Prime Australian Equities Growth SMA – March 2016

Prime Australian Equities Growth SMA – March 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

The market rebounded strongly in March, recovering Februarys losses and some of January’s too. However it was very much a tale of two halves, with the early strength subsiding in the final fortnight.

Equity markets had strong reassurance from all corners of the world this month with evidence emerging the US Federal Reserve will prove to be decidedly less aggressive in their rate hiking plans, the European Central Bank unveiling a further reduction in official interest rates and an expansive financing package for the banking system, and lastly in China there seems more confidence that the expedition of infrastructure projects is having a positive impact on the economy.

The main impact outlet for this improved global outlook was seen in the Australian Dollar, which leaped nearly 5c to 76c. The rise in the Australian Dollar shouldn’t necessarily have been a surprise in light of the Fed’s dovish interest-rate outlook and the improving levels of Chinese industrial activity, but the move certainly opens up the renewed prospect of the RBA moving to cut domestic interest rates in order to weaken the currency.

Amongst stocks and sectors, the biggest risers came amongst the banks (+5.6%), miners (+5.5%) and oil (+5.3%) groups. Healthcare (-0.5%) and telecoms (+1.9%) were the laggards. The rising AUD had a large impact on the performance of the major sectors, with healthcare notably weak given the substantial offshore earnings composition of groups such as CSL (CSL), Sonic Healthcare (SHL) and Ramsay Healthcare (RHC).

Notably the bank sector bounce came in spite of the negative announcement from ANZ Bank (ANZ) that its first half credit expense would be $100m or more higher than the initial estimate it gave as recently as a month earlier in its February trading statement. ANZ still managed to close the month 5% higher in spite of the heavy selling post this news.

Amongst the miners, there was a substantial spike in iron ore prices early in March which helped boost the likes of BHP, Rio Tinto (RIO) and Fortescue (FMG) – iron ore initially jumped 25% in the early part of the month, before subsiding to be up 10% for the month, and significantly 20% for the year-to-date.

Portfolio Commentary & Positioning

Though the portfolio recouped some outperformance in March, it remains a tough slog.

The portfolio rose +5.34% beating the ASX200 Accumulation benchmarks rise of 4.73%, but remains marginally behind the benchmark for the calendar year 2016 (Prime Growth – 3.21% YTD vs ASX200 Accumulation -2.75%).

Beyond the major sector moves there was little to help delineate the cause for the portfolio’s outperformance in March. The contribution was well spread amongst the major banks – notably National Australia Bank (NAB, +9%) and Westpac (WBC, +6%), and even ANZ Bank (ANZ) outpaced the index move in spite of the disappointing bad debt revelation made during the month.

Our industrial bets in Crown Resorts (CWN), Insurance Australia Group (IAG) and Computershare (CPU) all bettered the market, though there was no particular news of note in either name.

Dragging on portfolio performance was the large overweight we continue to hold in Telstra (TLS). TLS has not benefited from the ongoing bond market rally, and continues to be used as an obvious source of funding for other sectors when the market rebounds. We believe this will change in time as we foresee increasing prospect for interest rate cuts a positive catalyst for TLS shares given its steady dividend stream and bond-like characteristics.

Though the energy sector managed to beat the index in March, our oil bets lagged not only the oil sector but the market as well. Our positions in the high quality end of the energy sector by way of Oil Search (OSH) and Woodside (WPL) meant that as the leveraged bets in the sector rallied, both OSH and WPL were far less keenly sought.

Our recently added positions in both Sonic Healthcare (SHL) and Woolworths (WOW) continue to idle, and both underperformed in March. Both stocks are extremely high quality franchises offering excellent value, however lack momentum. We believe the tide will turn favourably for both soon, and should we see further weakness we will likely add to positions in both.

There were no changes to the portfolio during the month, and the portfolio retains a sensible cash weighting pre-emptively to action any opportunities that present themselves.

Transactions for the month

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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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