. The finance industry is littered with endless description and semantic discussion that does little to make you a buck.

The bottom line is the bottom line, and we really do mean it.

In being direct, we need to be transparent and self-critical to a fault.

I certainly hope this is how we come across!


Our economy has transitioned. Things are good.

The November employment report released this week is a great figure, irrespective of the doubts over its veracity. The monthly figure suggests the best monthly employment gain in 15 years and a rise in the participation rate to a 3-year high.

The only people playing down this number are the economists, who as always want to poke holes in the data compilation when they’re wrong.

Employment is on the up.

Jobs are being created in a myriad of service industries, and the fruits of being an open economy are writ large.

The AUD fall made business here more competitive. More goods and services were sold domestically, allowing Australia’s productive capacity to fill, creating jobs and profits here that otherwise were not.

The hand-wringing negativity and pessimism associated with the past few years should be consigned to the dustbin.

The mood and dialogue has shifted to positivity, the latest example of which is the new ‘ideas boom’ the current government unveiled this week.

What is impressive however, as evidenced by these job numbers, is THAT THE ECONOMY IS NOW WALKING THE WALK, AND NOT JUST TALKING THE TALK.

The recovery is underway.

Perhaps just as exciting and encouraging, is that 2016 will surely only get better as the current Federal Government unveil more stimulatory policy (infrastructure particularly) in the lead up to the next Federal Election in late 2015/early 2016.

The simple implications for asset-markets of this emerging economic stability are manifold – if jobs are good, then debt servicing and household spending will be good.

That’s good for housing, retail and the banks ultimately.

That’s important.


Whilst I am broadly constructive on the ASX200 at 5000, I find myself more compelled to explain why the market continues to struggle.


It might be easy to pick on the falls in energy and mining stocks this week and this year as justification for the markets relative weakness, but that is absolutely NOT the reason why the ASX200 struggles to bounce.

The problem is the banks first and foremost.

With 30% of the ASX200 made up of the big 4 banks and Macquarie (MQG), investors simply can’t buy any more.

That is the heart of the problem.

For context, the three big miners (BHP/RIO/FMG) and 4 big oils (STO/WPL/ORG & OSH) added together make up less than the entire weight of Commonwealth Bank (CBA).

So if local investors can’t buy more banks (or Telstra or Woolworths or Wesfarmers for that matter), then the incremental buyer has to be foreign investors.

And foreign investors are typically fickle.

This topic leads me into the next discussion point…


See, the trouble we all have still – and I am referring here to private retail investors and self-managed superannuation funds – is that we all still have these innate biases towards ‘large-cap, garden variety, Australian blue-chip’ shares.

These biases mean no one ever sells a blue-chip when its expensive, and the obverse of this is that when ideas outside the top-10 turn up, we allocate far less capital to them than we would if the share came with the initials CBA, ANZ, BHP or TLS.

It’s human behavior, and a natural bias to safety.

The trouble with this bias is that it hinders portfolio performance in many ways.

If you’re only prepared to sell certain stocks, and not the ‘sacred few’ you instantly limit your ability to react to new opportunity, because your capital base is then restrained.

By never selling, we never free up funds to be proactive and to buy assets when the time is right.

It’s like agreeing to a fight but voluntarily saying, I’m just going to tie this arm behind my back.

Right now, this behavior is hindering investors because few people right now have the capital to buy the market down here despite the increasing attraction of the ASX200 at 5000.

No one ever really sold down their banks holdings (CBA in particular) to free up capital. No one has really ever sold their Wesfarmers (WES) positions down to a workable position.

See you can own CBA and WES still, you just don’t need to be so heavily concentrated in them (or others for that matter).

In reality CBA and WES have been admirable performers in the market this past year or two, but there have been several other stock specific calls made that have DONE A LOT BETTER that haven’t received the interest nor allocation to portfolio’s they deserved, meaning portfolio performance hasn’t been maximized.


Just a reminder we think this is good to go.

A P/E of 13x, over $500m in cash on the balance sheet (15% of market value), and a business that has many more positives than negatives makes this thing well worth your attention.

The truth is, if the founders didn’t still control such a large swathe of stock, FLT would easily be one of the most attractive takeover targets in the market.

It is a terrific business, cheap and with a gilt-edged balance sheet.


We continue to love this share, but were disappointed to see Woodside (WPL) confirm they were walking away from their OSH bid this week.

The OSH assets are wonderful and will be worth a lot more in the market in the years to come, however with oil languishing at $40/barrel, the reality became apparent to WPL that there was precious little justification to push with a higher bid for OSH.

To my mind, the oil price was the final determinant in the collapse of this deal.

We commend WPL for showing restraint, but having been OSH shareholders this past few months, naturally we feel disappointed that the endgame here was no deal.

For the record I feel very strongly about OSH as a BUY, and would continue to recommend it strongly down in the low $6 area.

We will just have to be a little patient here.

Anyways, that just about does me.

Thank you for reading, commenting and participating this year.

On behalf of Guy and myself, we wish you and your families a happy and safe Summer Holiday, and we look forward to seeing and speaking with you in the new year.

Have a terrific weekend.

Jono & Guy

Key Dates: Australian Companies

Mon 14th Dec
Div Ex-Date: CBAHA
Tue 15th Dec
Div Pay Date: National Australia Bank (NAB), Dulux (DLX), ANZPA, CBAPC, CBAPD
Wed 16th Dec
AGM: Dulux (DLX), Ten Network (TEN)
Div Pay Date: ANZ (ANZ), AAA (AAA)
Thu 17th Dec
AGM: ANZ (ANZ), Incitec (IPL), National Australia Bank (NAB)
Fri 18th Dec
Div Pay Date: NABHB, Orica (ORI)

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