Prime SMA Performance Summary – November 2021

For a third consecutive month, the ASX 200 closed modestly lower. 

For November, the top contributor to returns was Materials (+6.3%) whilst Financials (-6.9%) and Energy (-8.3%) were the key underperformers. At a stock level, BHP Limited (BHP), Goodman Group (GMG) and Woolworths contributed most to returns, while disappointing earnings results from Commonwealth Bank (CBA) and Westpac (WBC) and lower energy prices for Santos weighed on returns.

Banks have been a key beneficiary of the recovery in the housing market and the rally in cyclical stocks since the nadir of equity markets in early 2020. While banks have enjoyed a strong recovery in earnings and dividends, we believe that the tailwinds underpinning their performance are now firmly fading. During November we reduced our exposure to the Banks as their most recent profit results highlighted a marked deterioration in earnings quality with margins impacted by rising price competition in mortgage lending combined with persistently high expense growth. Our cautious stance toward the banks was further reinforced by intervention by the Australian Prudential Regulator (APRA) with the announcement of a tightening of serviceability measures for new home loan applications. A further round of prudential measures is expected in the new year as APRA takes a “targeted and judicious” approach to strong housing loan growth. The effect of current and further prudential restrictions on borrowing is expected to dampen housing finance. Notwithstanding a more challenging backdrop, the banks still offer income investors an attractive dividend yield supported by strong capital buffers and sustainable payout ratios.

We have used the proceeds from banks to add to our portfolio positions in BHP Group and Telstra. The BHP share price has declined ~25% since the iron ore benchmark price peaked at ~USD$224 in May. Although iron ore made up 57% of FY21 revenues for BHP, market expectations already factored a steep decline in iron ore prices during FY22. Since the FY21 result BHP has announced the unification of its dual listed structure, the sale of BHP Petroleum to Woodside and the approval of the USD$5.7bn Jansen Potash project. BHP also plans to exit its remaining coal assets. We view these developments favourably. With gearing below its target range and a simpler capital structure to be in place next year there is also the potential for BHP to exceed its 50% dividend payout ratio and consider a share buyback.

The emergence of the Omicron variant has provided a salient reminder of the ongoing risks and challenges of the pandemic. Indeed, equity markets may be impeded in the near term by the uncertainty the Omicron variant and the prospect of more persistent inflationary pressures pushing central banks to consider tightening monetary policy settings. With this mind, the importance we place on investing in companies that continue to demonstrate earnings and balance sheet resilience, remains steadfast.

Portfolio Performance Figures

Risk Profile Portfolio Performance Figures as at 30 November 2021

Post-Franking Credits

Prime SMA – Model Portfolio Performance Figures as at 30 November 2021

Post-Franking Credits

About the Portfolio

Portfolio Objective
To achieve capital growth with moderate tax-effective income via franked dividends through investment in listed Australian securities.

Model Portfolio
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.

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.

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