Trade tensions >
Australian October Australian Industry Group service sector activity rebounded to an 11-month high, and lending support to our argument that the Australian economy is in the process of bottoming out.
The headline ‘sales’ sub-index jumped to its highest level since June 2018 indicating a renewed uptick in general service sector activity.
US job opening data continues to ease with September openings falling to an 18-month low and indicating that the US has reached peak employment with the unemployment rate near its 50-year low of 3.6%
Westpac (WBC) posted disappointing earnings for 2019 and gave soft guidance that things were unlikely to get any better in 2020 or even 2021.
National Australia (NAB) results weren’t as disappointing as their peer group in large part because the bank benefited from improved lending with its business and corporate bank alongside strong cost controls.
Pendal (PDL) shares have bounced +12% thus far this week after having reported FY19 profits that were largely in-line with analyst forecasts.
We have made much of our belief that Australia’s economy is set to bottom out before Christmas and that by early 2020 activity will be on the improve.
With that in mind we were encouraged to see the first visible green shoots of recovery emerge in the local economy last month as evidenced by the bounce in the Australian Industry Group service sector reading to an 11-month high, and the sales component jumping to its highest level since June of 2018. The combination of interest rate cuts and rebounding housing markets, the rising share-market and current and prospective income tax cuts should be making Australian households feel increasingly flush. We think the data is set to turn and we believe good exposures for Australian portfolio’s including small company exposures, housing and construction plays such as Boral (BLD) and Reliance Worldwide (RWC) and consumer travel group Webjet (WEB).
This week investors will look towards the latest Australian consumer and business confidence figures, whilst we will be paying close attention to Afterpay’s (APT) trading statement due on Wednesday.
Regards,
Jono
The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.
Trade tensions
U.S. Politics
Australian September Building Approvals bounced +7.6% month on month, which we think has the potential to be encouraging.
Continued high auction clearance rates will lead to a strong national house price rebound in the months to come and this will be substantial tailwind for consumer activity in 2020.
US employment gains remained strong in October with a further 130,000 jobs added and a 3.6% unemployment rate The US Federal Reserve cut interest rates to 1.50% as expected last week, but signalled that the economy was in a sound position and unlikely to need further adjustment lower in the near term
ANZ Bank (ANZ) shares fell over -6% last week after the company reported disappointing FY2019 profit figures that included a surprise reduction in the level of franking on its final dividend.
Afterpay (APT) shares have fallen over $10 from a high above $37 mid way through October to be near $27 today and we believe there is increasing merit in adding to positions around these levels.
Pendal (PDL) will report full year 2019 profit on Wednesday and whilst we know the year has been a weak one from the group, we are hopeful that the company can provide grounds for greater optimism looking into 2020.
Whilst far from comprehensive, the bounce in Chinese manufacturing activity over the last quarter – by one measure at least – gives markets reason to speculate that after 18 months of industrial weakness brought on by the trade war, China’s manufacturing sector could finally be stabilising.
The Caixin survey released on Friday saw the headline manufacturing index rise to its highest level since early 2017, and the new order sub-index jumped to its best level since as far back as 2013. It is hard to get to carried away as indicators on activity remain well down, but in recent months there has definitely been a stabilization in monetary aggregates (M2 remains in the low 8% annual growth rate range) and in annual electricity production (an excellent guide on real activity). Our portfolios are overweight emerging markets and have suffered modestly on account of this in 2019, but we are hopeful that if signs improve on the economic front in China, investment performance from several of our key funds should similarly improve.
This week our focus will be on the new economic data out from October, both locally and abroad, but also the Pendal (PDL) earnings numbers due Wednesday, the Boral (BLD) AGM statements on Wednesday. Both Westpac (WBC) and National Australia Bank (NAB) will report full-year earnings this week, but we think the outcomes here will mirror those of ANZ (ANZ) last week and likely disappoint investors.
Regards,
Jono
The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.
Trade tensions
Costa Group (CGC) shares were suspended last week pending an update to FY2019 earnings guidance.
Woolworths (WOW) shares continue to defy gravity, trading at near enough to their all-time high as investors continue to place a ridiculously high premium on the stock for its perceived earnings certainty.
Australian national auction clearance rates have rebounded back to be in the 75% range, not far off their peak recorded during the house price boom of 2015-2017.
Whilst current volume is significantly lower than in that period, the rising clearance rate augers well for rising house prices and with that, a turn in domestic construction markets.
