Australian Market Summary (Issue 430) – 16 December 2016

So this is going to be the last weekly update for 2016, and we will recommence back on January 13th.

Before I go into my remarks, and for those who can’t bear to read to the end of this week’s missive, just a big thank you to all Prime’s clients for your generous custom again in 2016.

We sincerely appreciate your goodwill, and we are extremely keen to put our best foot forward for you in 2017.

Looking back at 2016, I certainly didn’t have the same degree of success with our Australian share picks as we did in 2014 and 2015.

I intend to rectify that in the year ahead, and several of our recent recommendations I fully expect to blossom in the months to come.

On the fixed-income side we had a good year, and our choices of bank hybrids in the past 12 months have proven to be winners.

I will table a complete 2017 outlook for dissemination in January, but ahead of that, and feeling as strongly as I do insofar as my concerns for the Australian domestic economy, I really wanted to make several points clear.

2017 – a precis of our outlook

The year ahead will be infinitely tougher.

Share valuations are high and the momentum in economic growth is waning. Where construction activity has protected Australia’s economy from the negative drag of mining’s slowdown, it too is now easing on account of the slowing flow of bank credit.

The slowdown is in the post.

The upside in markets here is very limited and the downside is rising.

  • Australia’s economy will materially underperform its major trading partners in 2017
  • There is every possibility we see our first technical recession since 1991.
  • Australian interest rates are on HOLD for now, but the bias is for lower rates at a push
  • The Australian Dollar will recommence its fall, and will trade to the mid-60s during 2017.
  • Investors should hold overweight cash positions
  • Investors should RAISE THEIR EXPOSURE TO OFFSHORE EQUITY MARKETSAustralian investors still do not own enough international exposure. I expect offshore equity funds to outperform Australian equity returns by 10 – 20% in the coming 12 months when taking into account the likely Australian Dollar weakness

So what have we done in our Managed Accounts, and what more will we do in the months to come?

  • We have raised our cash levels to our 15% limit in both equity portfolios.
  • We are holding extra cash in both of our International Equity and Defensive Income portfolio also.
  • We have reduced our Bank sector holdings to now be 20% underweight in our Australian Equity Growth portfolio, and it is nearer 40% when plotted against the big-4 banks alone.
  • Macquarie (MQG) is our bank tip for 2017
  • We will likely make a strategic asset allocation in the new year to up our International Equity allocation at the expense of Australian Equities.

So what happened this week of note?

With Christmas a week away, there was always the potential of some last-minute deal announcements, and we duly got some.

SANTOS (STO) announced a $1.5bn capital raising, Macquarie Bank (MQG) announced their audacious A$7.3bn counter-bid for Tatts Group (TTS), outdoor advertising giants APN Outdoor (APO) and oOh!Media (OML) announced their $1.6bn merger, Swiss insurance giant Zurich announced its $740m bid for travel insurance provider Covermore (CVO), Estia Health (EHE) announced its much-anticipated $137m capital raising and lastly, and encouragingly for its long-suffering shareholders, Crown Resorts (CWN) pulled a rabbit out of its hat on Thursday announced a further sale of its Macau casino stake for a premium price and a subsequent capital return.


On CWN we were pretty relieved to see the news today, which to recap involved the sale of 13.4% of its stake in Melco Crown (MPEL) to its Macanese partner Melco for $1.6bn.

The deal came out of the blue and is at a premium to the last-traded price of MPEL.

CWN announced that it would use $800m of the proceeds to repay debt, and the balance of $800m split between a capital return to shareholders (worth 60c a share) and a further $300m share buyback (4% of the company).

The group confirmed the proposed IPO of 49% of its Australian hotel and retail assets would go ahead.

All of this is terrific news and comes against the backdrop of ongoing uncertainty relating to the incarceration of key staff in China.

CWN will re-list again on Monday and my expectation is that the stock will rise 10% or more on the news. The Australian market never gave CWN the full value for its substantial MPEL holding, so to crystallize this, and at a premium to market, is a terrific step in the right direction.

The Economy – Australia gets worse, US gets better

This week we had the Westpac Consumer Confidence and NAB Business Confidence figures for November and both deteriorated.

Employment data looked positive with 39,300 full-time jobs added (note prior to November the economy had shed 74,000 full-time jobs year-to-date) and a 5.7% unemployment rate, but the numbers were inflated by a whopping 58,000 new jobs in Victoria alone – the equivalent of 2.5% of Victoria’s workforce.

Um, I think this is a rogue number and will be revised down next month.

On the respective confidence figures, business conditions fell to an 18-month low, and consumer confidence fell to a 6-mth low.

Importantly, consumer intentions for purchase of large household items deteriorated materially, which given the time of year augers negatively for Christmas retail spend.

It is and remains a pressured domestic outlook.

Contrast this with the US economy however which the US Federal Reserve deemed strong enough to raise the cost of borrowing this week.

Further to that, the Federal Reserve members seemed to escalate their views on US economic growth, with members on average now expecting 3 x 0.25% rate rises in 2017, up from 2.

Again, for those interested in a few interesting economic charts, please click on the link below to a recent presentation I have been doing.

Merry Christmas

Again, our sincerest and warmest wishes to you and your wider family and friends.

We hope you have a terrific break, and look forward to welcoming you back in the new year.

All Ordinaries5595-15-0.3%
S&P / ASX 2005538-18-0.3%
Property Trust Index1333-9-0.7%
Utilities Index7667+134+1.8%
Financials Index6442+36+0.6%
Materials Index9592-341-3.4%
Energy Index8934-36-0.4%


Key Dates: Australian Companies

Mon 19th DecemberDiv Pay Date: AMPHA, NABHB, NABPB
Tue 20th DecemberDiv Pay Date: ANZHA, ANZPG, NABPA
Wed 21st DecemberDiv Ex Date: WBCPG
Thu 22nd DecemberDiv Pay Date: WBCPF
Fri 23rd DecemberDiv Pay Date: NABPC


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