Australian Market Summary (Issue 454) – June 23rd, 2017

The penultimate week insofar as the financial year is concerned.

Amazingly, as I write this week’s update, I note today is exactly 12 months to the day since Brexit occurred, which triggered a UK election of which the fallout still continues.

The ASX200 had a topsy-turvy week but ultimately ended 1.1% lower. It also suffered its worst day for the 2017 calendar year on Wednesday when continued weakness in oil prices and a negative outlook for commodities saw investors punish energy and mining stocks.

Despite OPECs extension of production cuts in May, prices continue to fall and now appear a real threat to test the $40/barrel level in the shorter term.

Given the concentrated nature of the Australian market it was unsurprising to see banks sold off in a similar manner.

“Strength begets strength; weakness more weakness” and Wednesday was an all-round weak day.

Naturally there was some sector rotation with healthcare stocks and utilities bought, but as we have yelled many times over, when the banks and miners fail to perform the index just does not stand a chance.

The widening gap in interest rates & housing

The issue around housing and the ability of mortgagees to continue servicing their loans led to auction clearing rates last week falling to their lowest levels in 12 months.

The gap between interest rates for principal and interest borrowers as opposed to interest only borrowers continues to widen as does the gap between owner occupiers and investment borrowers.

To give this some context, Westpac have cut owner occupied P+I rates from 5.29% to 5.24% in the past 6 months, whilst interest only lending rates have risen from 5.68% to 6.30%.

Not only is the gap widening, but almost 40% of all new loans in the past year have been investment loans and of these, a large majority would have been interest only.

So, as the gap continues to widen so too does the pain felt by investment owners on what are already negatively geared properties.

The downgrade we knew was coming…

Moody’s downgrade to the long term credit ratings of the major banks on Monday was largely insignificant.

Yes, they pegged back the credit ratings of our major banks due to high debt levels and poor nominal wage growth but we already knew all this.

The reasons behind the downgrade were well and truly public information and so it hardly caught anyone by surprise.

Not to mention the downgrade brings Moody’s in line with fellow rating agency Standard & Poor’s.

The RBA Minutes

The RBA minutes focused on the underemployment that continues to impact the labour force and the wider economy.

The RBA reinforced its ongoing concerns surrounding household debt and justified its decision to leave rates unchanged as a result of the wage price index increasing by 0.5% in the March quarter – a sign that “aggregate wage growth had stabilised at low levels.”

However, this was essentially one of the RBAs only optimistic remarks with weak growth in retail sales and the disproportionate growth of the labour market key factors to be concerned with in the months ahead.

Despite an increase in employment growth in 2017 and jobs continuing to rise, underemployment is not falling!

We have pushed this theme many times already this year but I think it is extremely necessary.

What good are all these new jobs if those already in the workforce cannot work as much as they would like to?

Becoming harder and harder to value…

It is becoming an increasingly harder environment to find value in.

The reason for this being that investors are looking to increase returns and extract value from stocks outside of the top 10, given this is where most investors have been so heavily exposed for so long.

Valuations ex miners and banks are looking incredibly full.

CSL is on its highest P/E since the GFC. Likewise, Cochlear (COH) is on a record high P/E. A2M has rallied to nearly 30x and rallied 20% on a 10% upgrade.

I’ll repeat that – it has rallied 20% on a 10% upgrade!

IOOF Holdings (IFL) and Sonic Healthcare (SHL) are on their highest P/E’s since the GFC too…

The point to highlight here is that valuations are becoming skewed as investors search for quality companies to invest or even rotate funds through.

With that in mind it is important to remember that every stock has a fair value and when share prices rise or even distort the intrinsic value of these companies, it’s best to be patient and watch from the sidelines.

Stocks this week!

QBE Insurance (QBE) profit warned this week which subsequently saw its share price smashed ~10%

Having been trading at close to 18 month highs prior to the announcement QBE cited heightened claims activity in Emerging Markets as the reason for yet another earnings downgrade.

A combination of increased frequency of medium sized risk claims in Asia and some weather related claims in Latin America in the first half of the year led to the announcement which will see its EM division report a first half operating ratio of 110%.

The 10% selloff seemed to more than adequately reflect the 1% increase to QBEs overall operating ratio and as a shareholder I’d be hopeful it could recoup some of Wednesday’s fall before considering selling it.

For those of you who accepted our invitation to bid for units in the Contango Global Growth (CQG) listed investment company, you will note that CQG units listed today and began trading on a normal settlement basis.

CQG units commenced trading at $1.14, and along with the Contango options (CQGO) which are currently bid at 3c represent a 5.5% return to shareholders.

As we mentioned from the outset, we think Contango is a great way for investors to further gain exposure to international share markets, run by a quality U.S based funds management group WCM Investment Management.

Investors who purchased CQG units in the capital raising will also have received one option for every unit purchased which they can exercise at any point from now until June 2019 at $1.10.

Qube Holdings (QUB) successfully completed its 1 for 15 non-renounceable entitlement offer with the new shares to be allotted to clients next Thursday and commence trading next Friday.

Given the high level of demand for additional new shares, eligible retail shareholders who applied for new shares beyond their entitlement (via the top-up facility) were scaled back and will receive 47.95% of the new shares they applied for.

On another note, QUBs Chairman Chris Corrigan today announced his resignation from the board with Alan Davies to replace him as new Chairman.

Chris Corrigan had advised shareholders at the Annual Meeting in November that he would not stand for re-election during FY17, so whilst pertinent this was hardly unexpected.

Anyways that’s all from me this week.

Have a great weekend everyone



Jono & Guy

Financial Services Guide Update

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

Friday 12pm Values

All Ordinaries 5740 -83 -1.4%
S&P / ASX 200 5703-88 -1.5%
Property Trust Index 1378 -58 -4.0%
Utilities Index 8948 -16 -0.2%
Financials Index 6347 -113 -1.7%
Materials Index 9509 -157 -1.6%
Energy Index 8567 -346 -3.9%

Key Dates: Australian Companies

Mon 26th JuneDiv Ex-Date – QUBHA
Tue 27th June Div Pay Date – AusNet Services Ltd (AST)
Wed 28thJuneDiv Ex-Date – NABPD
Thu 29th JuneDiv Ex-Date – Charter Hall Group (CHC), Dexus (DXS), Sydney Airports (SYD), Transurban Group (TCL), Vicinity Centres (VCX)
Fri 30th JuneDiv Ex-Date – Graincorp Limited (GNC) 

Div Pay Date – WBCPG


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