The chart below shows the national auction clearance rate in RED and the national house price index in WHITE and suggests we should again expect to see house price growth push back up through +10% annualized in the 2H of 2019.
We remain optimistic that Australia’s economy will improve as we enter 2020 and that it will be led by, at first, a stabilization in building activity and then a bounce in residential construction volumes.
We do believe Boral (BLD) will significantly benefit from the improvement and hold it as a key equity position.
Beyond ANZ and MQG’s results this week locally, markets will focus on results in the US from Alphabet (GOOG) tonight and then Apple (AAPL) and Facebook (FB) on Wednesday night.
Next week Westpac (WBC) will report on Monday, Pendal (PDL) on Wednesday, NAB (NAB) on Thursday and AMCOR (AMC) on Friday.
Regards,
Jono
The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.
Slowing global growth >
Trade tensions >
Australian Building Approvals for August showed little sign of recovery, falling month on month in absolute terms for both new houses and apartments.
Private Sector credit for August rose at its slowest annual rate since 2011 and Australian broad money growth collapsed back to near its lowest level since the 1990’s recession also.
Australian Banks came under heavy selling pressure last week following the RBA’s decision to further cut interest rates to a record low of 0.75%.
It would seem a given that domestic rates fall again, perhaps before year end, to 0.50%.
Remember of course that the RBA is cutting domestic interest rates in large part to avoid any unnecessary upward pressure on the Australian Dollar, but that it is rapidly losing firepower, particularly as it seems increasingly likely that the U.S. Federal Reserve could be forced into a more aggressive rate-cutting cycle than it currently indicates.
Though all of the major banks failed to pass the full RBA rate cut, bank profitability is being rapidly eroded both by lower rates, but also by the increasing exodus of consumer deposits from banks as households chase higher returns elsewhere.
Australian retail bank business models are premised on cheap deposit funding from households and with collapsing domestic rates, profit margins are being hit on both the asset and liability side.
Only as interest rate hedges begin to roll off in the coming 2-3 years will we see the real impact on bank profitability, but as we have highlighted before, the top-rated analysts on the sector are looking for future earnings declines and future dividend cuts from Australia’s major banks.
We remain significantly underweight in our recommended weighting to Australian major banks.
Regards, Jono
The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.
Trade tensions >
Australian September employment figures remained surprisingly strong, with 26,200 new full-time jobs created and an unemployment rate of 5.2%.
The data continues to defy the weakness seen in job advertising – skilled vacancies are -6% on last year and the wider ANZ job advertisement figures are down -11% on 2018.
Early October manufacturing data in the US seems to have stabilised with the Empire (New York) manufacturing sentiment bouncing modestly this month
Chinese Q3 GDP grew at an annualised rate of 6% which is the lowest figure since the data series started nearly 30 years ago in 1992.
China’s economy continues to soften as the impact of US tariff’s on US$360bn of Chinese exports to the US weighs, though we would expect to see continued, measured fiscal and monetary stimulus afforded by authorities to mitigate the significant slowing.
US housing sector trends remain positive with the October NAHB Housing Market Index jumping again in October and just shy of the record optimism we saw in the sector back at the start of 2018.
Falling mortgage interest rates continue to generate strong homebuilding activity and September Housing Starts and Building Permits rare up +12% and +8% on the previous year respectively.
IOOF (IFL) confirmed our expectations and announced last week that they were set to complete the ANZ Wealth transaction and at discounted price.
Challenger (CGF) reported a resilient first quarter in the face of falling interest rates and the stock bounced accordingly.
Afterpay (APT) shares were one of the worst performers during the week, falling -17% after UBS initiated coverage of the stock with a contrarian SELL rating.
Boral (BLD) was the subject of M&A chatter during the week with The Australian publishing an article suggesting US private equity giant, Lone Star, could be considering a bid for the company.
We note, with some modest trepidation, that though the Australian share-market is +18% year-to-date and within 3% of its high, that the Australian mining sector has not only foregone its sector leadership, but in fact underperformed quite materially over the last 3 months.
As the chart below shows, the Australian mining sector does a very good job of pre-empting the performance of the wider market.
As the leading edge of the market in a cyclical earnings sense, investor appetite for miners tends to offer an early look at future risk appetite across the wider market.
In red is the ‘relative’ performance of the Australian material sector against the ASX200 benchmark, and the white line is the ASX200 share price index lagged by 6 weeks.
The underperformance of Australian miners since Q2 seems set to presage consolidation in the wider market in the weeks and months ahead.
