Australian Market Summary (Issue 397) – 29 April 2016

Australian Market Summary – 29 April 2016

A bit of a nothing week.

But that’s fine, since we will more than make up for it with newsflow and catalysts in the week to come.

In fact, next week is perhaps the biggest week for Australian share-markets that I can recall in at least the last 12 months.

Next week is so significant for many reasons, both at the micro and macro level and I would hope and expect the tilt is to the positive.

RBA & Budget – the macro

I have said for the last few months that I expected the RBA would soon be brought back to the table for additional rate cuts and this week’s quarterly CPI seemed to vindicate that view.

Though inflation has hardly been an issue in Australia nor the rest of the world for well over a decade now, this week’s March quarter CPI then open the very real possibility of additional easing after it recorded a rise of only 1.3% annually – just shy of a 17 year low.

Now that the RBA have tamed the Australian market by way of prudential crackdown on investor lending, there is every opportunity available to them now to cut interest rates without the fear of unleashing more unhelpful house price appreciation.

Moreover, the rising Australian Dollar risks extinguishing the nascent domestic economic improvement by removing that competitive edge it has provided many domestic service and manufacturing businesses over the past two years.

If the RBA cut in May or June, as I fully expect them to do so, it will be the first of two cuts that take local cash rates to 1.5%.

The implications of the rate cut for investors are manifold. Term deposit rates will fall, hybrid income securities will see yields similarly fall by 0.25% – 0.50%, but it should also provide fresh ballast to domestic equities and to banks in particular.

In addition to the Reserve Bank meeting next Tuesday, the Federal Government will unveil its Budget and along with it several key planks to their economic policy in advance of a July election.

Given the hints along the way, I expect it will be very heavy on future infrastructure spend and the desire to spend money on areas that will provide improved productivity and quality of life.

Sydney & Melbourne traffic congestion will be a focus as the papers are already highlighting and for this reason we continue to feel strongly about our recent buy on QUBE Holdings (QUB) given its strategic Moorebank Intermodal hub in south-west Sydney.

Both the Budget and the RBA should be constructive for market and economic sentiment, but I would again caution that the path we are travelling on is one that sees us likely selling some shares into any related strength.

Like the miners, the outlook for Australian Banks remains mixed at best and valuations in many corners of the market outside these sectors are fair to full at best.

THIS RECENT RALLY AND ITS EXPECTED CONTINUATION REMAINS A RALLY FOR SELLING AS AND WHEN APPROPRIATE.

I strongly urge you to take the time to consider our BHP SELL recommendation if you haven’t already done so.

We feel very strongly that the rebound in Chinese steel sector activity and its associated impact on Australian iron ore players will be a temporary one and that the strength in BHP and to a lesser extent Rio Tinto (RIO) and Fortescue (FMG) is an opportunity too good to miss.

We hope to find levels to make a similar call to reduce holdings in the likes of Woodside (WPL), the Australian banks and potentially even some strong and sound holdings like Insurance Australia Group (IAG) and Flight Centre (FLT).

Please be vigilant and in contact with us here.

Banks, Woolworths, Telstra – the micro

Half-yearly profit figures are due from three of the major banks next week, in what will be widely seen as a chance to assess just how sound bank credit quality is.

Though there has been speculation over ANZ’s ability and willingness to accept a dividend payout ratio above its stated target, we think in the interim ANZ is likely to maintain its current dividend rate of $1.81.

Westpac (WBC) kick things off on Monday, before ANZ (ANZ) and NAB follow suit Tuesday and Thursday respectively. Commonwealth Bank (CBA) will have a third quarter trading statement on Monday week.

Woolworths (WOW) will release its quarterly sales figures on Tuesday and will be closely scrutinized for the performance of its core food & liquor sales.

Having seen some strong sales from Wesfarmers (WES) only last week, it seems likely WOW sales will continue to be soft, however that’s to be expected given the new CEO has only been in place for a few months and yet to fully expedite a new operational strategy.

What we should be looking closely at in both these figures and in the figures in the quarters ahead however, is the store traffic and average basket size. These will be key indicators as to the success or failure going forward of WOW’s attempt to reinvigorate its core franchise.

WOW was interestingly quite strong this week, rising 2% on reports suggesting it could choose to spin-off its substantial liquor business.

Whilst the business is an exceptionally strong one, encompassing the Dan Murphy’s, BWS and Cellarmaster brands, a sale of the asset would be seen favourably since it would narrow managements focus onto the core food franchise and likely pave the way for a substantial share buyback by a company that is only moderately geared already.

Telstra (TLS) will also be in focus next week, with the company holding an Investor Day on Monday.

Though it’s unlikely we will hear anything material on current business trends, the stock should be garnering market attention given the recent sale of its stake in Chinese auto website autohome.com and the funds this frees up for an additional share buyback.

The week that was …

Beyond the collapsing CPI figures, there was interest in companies such as Blackmores (BKL), Computershare (CPU) and RESMED (RMD).

Blackmores (BKL) posted pretty sound profit figures that allowed the shares to bounce small. Profits in the quarter are up 124% on last year and on sales growth of 59% – a pretty impressive statistic.

Asian in-market sales rose 64%, but perhaps more proudly, underlying sales ex Chinese consumers rose 14%.

We remain favourably disposed to the whole BKL China story and feel it is beginning to represent better value, but will continue to sit on the fence until we can receive greater clarity on near term sales momentum following the recent tax and regulatory changes made to Chinese cross border e-commerce trade (CBEC). We still feel these changes will cause a short-term hiatus in recent momentum and that this will provide us with the chance to buy the shares better than current levels.

Computershare’s (CPU) Investor Day came and went with little fuss, though broker reports back seemed to point to confirmation of recent soft conditions. We feel comfortable with our recent sale in the name in spite of the regrettable loss incurred, since we still feel this share has additional downside risk in the coming 6 months.

RESMED (RMD) a former favourite of ours vindicated our decision to book profits north of $8.00 when it reported disappointing margin attrition in its third quarter profit figures.

Underlying sales momentum remains sound but regrettably it is in its lower margin US franchise and hence it is not translating as strongly to the bottom line.

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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