Australian Market Summary (Issue 418) – 23 September 2016

 It was a good week for markets this week.

The ASX200 is up almost 3% and has recouped half of its losses since mid-August.

US Federal Reserve meeting

The main driver of this week’s strength was yet more hesitation from the US Federal Reserve over the trajectory for US interest rate rises, with asset markets continuing to deem the slow progress in tightening rates a green-light for risk-taking.

Reading through the statement, the Federal Reserve seemed to countenance a December interest rate rise assuming job gains and output continued to hold firm in the coming 2 months.

However, it was far from a hawkish statement and seems to continue pointing to a central bank that feels the risks of being too slow in hiking rates are far less than those of hiking too quickly.

In this sense and using past history as a guide, this ought to provide investment markets with a further shot of invincibility (rightly or wrongly), as it did towards the end of this week.

I’ll cover off the Federal Reserve decision more in the ‘international markets’ section of this piece for those that are interested.

More potholes – TPG Telecom (TPM)

Despite the market optimism this week, yet more evidence this week emerged of the risks inherent in paying up for fully-valued shares.

In these past 2 months, we have seen a long list of high-flying and highly valued shares come apart at the faintest hint of disappointment.

Stocks like BWP Trust (BWP) and the entire REIT sector, APN Outdoor (APO), Aconex (ACX), Australia’s three ‘internet names’ REA Group (REA), SEEK (SEK) and (CAR), the aged-care players like Regis (REG), Japara (JHC) and Estia (EHE), Blackmores (BKL), Mantra Hotels (MTR), AGL Energy (AGL) and Medibank (MPL), have all fallen 10-20% (or more) in the past 2 months either because they disappointed on earnings and/or their valuations were so high as to render further gains impossible.

This week saw Australia’s large alternate-network companies, TPG Telecom (TPM) and Vocus

Communications (VOC) fall 22% and 10% respectively after TPG flagged a more subdued outlook for 2017 profitability.

In the case of both TPM and VOC it seems the market under-estimated the upcoming margin impact of shifting customers onto the NBN and arguably the uptick in competition being applied by Telstra (TLS).

But the 20% fall in TPG is as much to do with the heady multiples investors have been paying for the share, since its guidance for 2017 looked to be no worse than a 7-10% earnings downgrade.

Despite the pull-back, TPM is NOT a stock we are warming up to buy.

The medium-term earnings outlook remains clouded by the customer shift onto the NBN and the company’s desire to plough cash-flows into the competitive Singaporean mobile market, also leaves us cold.

This is a great company with a tremendous recent corporate success, but not a great share for the next few years in our opinion.

We continue to stress our discomfort with valuations in certain areas of the market and to advocate for profit-taking as and when individual stocks reach full and fair values.

The economy locally is indifferent, meanings risks of earnings disappointment much like we have seen in recent months will continue.

Potential Future Profit-takers – ANZ Bank (ANZ) and Wesfarmers (WES)

Keeping in-line with our desire to sell shares when they become fully-valued, I thought I would make mention of these two household names in advance of some potential profit-taking in the weeks ahead.

As I have flagged in recent weeks, ANZ have been a stellar performer, blitzing the other major banks to be up 22% since early July.

But the outlook for Australian bank earnings hasn’t changed and remains as cloudy as ever.

It’s unlikely ANZ share-holders will see much earnings growth in the coming few years and even less a chance that the dividend will rise from the rebased level of $1.60 given the still elevated payout ratio at ANZ and the other major banks.

With this in mind we think another 5% upside through $29 and we would be minded to REDUCE our holdings in ANZ as a tactical move.

Similarly, Wesfarmers (WES) is a share that at $44 is looking increasingly full.

I have crowed and carped about the full WES valuation for the better part of 2 years whenever it trades near the mid-$40’s, so this little summary keeps me consistent!

That being said, the stock has struggled to push through $45 for the last three years in large part due to the consistent downgrades to underlying corporate profitability, the most recent driver of which has been the group’s coal assets.

Right now, there seems to be an optimism that coal prices have bottomed and that there could be a favourable swing in analyst forecasts to accommodate the bouncing coal price.

I’m a sceptic. Furthermore, I think analyst forecasts on both Coles and Bunnings are likely to stagnate.

The recent decision to lower its dividend and payout ratio is significant.

Watch this space. I think north of $45 we stand a good chance of asking you all to REDUCE holdings where you have them in this well-regarded Australian blue-chip.

Bullet points from the week just gone…

Miners were the dominant sector, rising 4%.

BHP (BHP) is now back into SELL territory for us and this recent spike above $21 makes for a great opportunity to sell down holdings.

Chinese steel sector profit-margins have collapsed with steel prices in the past month and we foresee a belated response forthcoming in iron ore prices too. BHP themselves even said this as recently as Thursday.

One of our preferred long-term bullish bets, QUBE Holdings (QUB) saw a broker upgrade this week which gave us some heart that the stock should be bottoming out in the $2.30 area.

We chose to add a small weighting to our position in the GROWTH portfolio a week or so ago under $2.30, topping up the position we sold back in early August 20% higher.

Minutes from the recent RBA board meeting were released this week and I have to say I found them surprisingly inconsistent with recent rhetoric.

The statement seemed to focus on the positive points of the Australian economy and Australian Dollar, in effect giving me and other traders reason to think the RBA is watering down the prospect of further rate cuts.

This is clearly important since I remain biased to think the RBA stands a far greater chance of cutting rates again in 2017.

Any suggestion the RBA is effectively on HOLD runs the risk of seeing the Australian Dollar complicating matters for the economy by rising north towards 80c, an outcome we explicitly DO NOT WANT TO SEE.

For now, that’s me done for the week.

Enjoy the weekend and I hope that if your team is playing, you have a win!

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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