The slowing Chinese economy is the main culprit for recent weakening in iron ore prices from their July highs at $110/ton to todays level at a touch over $80/ton.
BHP (BHP) and Rio Tinto (RIO) share prices have underperformed the market by almost -20% since their peak in April, although Fortescue (FMG) has fared marginally better.
Major corporate results in the US this week will come from Microsoft (MSFT) and Amazon (AMZN), and then the following week will see Apple (AAPL), Google (GOOG) and Facebook (FB) all report.
In Australia, the major banks and Pendal (PDL) will report September year end results in 2-3 weeks.
Regards,
Jono
The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.
Slowing global growth >
Trade tensions
Pendal (PDL) on Friday posted another disappointing quarter of fund-flows from both its domestic (ex-Westpac) franchise and from its growth engine, global equity fund manager, J O Hambro.
This morning the Federal Treasurer tasked the competition authority to investigate the major banks and their inability to pass on the full 0.75% of RBA rate cuts made in the past 12 months.
Falling U.S. interest rates are having the desired effect on U.S housing markets with last month posting a spike in both building permits and housing starts to their highest level since pre-GFC (see chart below).
U.S. average 30-year mortgage rates have fallen from 4.7% to 3.7% in the last year and this has seen a wave refinancing and new purchase activity which has fueled domestic consumption and new housing activity.
Core portfolio holdings in Boral (BLD) and Reliance Worldwide (RWC) should benefit from the rising activity with both groups making around 60% of their total earnings from North American construction markets.
RWC has bounced well after its recent downgrade, but we feel BLD has significant upside potential as there remains a major mismatch between company targets for their disappointing Headwaters fly-ash acquisition and market estimates.
U.S. Housing Markets strengthening – building permits (white) and housing starts (red) at their highest level since the GFC
U.S. Q3 corporate reporting commences in volume this week with many of the major banks due to report (Goldman Sachs, Citigroup, Wells Fargo, Bank of America) and industrial (Honeywell, CSX) and technology (Netflix, IBM, Microsoft) companies also.
Next week and the week after sees results from the major U.S technology platforms Alphabet, Amazon, Facebook and Apple.
Regards,
Jono
The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.
To achieve capital growth with moderate tax-effective income via franked dividends through investment in listed Australian securities.
The Model Portfolio is managed by selecting primarily those securities with moderate growth potential but robust cash-generating capacity. These securities are expected to deliver an above-market average income yield, together with a relatively moderate level of capital growth. The portfolio benchmark is the S&P/ASX200 Accumulation Index.
Global equity markets were weaker in August as represented by the MSCI World Index which fell -2.2%.
Volatility was again the flavour of the month with the Volatility Index (VIX) rising to its highest level since January.
US equities dropped -1.8% as the US imposed 10% tariffs on the remaining $300bn of imports from China. Fears of a recession rose as the yield curve on 2 and 10-year Treasury notes inverted for the first time since 2007.
China was weaker falling -1.6% as the ongoing Trade War continues to negatively impact business sentiment. China responded to the US by halting purchases of US agricultural products.
UK equities were heavily hit falling -5% as UK PM Boris Johnson shut down Parliament in an attempt to block MPs from blocking a no-deal Brexit.
Locally, the ASX200 Accumulation Index was weaker, falling -2.4% as corporate earnings season got into full swing.
The RBA left the cash rate unchanged at 1% instead opting to wait for the Federal Reserve to meet next month before taking action.
Australian bond yields tightened further with 10-year Government bonds yielding 0.88% at August 31.
Oil was weaker during August with Brent oil falling -8% and WTI falling -5% to trade $59/barrel and $55/barrel respectively. Oil prices have now fallen -20% since a 2019 peak in April, hit by concerns the Trade War would erode demand.
The iron ore price experienced its biggest monthly drop in eight years falling -28% to US$86/tonne as shipments increased to China sparking supply pressures.
Contributors to performance were BWX (BWX) and Afterpay (APT) which added 50% and 16% respectively. Both companies reported full-year results to the market with BWX guiding to 30% EBITDA growth in 2020 whilst also relaunching its Mineral Fusion brand. Afterpay continues to grow reporting underlying sales figures of $5.2bn whilst adding 12,500 new customers per day, far exceeding analyst expectations.
