Prime Australian Equities Income Portfolio – December 2015

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.

DOWNLOAD the Prime MPS Performance Report, December 2015

Market Summary

December market performance was very much a tale of two halves, with initial trading soft before a nearly 9% index rally in the final fortnight to close the month up 2.7%.

The month was dominated by news of foreign macro events, notably the decision by the US Federal Reserve to raise interest rates for the first time in 9 years. In addition to this, markets paid significant attention to the ongoing weakening in China’s currency – the Renminbi fell 3% in December and is now at its weakest level to the US dollar in 5 years. The concern with China’s currency weakness is the fear that China becomes more competitive in global export terms, and effectively crowds out volume and pricing power in economies and markets in which it competes. This is where the concept of China ‘exporting deflation’ comes from.

In local economic news, the mood was reasonably upbeat. Consumer and business confidence remained fine, quarterly GDP for September came in a shade above expectations at 2.5%, and most notably the November employment report delivered a whopping 71,400 new jobs – the highest monthly growth in over 5 years. The improving economic tone here locally saw the RBA remark that it could see the prospect of firming conditions ahead.

In stock news, the biggest December headline came with the decision by Woodside (WPL) to withdraw its interest in acquiring Oil Search (OSH). The move saw the OSH share price lose 20% in 2-days, and caused a significant dent in the performance of PRIME’s Australian Equity Growth portfolio.

Crown Resorts (CWN) saw a reasonable bounce as press reports emerged to suggest its major shareholder, Consolidated Press, were looking to take the casino business private. Fuelling this rumour was confirmation during the month that James Packer would step down from the CWN board, and flies hot on the heels of his decision to acquire a further 3% of CWN a month prior (taking his holding to 53%).

Retail shares performed solidly as reports of Christmas consumer spending came through with a positive tone – Consumer Staples (namely Wesfarmers) and Consumer Discretionary were the two best performing sectors in December.

Portfolio Commentary & Positioning

The PRIME Australian Equities Income portfolio rose +3.46% in December, comfortably beating the ASX200 Accumulation’s 2.73% rise and in spite of holding near maximum cash weights all month.

2015 calendar year performance saw a rise of 5.43% for the portfolio, again ahead of the 2.56% rise in the ASX200 Accumulation index. This is the second year running this portfolio has bested the benchmark.

It was an encouraging end to the year for this defensive portfolio, and we are pleased to report the outperformance in spite of its large cash weighting.

The main change to the portfolio this month was the inclusion of Flight Centre (FLT) and the completion of our exit from long-standing positions in both AGL Energy (AGL) and Ausnet Services (AST). As per the GROWTH portfolio, we chose to include FLT in the INCOME portfolio due to its sound dividend yield and excellent balance sheet. We feel business is tracking soundly YTD, and that first half profits to be reported in the coming months will demonstrate improving trade. FLT was an excellent performer in the month rising 8% after our position was initiated.

We are pleased to have exited our successful positions in both AGL and AST, and simply feel that much of the undervaluation we initially felt in both shares has now been repaired.

Beyond the constituent changes, the INCOME portfolio saw excellent gains by the likes of both Adelaide Brighton (ABC) and Wesfarmers (WES) – both rose over 9% in December. Whilst WES benefited from enthusiastic investor sentiment toward Christmas sales, we must admit to being slightly flummoxed as to the reason for ABC’s significant bounce. But we aren’t complaining.

We see ABC as likely to reach a fair value somewhere in the low $5.00 range, and would look to potentially take profits in that region should it be achieved.

Transactions for the month

Trade               Stock
BUY                   FLIGHT CENTRE (FLT)
SELL                  AGL ENERGY (AGL)
SELL                  AUSNET SERVICES (AST)

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Download the Prime MPS Performance Report, December 2015

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.[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]

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