Australian Market Summary (Issue 396) – 22 April 2016

Lest we forget.

Good morning all, and wishing all a relaxing long weekend ahead.

I can’t believe a third of the year is already behind us.

We have a lot to cover today, simply because I’d like to provide some additional context and commentary behind the activity you have seen from us this past week.

Moreover, please understand and expect that there will be more from us in the weeks ahead.

Our recommended equity portfolio’s have been quite static for the past 6 months, so it’s nice to see genuine reason for activity and the subsequent refreshment and re-invigoration some timely changes can make.

A Re-cap of our recent Portfolio Recommendations …

This week we made several moves that we think aim to look forward, and to break free from the past.

The decision yesterday to advise clients to sell BHP (BHP) is probably the starting point.

As we highlighted and have likely discussed with you on the phone, we feel the 50% bounce back in BHP shares from its February low is an opportunity too good to waste.

Sure, the stock is still down on where it was a year or more ago, but looking forward with the outlook in China what it is, we think the chance to sell BHP north of $20+ will prove well-considered looking 12 months down the track.

The China infrastructure theme has seen its best days, and though still large business, the theme will only weaken from here.

We also made the decision to part ways with Computershare (CPU) in our recommended portfolios.

CPU has not been a good recommendation by me/us, so cutting it for a loss is again not a decision taken without due process.

The concern we have for CPU is simply that with many favourable tailwinds through the past 12 months, there has been little evidence to flow through to bottom line profits.

Sadly in recent months these tailwinds have turned turtle and the support offered by strong capital markets and weaker Australian Dollar are now quite the opposite.

The CPU Investor Day next week concerns us that it could be a NEGATIVE catalyst for CPU management to further clarify the ‘soft environment’ they spoke to at the half year results in February.

On the positive tack, we have spoken favourably on each of QUBE Holdings (QUB) and Regis Healthcare (REG).

Both stocks we feel offer excellent medium-term growth, both are perceived to be well-run and to have assets that are difficult to replicate either from the standpoint of quality or location.

More recommendations potentially in the wings …

The recent rally in commodity stocks has been helpful to our desire to re-align portfolios.

Beyond the BHP call, we are mindful that Woodside Petroleum (WPL) was a recommendation made within the context of much higher oil prices.

WPL has not been a good one and we acknowledge that. We have a view on oil prices likely moving back north of $50/barrel through the middle of 2016, but will struggle to push much beyond that.

Certainly, the $100/barrel prices achieved 2 years ago when we turned bullish on WPL are highly unlikely, and with that in mind we need to re-calibrate our expectations for the stock.

North of $30 a share in WPL, we would potentially get an itchy trigger figure.

IOOF (IFL) and Insurance Australia Group (IAG) have both surged strongly in the past month, which has been helpful.

We feel sound in the underlying cash-flows of each, but would suggest moves over $9.50 in IFL or $6.00 in IAG might also create cause for consideration in both.

From the perspective of portfolio additions, we have made mention of Blackmores (BKL) in several commentaries.

Where BHP was the China ‘trade’ for the last decade, it seems clear to us that BKL and its sister stocks such as A2 Milk (A2M), Bega Cheese (BGA) and Bellamy’s (BAL) stand every chance of being the trade for the coming decade.

As China invested heavily in infrastructure, the need for Australian iron ore drove share prices in our miners.

As the quality of living improves alongside incomes, and the policy focus shifts to the promotion of a service economy, it is the Australian food & health providers that stand to benefit.

The recent changes to Chinese imported goods registration & taxation has created confusion between consumers, manufacturers and brokers (!) alike.

We feel this move is a constructive one and merely a further step in the maturation of the industry. It should be seen as a move suited to those groups who have built not only a brand-name but a distribution infrastructure.

We feel BKL certainly ticks this box.

Understandably, the confusion caused by the regulatory and tax changes may prove a short-term headache for sales, as consumers and wholesale intermediaries alike hold off ordering product until clarity emerges.

However, we feel strongly that the share price weakness arising from this uncertainty will prove a medium term opportunity to be taken.

Watch this space.

The Market this week …

On the week, the ASX200 rose 2% and was driven by oil and material stocks which rose 8% and 5% respectively.

We think the oil stocks have further upside, but that the Australian market will broaden out from here and investors will rotate from miners to banks.

With the real prospect of a rate cut on May the 3rd, I think it’s highly likely the banks emerge in the sun and enjoy some upside to share prices through May.

QANTAS (QAN) perhaps dropped the biggest clanger this week and with it took not only its own share price, but the price of other consumer-related shares down with that.

QAN chose to reduce domestic capacity, citing demand weakness over Easter.

After huge outperformance, QAN was very much a market darling, and this news was a genuine surprise to the market, with the shares falling 17%.

Wesfarmers (WES) posted some sound sales figures for the March quarter, which made some worry about the timing of Woolworths (WOW) recovery, but we would strongly suggest it is far too early to expect to see improvement in WOW like-for-like sales.

Turning a super-market group around is like reversing course on a super-liner. It is a momentum business.

What we should be looking for is an initial improvement in store traffic and then repair in ‘basket size’. These will be emerging indicators on the WOW recovery, and we will most likely be looking for these in the June figures, not necessarily before.

I’ll leave it at that.

Enjoy your long weekends, and we hope to be speaking to you again with more changes in the weeks ahead.

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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