Weekly Market Update (Issue 468) – September 28th, 2017

28th  September 2017, 10.00am

An early release of the weekly update this week given the public holiday in Victoria on Friday.

I must say the “Tiger spirit” is getting to me and watching them win a Grand Final would be quite pleasing.

Regardless, the weather is turning and with daylight savings kicking in this weekend, the future is looking a little brighter.

However, any strength in our share market seems likely to be tested in the coming weeks with the market down ~1% in September.

For the week to date we are flat and the market continues to sit right on the 2-year trend line, having broken through it last week.

Whilst the market has spent the better part of the calendar year trading in the sideways range of 5660-5800, we now appear headed for lower levels with the ASX200 sitting just over 1% above our yearly lows.

Market Currently Sits On Two-year Upwards Trend

This short week

With next to no economic data released this week, the ASX200 had little impetus to climb higher or fall significantly.

Telcos weighed on the market this week falling 2.5% and are now down over 30% since January.

Telstra (TLS) which has fallen by similar levels this year continues to slide, falling to 5-year lows on Wednesday.

TLS now trades on a 1 year forward p/e of 11x and a dividend yield of 6.3% which is 9% grossed.

Whilst this does not ease the pain for shareholders, the decision to cut the dividend in August was a prudent one. The payout ratio of 95% was unsustainably high if TLS wished to fund future investments and reinvent itself as a technology player.

TLS still provides a great source of income in client portfolios and the decision to reduce the payout ratio and strengthen its balance sheet is intelligent.

The last thing I want as an investor is for a company to pay out dividends it either could not afford or at the expense of future growth.

On the plus, energy stocks were the standout performer with the sector reaching its highest levels since the end of May.

Oil Search (OSH) rallied 4.5% during the week despite the sale of 31m shares by the Papua New Guinean government last Friday.

The PNG investment in OSH since 2014 has turned out to be a poor trade and facing cash flow problems the government decided to cut its losses and move on.

With the PNG government coming off the share register OSH looks an even more attractive takeover target with Total and Exxon the most likely candidates given their stakes in PNG LNG and Elk Antelope projects.

Rio Tinto buy back

Rio Tinto (RIO) announced a US$2.5bn buy-back comprising an on-market and off-market buyback.

Following the sale of its Coal & Allied operations to Chinese-controlled Yancoal for US$2.69bn, RIO has decided its balance sheet is in a sufficiently stable position to pass on the proceeds to shareholders.

The off-market buyback will entitle shareholders to tender shares at a discount between 8-14% to the market price with the distribution of franking credits likely to ensure participation will be high.

Given the attractiveness of the offer, we anticipate a rather large scale-back however the tender period does not open for another 2 weeks and remains open for 1 month so we shall see.

The strength in RIOs balance sheet and its disciplined approach to capital allocation is clear given this is RIOs third buyback this year following a US$500m buyback in February and a US$1bn buyback in August.

VGI Partners – Up and Running

VGI Partners Global Investments (VG1) commenced trading on the ASX today on a normal settlement basis and did so at its IPO price of $2.00

We have advocated for increased client exposure to international equities this year (which to date has been a good call) and VG1 provides another opportunity to gain such exposure.

The VGI Partners team are a high conviction, absolute return investment manager whose record of outperformance since inception despite holding significant cash is extremely impressive.

Having targeted a raising of $400m, the bookbuild raised closer to $600m by the time the offer closed.

It is for this reason coupled with their exceptional performance and management that we remain very optimistic here.

US inflation uncertainty & interest rates

Janet Yellen’s speech on inflation, uncertainty and monetary policy threw further support behind a December rate hike.

Despite acknowledging the Federal Reserve may have overstated the strength of US employment and the rate of inflation, Yellen maintained it would be unwise to keep monetary policy on hold until inflation is back at the Feds target level of 2%.

Instead a consistent and gradual approach to rate hikes seems to be its mantra with a December rate hike and three additional hikes forecast for 2018 now popular amongst most economists.

Despite the slower than forecast growth in the US employment figures and inflation, the commitment to gradual rate rises ensured the USD added to gains versus its major rivals this week including the AUD which is back trading at 78.3c having reached 81c last week.

I’ve kept it short and sweet this week everyone, given I only have three-and-a-half days to work with.

Next week we have a slew of economic data to hit the market so we will be back at it then.

Enjoy the long weekend and dare I say it – go Richmond!

 

Jono & Guy

 

Interest Rate Commentary & Update

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28th  September 2017, 10.00am

Australian Market Index

 IndexChange%
All Ordinaries 5731 +14 +0.2
S&P / ASX 200 5670 +15 +0.3
Property Trust Index 1310 +6 +0.5
Utilities Index 7980 +103 +1.3
Financials Index 6399 +38 +0.6
Materials Index 10256 -21 -0.2
Energy Index 9380 +232 +2.5


Key Dates: Australian Companies

Mon 2nd October Div Pay Date – Altium (ALU), GMPPA, WBCPC, WBCPG
Tue 3rd October Div Ex-Date – MYOB (MYO)
Div Pay Date – Boral (BLD), Coca-Cola Amatil (CCL), Fortescue (FMG), Tatts Group (TTS)
Tue 4th October Div Pay Date – CIMIC Group (CIM), Inghams Group (ING), Wisetech Global (WTC)
Thu 5th October Div Ex-Date – Auckland International (AIA), Sims Metal (SGM)
Div Pay Date – Adelaide Brighton (ABC), Costa Group (CGC), Corporate Travel (CTD), Pact Group (PGH)
Fri 6th October Div Pay Date – Automotive Holdings (AHG), Caltex (CTX), Crown Resorts (CWN), G8 Education (GEM), Greencross (GXL), Invocare (IVC), Mantra Group (MTR), Treasury Wine Estates (TWE)

 

International Market Index

Wednesday Closing Values

 IndexChange%
U.S. S&P 500 2507 +6 +0.2
London’s FTSE 7314 +50 +0.7
Japan Nikkie 20267 -80 -0.4
Hang Seng 27642 -468 -1.7
China Shanghai 3345 -13 -0.4
    

 

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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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