Australian Market Summary (Issue 384) – 29 January 2016

We saw a bit of ‘normality’ (what is normal?) and mean reversion this week.

The ASX200 is up 2.5% and oils and miners have led the charge, with past hero’s such as healthcare confined to be tail-end Charlie.

SANTOS (STO) rose 20%, Oil Search (OSH) was +12%, Woodside (WPL) +10% and BHP (BHP) also jumped 9%.

Oil prices rose 10% this week in spite of a further jump in US oil inventory to 80-year highs (US supplies are 20% higher than last year).

The respite for materials stocks was welcome.

Equally welcome was the pullback in market-darling stocks such as Magellan Financial (MFG), Blackmores (BKL) and Healthscope (HSO), to name but a few.

It goes to show that markets invariably mean-revert and that the world we invest in is a relative one.

Winners easily become losers and vice versa.

Not one stock is immune to the vagaries of investor sentiment and even the pretty girls get hurt in the bus smash as my first boss used to say.

It’s precisely for this reason that we continue to encourage clients to rotate portfolios, to be mindful of ‘relative value’ and to acknowledge the need to refresh positions where appropriate.

With that in mind we chose to TAKE PROFIT in two of our long-standing (and successful) positions, being RESMED (RMD) and Adelaide Brighton Cement (ABC) this week.

RMD had risen over 60% in 2 years and ABC was +30% in 18 months, in spite of falls in the ASX200 of 10% or more in that time.

In the case of both, we felt valuations had become less attractive in an absolute and relative sense and that in a still very tricky market, it was appropriate to hold some additional cash on hand.

In fact, we are hopeful that as part of this ongoing market volatility we will get the chance to pick up some gems at genuinely attractive prices.

We mentioned Healthscope (HSO), Magellan (MFG) and Blackmores (BKL) specifically above because all three are sound medium-term corporate stories, but ones we felt the market had over-valued in its enthusiasm to participate.

There’s no point being in a ‘good story’ if you can’t make a buck, so we continue to sit tight for those chances.

Slowly, slowly catchy monkey.

MARKET STILL UNSETTLED

I still feel adamant this market is yet to properly bottom. I still feel 4600-4700 is coming our way (that’s another 5-7%)

The market here has consolidated for 2 weeks, but really hasn’t made any great ground. That is telling.

Secondly, the incremental news-flow is weaker – corporate earnings are indifferent (see Amazon, Apple & FANUC remarks in the international section) and the global economic environment for choice is slightly softening courtesy of China’s devaluation and the strong US-dollar.

OBSERVATIONS THIS WEEK

Crown Resorts (CWN) held a bid this week after continued press speculation relating to privatization of the company.

Secondly, from an operational standpoint, investors were encouraged by the results and outlook commentary from major Macau casino group Sands China, who remarked that mass-market gaming volumes had stabilized and that its outlook for 2016 was perhaps more sanguine than the pessimists had expected.

As I type, more headlines supportive of Macau are hitting the tape with the Macanese press talking of more policy support from the Chinese government.

REA Group (REA) continues to defy the odds despite this weeks news that Sydney house prices took their biggest quarterly fall on record during December (-3% and the first fall since June 2012).

I have to say that I find it extraordinary to see REA still priced north of $50 despite the double-whammy impact of softening housing market conditions and the impressive competitive response from Fairfax via its domain.com portal.

There are stocks that to me seem like the Wiley Coyote hanging out in thin air and this has to be near top of the list.

If you happen to own this share, pat yourself on the back and then book yourself a profit.

Healthscope (HSO) I have mentioned several times above for reasons associated with its significant share price pull-back.

Much like Sonic Healthcare (SHL) and the broader sector, HSO has been beaten up as part of the ongoing Medicare Benefits Review and the push to reduce wastage in the healthcare system.

Medibank Private’s (MPL) results last week which showed a significant improvement in claims experience amongst its client base, is further evidence that the push to eradicate unnecessary medical services is genuinely impacting hospital volumes.

We see this as a likely one-off step down, but will not impact the durability of longer-term trends towards the private healthcare sector.

So the pullback in share price from the quite frankly ridiculous share price in the high $2’s earlier this year, to near its IPO price of $2.10 is making us pay attention.

All that said, we feel there are some modest earnings downgrades to come through and the market seems a little too free and easy with the group debt level, so we are not in a rush.

But sure, it’s starting to make us take note.

IOOF (IFL) is rapidly becoming one of my more frustrating recommendations.

Having been an incredible share for much of 2014 and early 2015, the compliance scandal and the share-market fall have taken the sheen off our call.

This week IFL eased back a little again after reporting its Q4 fund flow. I guess the takeaway from this release is simply confirmation of my longer term concerns that IFL is a one-trick ‘Australian retirement savings pony’ and if markets are indifferent, they will find it difficult to grow without further acquisitions.

That’s a pretty sombre remark for a share that has been one of our favourite’s, but please don’t misconstrue that as overt pessimism. It’s not.

IFL is more than adequately pricing this in at $8.00, with little debt to speak of, a cheap valuation and a dividend policy that ensures a dividend yield in the high 6% to 7% range fully-franked here.

There will be much better times to sell IFL than now.

I will leave it at that for this week.

We come in to local reporting season next week with JB Hi-Fi (JBH) and NAVITAS (NVT) notable early reporters. The following week really ramps it up.

The RBA also meet for the first time in 2 months on Tuesday, but I wouldn’t expect much here – perhaps a dovish acknowledgement that house prices had eased back and Chinese growth was creating some uncertainty. All the same, a further interest rate cut still seems a long way off.

We remain cautious and prepared for some additional downside in the next few weeks, but ever expectant that any market-weakness will offer opportunity to re-invest in some new names.

Hang in there.

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