Detractors were Boral (BLD) which fell -18% and IOOF (IFL) which fell -13%. Boral posted disappointing 2020 guidance flagging a -5% to -15% fall in earnings and its fly-ash acquisition Headwaters also missed earnings estimates. Whilst disappointing BLD trades on 11x earnings and generates ~$500m in free cash flow per annum so we believe it remains cheap at these levels. IFLs total funds under management reached $150bn so despite the selloff we believe business activity remains strong. The next catalyst for IFL will be an update on Federal Court proceedings and the ANZ OnePath deal.
The Growth SMA reduced BWX, added to IFL, exited our position in VAS and established a new position in Webjet (WEB) in August. The Diversified Income, Defensive Income and International Growth SMAs went unchanged. On a risk profile performance basis our 5-year numbers continue to perform well against their respective benchmarks.
RISK PROFILE PERFORMANCE FIGURES
As at 31 August 2019
Pre-Franking Credits
SMA—MODEL PORTFOLIO PERFORMANCE FIGURES
As at 31 August 2019
Pre-Franking Credits
What is a Separately Managed Account (SMA)?
What’s the benefit of a Separately Managed Account (SMA) to a Managed Fund?
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.
Little to add from last week as data was mixed – some softening in US consumer confidence, but little else to report
China’s Vice Premier Liu He is reported as planning to visit the United States for the next round of trade talks next week on October 10th.
Over the weekend the Trump Administration floated the idea that they could enforce restrictions on portfolio investment flows by US firms into China and potentially even restrict access to US capital markets for Chinese-controlled entities.
Whilst any imposition of such restrictions was said to be a long way off, the suggestion was enough to cause a significant scare to investors who marked down the share price of major NASDAQ-listed Chinese stocks on Friday night – Alibaba (BABA) was down -5% as an example.
DE-RISKING (a new theme)
We’d highlight increasing evidence of local investors reducing share-market risk and how we have begun to similarly move to higher cash holdings after the ASX200’s stellar year-to-date rise
In the past fortnight we have reduced exposures to Westpac (WBC) and BWX (BWX) after their strong respective rises.
We fear WBC is likely to cut its dividend come results in November, and in the case of BWX, the share price has doubled in under 2 months.
Beyond our own moves, it is worth noting that recent market high flyers such as Clinuvel (CUV), Appen (APX), Pro-Medicus (PME) and Nearmap (NEA) are down some -30% to -40% in barely a few months and on no news – indicative of a market in which investors are locking in speculative gains.
Chinese September manufacturing data was flat on last month with little worth mentioning.
Australian Private Sector credit for August rose at its slowest annual rate since 2011 and Australian broad money growth collapsed back to near its lowest level since the 1990’s recession also.
Private sector credit grew at +2.9% and Australian M3 money supply a measly +1.9% in the 12 months to August, highlighting that even in spite of the multiple interest rate cuts, domestic money supply remains significantly constrained.
Nufarm (NUF) this morning positively surprised the market with a left-field announcement it had sold its profitable Latin American crop protection business to major shareholder Sumitomo Chemical for almost $1.2bn.
Downer (DOW) was in the press last week with suggestions it could put the Spotless Laundries business up for sale.
All investors should be paying close attention to US Presidential election issues even in spite of the fact the election itself is not until November next year.
This is because its impact will be felt in markets well before then, and likely as early Q1 2020 when the initial Democrat caucuses commence (Iowa is February 3rd and New Hampshire a week later).
The reason we are focused on the Democrats is because two of the leading candidates to face off against President Trump, Senators Elizabeth Warren and Bernie Sanders, support policy in favour of greater government regulation, expanded national healthcare, free college tuition and higher taxes on wealthy individuals.
With an economy and share-market hugely attuned and linked to low regulation and the significant corporate profitability this has engendered, any prospect that either of Senator Warren or Sanders could usurp President Trump will be extremely closely monitored by investors.
In fact, the surge by Elizabeth Warren in the polls over the past few months, should have investors paying attention (see the chart below from Predictit.org) as a Warren presidency would likely cause not only a significant share-market fall, but potentially even a medium term sell off in government bond markets as well.
Senator Warren is running on a platform that promises to levy a 2% ‘wealth tax’ on those whose net worth is over US$50m and to spend these funds on providing free college tuition and a concept, as yet undefined, of nationalized healthcare.
She is a fierce consumer advocate and a supporter of increased corporate regulation and is also promising to provide increased distance between vested interests (corporate lobbyists) and US policymaking.
U.S. Democratic Candidate ‘market movements’ – Warren surging ahead of Biden
Regards, Jono
The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.