Australian Market Summary (Issue 434) – 3 February 2017

 It was an interesting week in which share-markets consolidated, politics continued to command centre-stage and Australia’s confusing economy continued to give mixed signals.

Record Trade Balance

This week saw a record Australian monthly trade surplus of $3.5bn, which is undeniably excellent news for the Government and the economy.

Australia exported more coal by value than ever before in December 2016, and it was the second highest month for iron ore sales to China on record also.

The December net export figure to China was the highest on record by over +8.5% against the next best, and was over +65% more than was exported this time last year.

The figure is wonderful news for the Federal Government both as a source of much-needed revenue, and as a possible bulwark against the risk faced this year of a downgrade to Australia’s coveted AAA credit-rating.

Like many others, the strength in demand for Australia’s commodities has been a genuine surprise to me, and a welcome respite to the patchiness felt across much of the domestic economy.

It is trickier for the RBA however, who would prefer the Australian Dollar lower than the current 76.5c as a means to stimulate domestic business confidence.

Improving Service sector activity, continued construction slowdown

On the domestic front this week, the economy continued to be far more mixed.

December business conditions jumped soundly, but underlying business ‘confidence’ continued to lag, indicating a lack of faith in the recent uptick in activity.

Building Approvals for December continued their recent softness, but notably this month it was approvals for private home construction that proved the softest, with apartment approvals moderately rebounding from significant Q416 falls.

We still see this trend as concerning for domestic employment prospects.

Housing Investment Borrowing hits its straps (again!)

Interestingly, rounding the week’s economic data out, we also had reasonable credit growth in December of +5.6% annually, but notable within that figure was the continued resurgence of investor lending which is now back running at an annualized rate of +9% over this past 3-months, and just shy of the regulator-imposed +10% lending brake for the banks on this form of lending.

It is quite incredible that in a week where housing affordability dipped back to a 2-year low, investors continue to pile into Australian residential property with a ferocity not seen in over 18-months.

Once again, all this leverage and speculation has to be backed up by employment and wage growth, neither of which is proving evident.

It’s really interesting stuff, and makes the job of pre-ordaining our economic outlook about as difficult as it has been in a long time.

On the one-hand you have significant and surprising export strength, but locally you have a domestic economy burdened by increasing levels of household debt and stagnant wage growth.

Tricky stuff.

Results Season

With this rather tricky backdrop, we are eager to see Australia’s corporate reporting season kick off next week.

There have been some incredibly large bursts of outperformance and underperformance from respective stocks and sectors in recent months, and it will be interesting to see how much of this is vindicated.

Next week we have Transurban (TCL) on Tuesday, and we are hopeful of some strong numbers and potentially even a $1bn equity raising to fund the group’s myriad number of growth opportunities. (CAR) also reports next week, and though we have not held positions in the share for some time, we do note its significant underperformance of late and are looking more closely at the potential for re-initiating positions.

News & Observations this week

We were thrilled to see some collective market ‘love’ for Woolworths (WOW) finally this week with both UBS and JP Morgan upgrading WOW to BUY.

It is becoming increasingly apparent that the in-store efforts of WOW’s super-market team are yielding increased business, with WOW likely to report on February 22nd that its sales growth for the quarter is ahead of that of arch rival Coles for the first time in many years.

We think WOW is now in a position to see a re-emergence of operational leverage (it is after all 15-20% larger than Coles by sales), and an uptick in its earnings momentum from this.

We think WOW is worth $27-28 in the near-term.

As an aside, Wesfarmers (WES) has fallen to a 5-year low against the ASX200, but is now looking cheaper than it has done in some time.

Many of you will be aware I have had issue with the WES valuation for several years, but I would like to make it known that WES is looking increasingly better value.

Under $40 it might even prove a BUY.

Might. J

IOOF (IFL) reported reasonable quarterly funds under management this week, and continues to look a sound investment proposition for those seeking yield.

More interesting in the weeks ahead will be IFL’s interest in ANZ’s (ANZ) wealth operation, due to be sold soon.

It’s likely IFL will form part of a consortium on any bid, with it buying the private wealth assets and its partner acquiring the ANZ Life Insurance operations.

We would likely look favourably on any IFL deal given the scale and cost-benefits that would accrue from the acquisition of such a sizeable asset, but also given our confidence in IFL managements post-integration track record, earned through a rich history of M&A.

Sonic Healthcare (SHL) were an acquirer this week, again of pathology assets in Germany.

SHL has quietly made several acquisitions in 2016, all of which have been immediately earnings accretive.

We feel the recent rally in banks and miners has made stock’s like SHL look increasingly cheap, and we are looking more closely at adding to SHL positions in the month or so to come.

A quick update on trends

I thought to round out this week’s remarks, I would just offer up some context on investment markets.

Much has been made of the Trump effect post his election in November, some of which is true, but other impacts have slowly faded away.

Firstly, inflation expectations in the United States have definitely increased and the rise is sticking.

Forward inflation expectations in the U.S are back up above 2% and at nearly 3-year highs.

As I have said before, US Consumer and Business Confidence indices are at decade or more highs.

Where much was made of the impact of Trump’s election on ‘old-economy’ stocks, in truth, the technology-heavy NASDAQ index has recouped almost all of its underperformance against the broader S&P500 index in the United States, disproving that point.

In Australia, ‘big-cap’ stocks continue to outperform, in stark contrast to the first-half of 2016.

Australia’s top-20 shares have outperformed the ASX Small Ordinaries index by 15% since September.

Market-darlings such as Domino’s Pizza (DMP), REA Group (REA), Aconex (ACX), Mayne Pharma (MYX), Bellamy’s (BAL), Vocus Communications (VOC) & TPG Telecom (TPG) have all been savaged off what have proven to be extremely high valuations.

I guess the lesson in this is that trends can and do change. Often. And even the good ones.

Anyways, enough from me.

We are head down and bum up over the coming month or two, and hope we can get through reporting season in reasonable shape.

Have a terrific weekend.

Jono & Guy.


All Ordinaries5708-54-0.9%
S&P / ASX 2005657-53-0.9%
Property Trust Index1339+2+0.1%
Utilities Index8088+114+1.4%
Financials Index6456-60-0.9%
Materials Index10253-180-1.7%
Energy Index9147-160-1.7%


Key Dates: Australian Companies

Mon 6th FebruaryEarnings: National Australia Bank (NAB)
Tue 7th FebruaryEarnings: Transurban (TCL), Macquarie Bank (MQG)
Wed 8th FebruaryEarnings: (CAR)
Thu 9th FebruaryEarnings: AGL Energy (AGL), Rio Tinto (RIO), Hendersons (HGG),  Suncorp (SUN), AMP (AMP)
Fri 10th FebruaryEarnings: NewsCorp (NWS), REA Group (REA)


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