Australian Market Summary (Issue 422) – 21 October 2016

 Another indifferent week in Australian share-markets, with the ASX200 broadly unchanged.

But in spite of that, there were several items deserved of our consideration for the future.

Firstly, the remarks by Donald Trump as to his unwillingness to accept the final outcome of the US Presidential election on November 8th are horrifying.

Trump’s insistence of a grand conspiracy against him by establishment forces runs the risk of increased civil disobedience by his supporter base in the event that Clinton is elected the new President.

The division in society across many countries is self-evident, but as the largest consumer nation in the world, the potential for US household uncertainty is not something the economy nor share-markets long for.

Australia’s economy gets less and less productive…

Closer to home, this week we saw the release of Australia’s September employment report and it was sobering reading.

Though the headline unemployment rate fell to a 3-year low of 5.6%, it did so in large part because less Australians of working age were actively in employment or seeking it.

Australia’s participation rate (being the measure of the active portion of an economy labour force) fell to an equal 11-year low.

This is a scary fact.

Not only are less Australians employed or seeking to be a part of the workforce, of those that are indeed working, more and more of them are working less hours than they want to.

Australia’s ‘underemployment’ rate last month jumped to 9.1% and is now a whisker away from its all-time record high of 9.3%.

To make this clearer, in the 9 months to September this year our economy has shed 100,000 full time workers and added 107,000 part-time workers.

This is the year of Uber and Deliveroo in an employment sense.

Our economy is increasingly less productive.

The human resources at our disposal are being significantly underutilised.

Like anything, if there is greater supply than demand then prices fall. Hence there should be no surprise to anyone in light of the above remarks, that Australian wage growth is at record low of 2% per annum

And if real wages aren’t growing, it is awfully difficult to maintain a country’s standard of living.

I have made this point on many occasion, and I truly believe that we face several years of sub-par growth (or worse) given the enormous build-up of consumer debt and the heavy reliance households have come to place on that illusory asset called ‘home equity’.

We will see where this all ends, but certainly in investment markets this week participants voted with their feet in selling the Australian Dollar down 1c+ from its highs north of 77c after the employment report was released.

Make no mistake guys, ‘income’ in all its forms – corporate, investment, export and wages – are under significant pressure in Australia for the foreseeable future.

The Reject Shop (TRS) …another sign of consumer stress?

Tying in with the commentary above, this week saw TRS shares fall -17% after the company warned on future profits.

Specific to the warning were words around the patchiness of consumer sentiment.

I suspect this is the first of more warnings on a softness in consumption as we head into Christmas.

Crown Resorts (CWN) … just when it was starting to look good…

You would have to have been living under a rock not to have read about the plight of 18 CWN employees detained in China this week for supposed breaches of that country’s gaming laws.

The stock is down 15% on the week in response.

Without truly knowing or understanding the actual charges levelled nor the background behind the arrests it is clearly difficult to comment.

However, on the maths behind the likely impact on CWN profits, it feels fair to say the response has been a significant over-reaction.

Using some analyst forecasts I have seen, the suggestion is VIP gaming contributes about 15-20% of CWN group pre-tax earnings, and that Chinese VIP’s are about 70% of that.

So that implies around 10-12% of the group’s profits are tied in in some way to the scandal.

Given similar arrests and charges were levied against a Korean casino operator last year, and that casino player saw a 30% decline in its Chinese VIP revenues, it seems fair to assume CWN might see risk in the order of perhaps 5-6% to group profits.

The 15% fall clearly factors in a huge discount for the uncertainty created, and it is our hope that as the uncertainty fades, the share price can begin to recoup some of this week’s annoying losses.

Transurban (TCL) – a new buy.

Our first fresh recommendation in some time, we are pleased to be recommending investors pick this stock up after its near 20% share price fall.

I’ll direct you to the BUY note we wrote, but hope you have all given it due consideration.

We have been cautious on market for much of the last 4-5 months and have advocated for holding excess cash.

TCL is a neat and low-risk opportunity for investors to utilize some of this excess cash.

Woolworths (WOW) and Blackmores (BKL) a big focus next week

Next Thursday and Friday are big days for us since we have the quarterly sales releases from both companies next Thursday and Friday.

BKL will come first on Thursday and it is our hope that we will learn just where the company are on the channel de-stocking that has taken place post changes to Chinese import regulations announced in March/April.

WOW will report Q1 sales alongside its AGM next Friday, and on this front we are particularly confident in a strong start to fiscal 2017 trading in its core supermarket business.

Recall that 6 weeks ago WOW disclosed that trading for the first 8 weeks of the year was surprisingly positive, and it is our hope and expectation that this momentum has continued on since.

WOW is up 5% this week and finally delivering us some of the outperformance we have been looking for.

WOW has outperformed the market by 18% since the end of June, and we hope and expect the stock to push towards a fairer value in the $27-29 region before the year is out.

Healthscope (HSO) … look out below!

To round the week out, another ‘market darling’ finally took it in the neck after warning that patient admissions were running behind expectations.

Like so many companies locally we felt the valuation on HSO and its peer stock Ramsay Healthcare (RHC) were bordering on excessive in light of the tightening reimbursement trends witnessed across the entire healthcare sector.

Todays warning vindicates this to some extent, but more importantly casts favourable light in my opinion on both our preferred healthcare bet, Sonic Healthcare (SHL), which has seen the worst on the regulatory front and arguably has the potential to benefit from announced regulatory changes capping rents paid by the group on specimen collection centres.

SHL is up almost +20% since our BUY recommendation in January, but the 10% pullback over the winter months will increasingly focus our eyes back on the stock with a view to adding to positions.

Add this point I would suggest $20-21 looks a nice place to consider adding again.

That’s all folks.

All Ordinaries5497-27-0.5%
S&P / ASX 2005412-27-0.5%
Property Trust Index1341-31-2.3%
Utilities Index7104-1
Financials Index6024+10+0.2%
Materials Index9117+156+1.7%
Energy Index8606-68-0.8%


Key Dates: Australian Companies

Mon 24th October  N/A

Tue 25th October AGM: Aconex (ACX), Tabcorp (TAH), Worley (WOR)

Wed 26th October Earnings: RESMED (RMD), Wesfarmers (WES) sales

Thu 27th October AGM: Blackmores (BKL), JB Hi-Fi (JBH), Tatts Group (TTS)

Fri 28th October AGM: (CAR), Regis Healthcare (REG), Woolworths (WOW)

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