Australian Market Summary (Issue 392) – 24 March 2016

Australian Market Summary – 24 March 2016

Firstly, wishing all and sundry a happy Easter holidays and a deserving break.

Footy season is back properly (I can hear the equal mix of elation and groans already) and East Malvern Under 9’s kicks off in under a month – I’m pretty pumped.

It was actually an incredibly quiet, if not tedious week and but for the selling seen today we would have closed near flat.

As it happens, the market is down 1.5% today and a shade worse than that for the week.

Both banks and miners – the two largest sectors in the ASX – are down 3%+ on the week.

The miners and oil stocks have retraced in part due to a stronger US-dollar this week (and the impact that has on commodity prices), whilst the banks are down after ANZ Bank (ANZ) disappointed investors with the concession that first half credit losses would be worse than expected.

ANZ Bank (ANZ)… disappointing

The disappointment in ANZ’s release this morning is that only a month ago (February 17th to be precise), ANZ suggested 1st half credit loss would be of the order of $800m and yet are now suggesting it will be $900m+.

The deterioration on account of specific resource sector lending in such a short time leaves the market fearful this is a trend that could escalate if commodity prices remain pressured, as expected, for the remainder of 2016.

That is the concerning issue. The best case is this is simply poor internal communication and management systems, but you would probably be a little rose-tinted to think this is the case.

The knock-on concern of this hit to profitability turns to the dividend and the ability of ANZ to withstand the cumulative earnings hit from a deterioration in credit quality and the progressive withdrawal from their Asian lending expansion.

ANZ report their interim profits in 6 weeks on the 3rd May.

Having run up strongly over the past month, the falls today seem part of the ebb and flow on sentiment towards the sector.

I sit in neither a bull nor bear camp on the banks, which is why it is difficult to be overly opinionated here other than to say, portfolio’s that are significantly overweight in the bank sector, on account of the dividend income, are doing themselves a disservice.

Elsewhere this week …

Sonic Healthcare (SHL) had a reasonable week, rising 5%. There was no particular reason for the jump, but it’s important we reiterate our firm conviction in the value this share currently offers.

Crown Resorts (CWN) and Flight Centre (FLT) both went ex-dividend this week and still managed to hold ground, which was also encouraging.

We have high hopes for both stocks reaching our target prices sooner than later.

RBA Remarks …

The RBA Governor Glenn Stevens this week reaffirmed recent rhetoric in saying the bank still had ‘more room to ease policy than most if a serious downturn’ occurred and that the recent rise in the currency ‘may be getting ahead of itself’.

These comments are in keeping with recent remarks and again speak to a confidence in the outlook for the economy but also a confidence in the tools available to policy-makers should conditions worsen from here.

Malcolm … Cities & Infrastructure policies could be ground-breaking

I have to say, I have been extremely excited by the political events of this week and the potential for some good if not very good news at the May 3rd Budget.

In recent months it has seemed like the Turnbull Prime Ministership might have lost its impetus and policy focus, such has been the disappointment around the lack of tax reform progress in particular (but amongst other social agenda items).

The move this week to set about a likely Double Dissolution election for July 2nd demonstrated in one fell swoop that Turnbull has an agenda and seemingly a plan to execute it.

The article I highlighted last week about the potential for major infrastructure spending is I think increasingly relevant and I would be surprised if this wasn’t the centerpiece of the May budget, not the cut to corporate tax as the papers today are implying.

When the private sector won’t spend, the public sector should and I expect the Liberals to unveil plans for significant infrastructure development, funded by long-term borrowing at Budget time.

Turnbull has made it entirely clear that one of his key policy agenda’s is ‘Cities’ and it is here that the infrastructure theme resonates so strongly.

Read the article from a fortnight ago by Peter Hartcher in the SMH:

As an interesting parallel, this week the Canadian PM Justin Trudeau revealed a plan for greater than anticipated budget deficits over the coming 6 years and no firm date for when the Canadian government would return to a balanced budget.

Investment markets and political commentators took the news well.

Australian debt-to-GDP is lower than that of Canada.

We hope to find some opportunities to play this over-arching theme in the weeks and months ahead and feel confident that some stocks within the domestic contracting, infrastructure, construction and even employment and retail sectors will provide investors with the appropriate exposure to improving domestic economic conditions.

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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