Australian Market Summary (Issue 394) – 8 April 2016

If I sound frustrated this week, it’s because I am.

And it’s not necessarily because markets remain wholly unconvincing either – even though they sadly remain so.

It’s as much because things remain embedded in this purgatorial, sideways range in which I am finding it difficult to make a case for action.

Blue-chip shares remain pressured…

Undeniably the overarching mood in Australian shares is one of caution across the big-caps.

Both retail and institutional investors alike seem to be nothing but sellers of Australian blue-chips from a risk mitigation strategy, particularly now that so many of the top-20 shares lack much of a ‘story’.

The ASX Top-20 has underperformed the ASX Mid-Cap 50 by over 20% this past 12 months.

Being in Banks and Telstra (TLS) and BHP (BHP) alone hasn’t cut the mustard.

This selling is an ongoing and pervasive theme that will be with us for some time and revolves around the reality that both private and institutional investors alike are still ‘overweight’ Australian blue-chip shares.

Value emerging & catalysts pending near term…

Where it gets difficult, for me at least, is that so much of the negativity seems to be reflected into shares at these levels, at least in the near term – particularly a couple of the banks, in ANZ Bank (ANZ) and National Australia Bank (NAB) and I have to say, Telstra (TLS) too.

Australian equities are now as cheap against Australian bonds as they have been in the past 2-3 years.

Australian equities have underperformed the 10-year Government bond by 16-17% over the past 12 months.

There is a bit of value emerging, particularly if we can get a fresh set of catalysts.

I have highlighted in recent weeks my optimism for not only an expansionary 2016 Budget, but also for interest rate cuts from the RBA.

Equity markets are yet to see the potential in either of these macro-policy levers, but with fingers crossed, my belief is that as soon as early May these triggers should provide us with levels at which to make some portfolio changes as appropriate.


All roads lead to May the 3rd

It turns out that May 3rd has the potential to be a hugely significant day for portfolios, since it is the day of the next RBA meeting, it is the day of the 2016 Budget and it is also the day that ANZ Bank (ANZ) will hand down its first half profit figures.

If the US Federal Reserve fail to tighten interest rates at their next meeting on April 28th, I think the odds shorten significantly of a Budget Day rate cut here in Australia.

As to the Budget, I still feel strongly that I have seen enough to suggest a firm push from the Federal Government to up the ante on national infrastructure spend, both as a worthy means to stimulate the economy, but as much or more so to alleviate productivity bottlenecks.

ANZ (ANZ) itself will be a market and sector bell-weather when it reports, simply because ANZ seem to have the most significant risk of a DIVIDEND CUT.

The dividend is the endgame to all the other concerns. It is the wood for the proverbial trees.

We have read enough to feel there is a majority chance ANZ endeavor to hold the dividend at $1.81 in 2016 (makes for an 8% fully-franked yield), but even a 10% cut to re-base the dividend, would seem largely priced in to shares here.

So… May the 3rd awaits us.


Hybrid sector sparks into life…

Since its listing 10 days ago, the new CBA PERLS VIII (CBAPE) issue has traded well over $100, which is terrific to see.

It seems the 7.5% yield offered in this issue and more broadly the yields on offer in the sector leading up to this deal, were attractive enough to encourage institutional participation in a sector that up until now had been almost entirely the domain of private investors.

This is terrific news.

Australian Manufacturing activity at a decade high…

Though much of the March economic data we received this week seemed to point to modest levels of activity, the survey of domestic manufacturing showed a rise to levels not seen since 2004.

The steady re-birth of domestic manufacturing activity in Australia, has been driven by weakness in the Australian Dollar over the past few years and is evidence as to why the RBA will be keen to ensure the Australian Dollar doesn’t rise materially further from here – note the AUD jumped nearly 5c in March from 71c to 76c.

Manufacturing comprises some 7-8% of our workforce, but like the services sector, its re-generation is a function of more economic activity being done locally given the relative cost competitiveness a weaker Australian Dollar has provided – it is as much about import substitution as it is about export competitiveness.

The week just gone …

As I pointed out earlier, it was tedious.

Bear markets are tedious and constantly disappointing and we are surely in one.

Telecoms, Banks, Oils and Supermarkets all UNDERPERFORMED THE INDEX this week.

Think that over – that’s half the market and it underperformed the total index.

Despite the oil price bounce, the oils lagged.

Arrium (ARI) announced voluntary administration less than 2 years after its 1 for 1 rights issue raised over $650m at 48c.

Downer Group (DOW) announced the loss of a major mining contract at Fortescue’s (FMG) Christmas Creek iron ore mine and will see a downgrade to earnings of perhaps 5-6%.

In some ways we were encouraged to see this since DOW is a stock we are looking at more favourably and the subsequent 10% fall in the share price has potentially opened up an investment opportunity for the future.

DOW is a major engineering group that ought benefit from any lift in national infrastructure spend, so we are watching the share price with a view to investment.

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