Australian Market Summary (Issue 452) – June 9th, 2017

Australian Market Summary (Issue 452) – June 9th, 2017

Geez, what a curious and rather depressing week.

From the horrors of the London tragedy, through the Comey testimony, and now the prospect of a divided British Parliament, it has been a volatile 7 days geopolitically.

In spite of it all, the U.S market is flat on the week.

But in Australia, things have been decidedly more tawdry.

The ASX200 is down more around -2% on the week, and only one stock (CSL) is up amongst the ASX 20 Leaders.

The recent malaise in Australian share-markets seems set to continue. Valuations are mixed, but perhaps more pointedly, the earnings outlook is beginning to darken.

Iron ore remains weak ($54/ton currently, was $89/ton in mid-February) and oil fell -4% under the weight of record U.S oil inventory and fears that the spat between Saudi Arabia and Qatar would fracture the OPEC coalition.

This leaves resources without momentum.

In the banks, the housing market is demonstrating greater evidence of a peak. Banks remain over-owned and hence remain lacking in positive impetus.

In the food retail space, it feels like there is growing concern over an uptick in price competition.

Whilst we have been big fans of Woolworths (WOW) and its restructuring, I can’t help feeling like the share has been dragged up against its will.

Wesfarmers (WES) this week at their annual strategy day alluded to a step-up in second-half customer investment within its Coles supermarket business, leading many analysts to question the margin outlook for both WES and WOW supermarket operations.

Graph 1: Wesfarmers (WES) share price performance relative to the ASX200 – almost a 5-year low

Telstra (TLS) too remains stuck in the mud with ongoing fears of TPG’s emergence as a viable 4th competitor in mobile. Though we feel this threat is overplayed, we can’t deny feeling in the minority here.

Let’s not be downbeat, it’s merely to make the point, once again, that the pond we are fishing in for ideas gets smaller by the day.

In those previous paragraphs I just covered off 45% of the ASX200.

To make the point, the ASX200 Accumulation is up +3.2% where PRIME’s International Separately Managed Account (SMA) is +9.8%, and there is a lot more outperformance from these offshore funds to come.

Offshore Fund Managers – Platinum (PTM) and Magellan Financial Group (MFG)

Speaking of the foreign funds, both Magellan Financial Group (MFG) and Platinum Asset Management (PTM) posted monthly fund flows this week, neither of which was particularly inspiring, but all the same both stocks hold interest for us given the theme.

MFG has continued to motor higher this year, but is increasingly fully valued at $27 or more with it’s valuation pushing 20x 2018.

The theme is a good one and MFG will continue to benefit, though it does look ever more that the market is pricing in ongoing success.

In PTM’s case, there does seem to be increasingly latent value albeit PTM continue to see funds outflow after several years of indifferent performance across their two main funds.

We flagged PTM as a stock we were interested in last week, and were not surprised that it managed to bounce around +8% during the week after it posted strong May monthly figures in each of its two flagship funds, Platinum Asia and Platinum International.

We aren’t in a rush here and will wait for an opportune time to consider being more positive on PTM.

Headwinds for Wesfarmers (WES), but beginning to show some value.

Wesfarmers (WES) continues to be beset by concerns regarding its core Coles supermarket business and potentially the impact of a slowing housing market on its Bunnings DIY chain.

But that said, WES is now trading at a 4-year low to the ASX200 and now sits on a reasonable 15-16x forward P/E, with a forward dividend yield of 5.3%.

More interestingly, if WES are successful in their plans to sell down the group’s non-core coal division, the company will be in the enviable position of having a largely ungeared balance sheet and able to potentially buyback shares.

The stock isn’t cheap enough for us to turn more positive just yet, but do we think it’s one to watch in the weeks and months ahead.

Metrics Credit Partners – an exciting new issue in the defensive space.

You will have received a flyer this week detailing our excitement at the ability to offer investors the chance to participate in this truly unique corporate loan fund.

As per the flyer, we are seeking expressions of interest from those investors seeking to broaden their defensive holdings beyond the limited subset of bank hybrid securities and term deposits.

The fund aims to return 3.25% above RBA cash rates (1.50%, making a 4.75% targeted total return currently), and will pay the interest monthly.

The portfolio will be highly diversified across the Australian corporate loan market, and will be run by the Metrics Credit Partners who we have come to know and respect over the past few months of our due diligence.

We strongly suggest you talk to your advisor as to the suitability or not of this product, as we think it will have a widespread appeal.

Economic data this week

We got the Q1 GDP figure and it showed annual growth of only +1.7% for the March to March year – the lowest run-rate since mid-2009.

Graph 2: Australian GDP – March Quarter Yearly Growth +1.7% lowest since 2009

Graph 2: Australian GDP – March Quarter Yearly Growth +1.7% lowest since 2009

A few breathed a sigh of relief that we still showed positive quarterly growth, but it’s a small relative win.

It feels inevitable to me that we are going to see a ‘technical recession’ in the quarters to come.

Construction is slowing, which I have mentioned enough.

Our trade balance took a dive in April, and looks set to fall into negative territory in the months ahead, leaving our export account as a negative contributor to growth.

Graph 3: Australia’s Monthly Trade Balance (white) corrected in April, but has significantly further to fall given collapsing iron ore prices (red)

Graph 3: Australia’s Monthly Trade Balance (white) corrected in April, but has significantly further to fall given collapsing iron ore prices (red)

Iron ore exports to China alone make up a whopping 20% of all of our national exports, which means we are hugely tied to the relative strength or not of iron ore prices.

When you add in related iron ore, energy and coal exports to each of China, South Korea and Japan, our reliance on commodity prices and sales to the Asian region totters up to just shy of 50%.

The RBA left rates on hold this week as expected, and surprisingly left much of the rhetoric on the economy unchanged.

Personally I think the coming months we will see the RBA actively jawboning the AUD lower as a means to provide the local economy some productivity ballast.

It feels like a no-brainer, particularly given so much of the underlying support for the AUD is now going weak at the knees.

Let’s see on this.

Anyway, that’s it from me for now.

Winter down under tends to be a quiet time for markets, so don’t be surprised if it all gets a little dull in the weeks to come.

Have a great weekend.

Jono & Guy

Financial Services Guide Update

Our Financial Services Guide has been updated, please click here to download the most recent version.

Friday 11am Values

All Ordinaries 5720 -93 -1.6
S&P / ASX 200 5683 -98 -1.7
Property Trust Index 1389 -29 -2.0
Utilities Index 8751 -354 -3.9
Financials Index 6298 -115 -1.8
Materials Index 9751 -77 -1.8%
Energy Index 8953 -421 -4.5

Key Dates: Australian Companies

Mon 12th JuneN/A
Tue 13th JuneDiv Ex-Date – WBCPF
Wed 14th JuneDiv Ex-Date – NABPC, WBCPE
Thu 15th JuneDIV Pay Date – CBAPC, CBAPD, CBAPE, CBAPF, Resmed (RMD)
Fri 16th JuneN/A


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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