Australian Market Summary (Issue 391) – 18 March 2016

We managed to hold onto our gains for the third week in a row and the ASX200 now sits 11% off its February lows and down a shade over 1% for the year-to-date.

The ‘mean reversion’ evident in global markets for much of the last month continued, with commodities and emerging-markets performing well.

Chinese news-flow incrementally improving…

In a bigger picture sense, the drivers for this turn in sentiment have been an increasing confidence in both the Chinese economy (and its policymakers) and with that some easing in demand for ‘safe haven’ assets such as the US-dollar.

Though by no means resolved, concerns relating to the Chinese economy have eased in recent weeks as reports on the ground point to improving domestic activity and policy-makers have similarly made several pro-active moves aimed at alleviating the many and varied stresses there.

Again, I stress the broader issues of excess capacity and debt remain unresolved in China, but markets move on incremental news-flow and in recent weeks that news has been marginally better, not worse.

Where global investors were heavily positioned for strength in the US-dollar early in the year and all the derivative positions that stem from this core view (short commodities, short emerging markets), the opposite has happened.

Impact for Australian assets significant…

For Australian investors the ramifications of this change in trend have been across many markets, notably the Australian-dollar, commodities and in general Australian equities.

Since we are perceived as a major play on the health of China, it’s understandable to see Australian assets performing so well.

This week the Australian dollar rose to its highest level since June 2015 and is tapping on 76.5 US cents this morning.

As I said again last week, with relatively low government debt and the ability to further stimulate the economy monetarily and fiscally, Australian assets in a global context have far more appeal than many of the naysayers think.

Australian policy potential…

On this point and ahead of the much-discussed Federal Budget in May, do please take a read of the following article that appeared in Thursday’s Fairfax media.

The article is by the Economics Editor at The Age, Peter Martin. In it he discusses the very real potential for the Liberal Government to unleash a torrent of infrastructure spend, funded by longer-term Australian government borrowing.

http://www.theage.com.au/comment/turnbulls-budget-will-be-big-and-bold-and-about-boom-20160315-gnjd2y.html

I have to say, I’d be enormously impressed if this was true. In fact, if we do see this occur, all the short-term criticism of Turnbull as a ‘leader who has let go of his core beliefs’ in his incredibly short-time as PM, would seem highly tedious.

There are two ways to stimulate an economy – by fiscal expansion (government spending) or monetary stimulus. As I have mentioned over and over, Australian policy-makers have the ability to use both policies – Australian government debt is still not excessive relative to GDP and Australian interest rates are still well above zero.

Few other countries have these policy luxuries.

But falling interest rates have done little to stimulate demand and instead, both in Australia and the rest of the world, have perhaps created bubbles of financial excess (notably Australian housing).

This is precisely why fiscal spending should be a serious consideration for the Australian government, because it is in this fashion that there can be a direct influence on final demand by commencing projects that not only serve a societal purpose, but create jobs and profits to boot.

Watch this space, but it could be a terrific thing if enacted. Take a read of the article.

Commodity prices … good.

Helping mining stocks this week, iron ore prices continued to jump. Prices are up 55% since their pre-Christmas lows and are well into the $60-65/ton range – well north of analyst estimates in the mid-$40’s.

Oil too is pushing through $40/barrel and at a 4-month high.

We still feel like BHP (BHP), Rio Tinto (RIO) & Woodside (WPL) are shares to be sold/reduced into this strength, however for the time being we aren’t convinced they have reached ideal levels yet.

Australian shares this week…

Amongst our names and those we are watching, there was some items of note, amongst them:

a) RESMED (RMD) continued to fall this week, after reports of a harsher outcome on US reimbursement pricing were released by US Medicare/Medicaid.

The stronger AUD also took its toll on RMD and the stock has now underperformed the broader ASX200 by 15% since our decision to SELL was made in late January.

b) QUBE Holdings (QUB) announced its long-awaited equity raising designed to part fund the acquisition of a 50% stake in Patricks Stevedoring made by way of its joint bid for Asciano (AIO).

Though as yet we have not recommended QUB as a BUY, we do like the business and we are extremely optimistic about its Moorebank logistics property, located in south-west Sydney.

As ever, we value our entry level highly and are yet to pull the trigger, but we do like the business and this is indeed a share to keep an eye on.

c) Insurance Australia Group (IAG) continues to power ahead even after having shed its 23c dividend in early March, buoyed by news of a review by the NSW Government into Compulsory Third Party (CTP) insurance.

NSW CTP insurance profit margins have been on the slide of late, so the prospect of mandated government support for the business is useful news.

We see IAG to $6.00.

Computershare (CPU) and IOOF (IFL) also continued to grind higher this week, whilst our recent BUY’s in Sonic Healthcare (SHL) and Woolworths (WOW) have been drifty.

We feel very strongly about both SHL and WOW and would continue to recommend adding to the names during this lull.

Flight Centre (FLT) goes ex-dividend next week, alongside Crown Resorts (CWN).

FLT has been awesome for us, rising 22% since our recommendation in early December and we are looking to book profits in the share in the mid-$40’s, so watch this space.

Crown (CWN) has continued to trade well, supported obviously by the ongoing takeover speculation, but also by continued incremental improvement in Macau gaming conditions. This week Chinese government policy on Visa restrictions for Chinese residents appeared to point to further easing, which would be another additional supportive move for the Macau casino names.

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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