Australian Market Summary (Issue 393) – 1 April 2016

Another week on the ASX200 that leaves me shaking my head in disbelief.

Post Easter and prior to today, the index was largely flat and there was little to speak of. The final trading day of the quarter was a strong one and banks as well as Telstra led the pack to see the ASX200 close down 4% for the three months to March.

With little news overnight and some key Chinese and US manufacturing data ahead of us today, one could have been forgiven for expecting a quiet start to the day. Turns out that was wishful thinking.

As I type today at midday the ASX200 is down over 1.5% and all manner of Australian blue chips are down that or more. There is no rhyme nor reason for it today, other than to say it’s a reversal of yesterday’s rally, that perhaps made some fund managers quarterly performance just that little bit prettier.

But the reality, however, is more significant.

The Banks…

Yes, the banks are at the moment a problem insofar as credit fears are concerned, but the bigger issue at play locally and why our market suffers the epileptic fits and starts it does, is once again explained by its lack of diversity.

The enormous concentration of market weight in the banks means that whenever sentiment in this sector ebbs or flows, it has knock on effects to other sectors and the index.

It has to be said because until this is appreciated, we will continue to have the same pointless conversations amongst ourselves that go along the lines of this “why is the market up/down so much today on no news?”

It is simply that given the concentration, when news flow impacts that sector and everyone is rushing to do the same thing at once, it makes for an exacerbated move and a wilder ride than many of us like!

In the market this week, there was little to drive performance outside of a rather dovish speech given by the US Federal Reserve Governor Janet Yellen.

The speech certainly paved the way for markets to believe the US central bank would rather be slower on the brakes and this understandably has helped foreign equity markets rally.

What’s even more constructive is that this is in spite of increased evidence of uptick in US inflationary expectations and a rebound in US economic activity after a slow northern winter.

This is understandably bullish and makes me continue to feel that even in spite of Australian concerns on credit quality, our market will end up higher sooner than later.

Though the RBA would like the fed to be tightening sooner than later, as it would mean the AUD eases back, the reality is that a dovish and expansionary fed policy towards growth is unequivocally positive for risk assets globally.

Concerns of the fed being ‘behind the curve’ in tightening are premature and alarmist to my mind.

The RBA meet next Tuesday and whilst the expectation is for rates to remain on hold, it will once again provide further information for our rate direction going forward.

Given the feds revision from an initial four interest rate hikes to two this week, we await the RBAs response eagerly.

On the stock front…

We were encouraged by the pickup in pathology trends in February’s medicare data. Sonic healthcare remains a standout buy for all concerned.

We also got some great feedback on Woolworths from an industry source of ours, who confirmed our strong belief in the quality of the Woolworths store base and the assumption we have that better management of the supermarket business will see the group quickly regain lost footfall.

Guys, Woolworths is a buy!

Increasing suggestions abound that Telstra would consider selling its 50% stake in Foxtel, a move we see as being positive for the shares in the sense that it would likely free up further funds for a share buyback.

With a strong AUD making it increasingly possible we will see the RBA cut rates again, Telstra to my mind still looks great value in the low 5s.

I’ll keep it rather simple this week as I am typing this from the back of my car up in lovely Horsham. My pressing hope is that I don’t embarrass myself too much at the Green Taylor golf day!

Thanks to Guy for putting the finishing touches to the comments.

We do have some stocks on the radar, make no mistake. They will come in time.

Equally, we continue to view the likes of Flight Centre, Crown, Computershare, BHP and Woodside as stocks we are minded to sell if price targets are met.

I expect it could be a busy few months ahead on portfolios, but I have thought that before and found things never quite fell into alignment. We will see this time.

Have a great weekend team

Jono & Guy

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