Prime Australian Equities Income SMA – May 2017

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

Banks endured their worst month in nearly 2 years, falling -9.2%. Low interest rates and rising funding costs continue to impact banks’ profitability. Additionally, current dividends suggest banks are paying out significantly more than their target ratios and infer dividend cuts are coming. Most of the outperformance came from our large underweight position in the banks and we continue to remain underweight for the time being.

The Federal Budget heaped further pressure on the banks with the announcement of a Major Bank Levy aimed at raising $6.2b. It remains to be seen whether this tax will be “passed on” to shareholders and mortgage holders. Whilst the focus on infrastructure spend was timely, there was little detail on just how the government intends to stimulate employment and productivity for the wider economy.

Miners were flat on the month (-0.26%) despite the glut of iron ore at Chinese ports. Iron ore fell another 14% in May. What was last year’s strength is rapidly becoming this year’s weakness.

Following the budget, S&P reaffirmed Australia’s AAA credit rating, however we expect a downgrade in the coming 12 months.

Bonds rallied for the third consecutive month given the continued weakness in Australian domestic economic data. Australian 10 year bond yields fell from 2.58% to 2.39% as May’s consumer confidence numbers continued to slide.

Portfolio Commentary & Positioning

The PRIME Australian Equity INCOME portfolio fell –2.02% in May, yet still beat the ASX200 Accumulation Index loss of -2.75%

Telstra (+4.27%) finally saw some respite in May having been savaged the month prior. The ACCC ruled that that it would not support wholesale mobile domestic roaming meaning TLS will not be forced to let out its network to other operators at a heavily discounted rate. This is obviously a big win for TLS.

Sonic Healthcare (+4.84%) was the beneficiary of the Federal government’s plans to index the services available for Medicare subsidies which will translate to gradual price rises. Additionally, incentives for bulk billing pathology services will continue which will further support SHLs business. We took this opportunity to reduce 1% weight in our SHL shareholding.

The biggest detractor on portfolio performance was ANZ (-14.50%). Half yearly results showed margins remained under pressure. ANZ went ex-dividend during May with an 80c dividend to be paid to shareholders in early July further contributing to the selloff.

National Australia Bank (-11.41%) was marginally better off with the bank benefitting from growth in lending and stronger trading income. NABs first half results were much improved on the prior corresponding period given the costs incurred with spinning out Clydesdale Bank last year.

Woolworths share price was also disappointing (-3.09%) despite its Q3 sales figures beating analyst forecasts significantly. Same-store sales rose 4.5%, easily ahead of market expectations of +3%. The market still seems unconcerned that WOWs strong sales growth will translate to profits, however we remain confident in WOW achieving our $27 target price.

Transactions for the month

Trade               Stock

REDUCE           Transurban Group (TCL)

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DOWNLOAD the Prime Separately Managed Account (SMA) Report, May 2017

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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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