Prime Australian Equities Growth SMA – April 2016

Prime Australian Equities Growth SMA – April 2016

Portfolio Objective

To generate a grossed-up dividend yield at least equal to the one-year bank deposit rate and capital value targeted to grow at least in line with CPI.

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.

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Market Summary

Performance in April was dominated by the commodity sectors, particularly the iron ore names. A well-reported surge in speculative activity in Chinese commodity futures markets saw iron ore and steel prices rise a staggering 30% during the month, dragging the likes of Fortescue (FMG), BHP (BHP) & Rio Tinto (RIO) up 20-30%.

In spite of OPEC’s failure to cap oil production at their mid-April meeting, oil prices too surged in the month to rise some 20%. As a result, Australian oil shares jumped just under 8% too.

The substantial outperformance of all things commodity-related meant no other major sub-index was able to better the ASX200 performance, meaning a portfolio’s relative exposure to commodities was the predominant determinant of performance during April. It was here specifically that the INCOME portfolio lost significant relative performance against the index.

Beyond the significant jump in commodity exposures, the other major item to note during April was the collapse in Australian inflation figures with the release of March quarter annualised CPI showing a rise in prices of only 1.3% – just shy of a 17-year low. The figure triggered a rally in Australian bond yields, and the renewed expectation by many in the market that the RBA would follow a global trend by reducing domestic interest rates in early May – an outcome ultimately confirmed.

In single stock news, QANTAS (QAN) was a standout in April falling by 20% after it warned domestic demand had waned since Easter and that it was reducing capacity in response. For both portfolios, this news proved a negative as it had a knock-on effect to listed travel plays such as Flight Centre (FLT), which fell 10% in sympathy with QAN.

Portfolio Commentary & Positioning

The portfolio rose +2.68% during April, lagging the +3.37% gain of the ASX200 Accumulation Index.

April was another interesting month on the Australian share-market. Oil and mining shares dominated performance, driven by an incredible surge in underlying commodity prices, particularly in China. The Materials sector rose 14% and oil shares rose over 7% during the month, leaving all other major industry sub-indices as underperformers.

The portfolio had a sound exposure to the commodity sector by way of BHP (BHP), Woodside (WPL) and Oil Search (OSH) which helped, however offsetting this to some degree was the underperformance of Flight Centre (FLT) which fell 10% in April after QANTAS warned on anaemic domestic travel demand, and the large weights held in defensive positions such as Telstra (TLS) and Woolworths (WOW).

The surge in Chinese commodity futures allowed the portfolio to sell out its stake in BHP at the highs. Our firm view is that the spike in steel prices is a temporary phenomena, and that the medium term outlook for iron ore prices remains a subdued one. The portfolio now has no exposure to mining, and it is expected this will remain the case for the foreseeable future.

Other than the BHP sale, the portfolio also discarded of its position in registry provider Computershare (CPU). Though CPU is not an expensive share, we have been frustrated by the lack of earnings leverage to the tailwind of 2015’s surge in corporate merger activity it has been able to achieve. Sadly, transaction volumes year-to-date have fallen in equity markets, alongside more subdued deal flow. Similarly, expectations for the pace of US interest rate rises have moderated, meaning that many of the drivers for CPU profit growth have diminished. With this in mind we thought it prudent to put the capital to better use.

Replacing the BHP and CPU positions, the GROWTH portfolio initiated fresh holdings in each of Regis Healthcare (REG) and QUBE Holdings (QUB).

The REG position is driven by our confidence in longer-term aged-care demographics, recent share price underperformance and the material domestic property exposure the company has underlying its core franchise. We feel REG will provide the portfolio with significant capital upside in the coming year, alongside a not insignificant 4%+ dividend yield.

QUB is similarly a nod towards future growth given its significant exposure to the Moorebank Intermodal precinct in Sydney’s south-west. This asset in particular we feel has the capability or providing significant profits for QUB shareholders in coming years, and we are expectant of final development approval in the months ahead which should give the shares a short-term boost.

The portfolio also added to Woolworths (WOW) in the month at attractive prices, and is now fully weighted to the share. We remain committed to the WOW turnaround plan, and feel this position has huge potential in the coming year.

Transactions for the month

Trade Stock
ADD Woolworths (WOW)
BUY Regis Healthcare (REG)
BUY QUBE Holdings (QUB)
SELL Computershare (CPU)
SELL BHP (BHP)

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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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