Australian Market Summary (Issue 438) – 03 March 2017

 This week sums up the year thus far pretty well – a lot of noise, a fair deal of optimism, but at the end of the day the market closed largely flat.

The Trump speech to U.S Congress was encouragingly measured, and again spoke of the lofty aspirations the new President has for policy change, but at the end of day it’s still just words, and the share-market has run a long way already on this.

Sometimes it’s the travelling, not the arriving.

I mentioned last week that with the corporate reporting season having drawn to a close, macroeconomic and geopolitical factors will increasingly influence market direction. Having seen U.S economic activity continue apace during February, interest-rate markets are now factoring in over an 80% chance of U.S interest rate tightening on March 16th.

This ought to prove a likely reason for equity markets to pause, even more so if investors begin to feel like the U.S central bank has been too slow to tighten thus far.

On the positive front for Australia, the prospect of a steeper pace of U.S interest rate tightening should bring about further falls in the Australian Dollar, and we and the RBA would welcome this.

On the horizon but creeping closer are the Dutch and French elections. In Holland elections will be held in 10-days, and in France in late-April.

Whilst neither of the anti-European parties looks likely to emerge with power, clearly the market’s faith in pre-election polling has been diminished in the wake of both Trump and BREXIT, so nervousness leading into the European spring seems almost assured.

Australia remains a mixed-bag

Australia’s economy continues to give off mixed signals despite what others might say.

There is no doubt Australia’s corporate sector has begun 2017 with a shade more vigour than I had expected, but equally the Australian consumer looks equally as tired.

This week saw Australia’s resurgent manufacturing industry post the strongest business sentiment in 15-years, which is really encouraging. GDP also rebounded back in Q4 to a +2.4% annual pace, aided by the resurgent resource sector.

Manufacturing conditions have been aided by the Australian Dollar’s fall in recent years, and demonstrates precisely how currency competitiveness brings back domestic economic capacity utilization – with a cheaper currency it makes more sense to make things here for domestic consumption.

Confounding the optimism however was the ongoing deterioration in our forward construction outlook, with January Building Approvals down -12% annually.

The monthly rate of new house approvals is -10% lower than the 2-year average, and the monthly apartment approvals for January is running at a rate 24% lower than the 2015-2016 average.

Construction is slowing and will likely drag as we push through 2017.

Service sector activity in February also consolidated after a surprising summer surge, and was indeed flat through February.

This week in Australian markets

We were fortunate to see Hamish Douglass from Magellan present to well over a thousand advisers and brokers this week. Hamish spent several hours talking about the rapid change technology is reaping on society, and how Magellan is seeking to profit from these changes.

I would urge any of you with a spare hour or two to watch the presentation (link below). It’s hugely important to understand the powerful business models behind many of these technology behemoths, but also hugely important to understand that these business opportunities are in foreign share-markets, and not in Australia.

Again, international share-markets offer a platform for earnings growth that simply doesn’t exist domestically in Australia with our bank and mining-dependent indices.

Interestingly, in the last week alone Australian share indices have underperformed their U.S peer group by almost 4% when currency (rightly) is included.

We think there is considerable outperformance from international shares in the coming 12-24 months relative to their Australian counterparts, as we have pointed out on many occasions in recent months.

Dividend season is back upon us, so expect a welcome inflow of dividends to hit accounts between now and late April.

This week saw Telstra (TLS), Crown Resorts (CWN), Woolworths (WOW), Woodside (WPL) and Regis Healthcare (REG) all go ex-dividend.

Having gone ex a 16c dividend, TLS now trades at 14x 2017 earnings and with a whopping 7% fully-franked dividend. The stock is unlikely to stay down here at $4.54 for long, and I would foresee some improved relative performance imminently.

CWN is also interesting having gone ex not only its 30c interim dividend, but also the 83c capital return it promised shareholders post the sale in large part of its Macau gaming asset MPEL.

CWN has shifted the focus of its operations domestically in recent months, and with the sell-down of MPEL, the significant capital return & soon-to-commence $500m buyback and a promise to pay 60c in annual dividends, CWN now shapes as a defensive income producing stock.

We have been long-suffering in CWN, but with the recent bounce and capital return we are significantly closer to recouping our entry price. That said, the underlying strategic change and soon-to-commence buyback should continue to attract buyers to the stock, and we would expect to see it push up closer to $13 before we would look to SELL.

Our recent recommendation to BUY SEEK (SEK) is another name to flag.

SEK has pulled back to the levels we recommended buying it (low $15’s) and we would encourage those clients yet to add this name to portfolios to have a conversation with your adviser.

SEK is a quality growth business with a rapidly emerging international cash-flow stream. Much of the softness in SEK’s recent figures came from its employment websites in emerging economies across S E Asia and Latin America, however the outlook for Brazil is already significantly improving and Chinese growth continues apace.

SEK is well worth the attention.

That’s probably it for the time being.

Perhaps on a final point to end, the presentation from Magellan’s Hamish Douglass this week really made the point about the need to invest for the long-term and not to be swept up in the near-term comings and goings of markets and their related noise.

Short-term performance ebbs and flows, but longer-term performance is and remains key.

We, like everybody, would do well to continue to remember this.

Have a great weekend.

Jono & Guy.

All Ordinaries5764-35-0.6%
S&P / ASX 2005719-31-0.5%
Property Trust Index1368
Utilities Index8272+129+1.6%
Financials Index6679+16+0.2%
Materials Index9937-84%-0.8%
Energy Index8795-234-2.6%

Key Dates: Australian Companies

Mon 6th MarchDiv Ex-Date: CBAPC, CBAPD, CBAPE, Caltex (CTX)
Tue 7th MarchDiv Ex-Date: Blackmores (BKL), Medibank (MPL), Oil Search (OSH), QANTAS (QAN), QUBE (QUB)
Wed 8th MarchDiv Ex-Date: Brambles (BXB), Healthscope (HSO), IOOF (IFL) Div Pay-Date: AGLHA, WBCPD
Thu 9th MarchDiv Ex-Date: ANZHA, ANZPG, ASX (ASX), BHP (BHP), NABHB, QBE (QBE)
Fri 10th MarchDiv Pay-Date: Boral (BLD), JB Hi-Fi (JBH)


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