Weekly Market Update (Issue 473) – November 3rd 2017

3rd  November 2017, 11.30am

The music continued to play this week, and the markets continued to dance to it.

OPTIMISM REIGNS

U.S economic momentum remains pedal-to-the-metal with Consumer Confidence for October the highest monthly reading since 2000, another strong month for job growth (U.S payrolls set to confirm this tonight) and continued manufacturing strength.

In Europe, Germany recorded its lowest ever rate of unemployment (5.6%), French consumer spending and manufacturing pushed to the highest levels in several years, as did Italian manufacturing momentum.

Apple (AAPL), Amazon (AMZN), Facebook (FB) & Alphabet (GOOG) have all reported strong September quarter profit figures in the past week

Oil reached a 2-year high.

It’s all a go.

Despite this, global bond yields continue to hold fast, unflinching in the face of such strong economic momentum.

It feels very ‘finger-in-the-dyke’ to me on bond yields, but so far so good.

That bond markets are so well-behaved is crucial to understanding how equity markets remain so well supported.

The economic optimism continues to drive investment markets to ever higher levels (albeit in a slow, creeping fashion), but there are obvious pockets of investor exuberance that should be noted lest complacency creep in.

Examples of which are the likes of –

  1. BITCOIN has rallied from $3,000 to $7,000 in 6 weeks, taking its annualized gain to well over 600% year-to-date
  2. Hybrids are now so well bid that the infamous $3bn Commonwealth Bank CBAPD hybrid issue that launched back in 2014, and which has never ever traded at its issue price since listing, is now at its highest traded price ($98.90) and just shy of the $100 issue, offering investors now barely a 4.5% gross return (<3.2% before tax credits)
  3. Just like the way Blackmores (BKL) and Bellamy’s (BAL) traded at the peak of their ‘crazy China demand phase’ in late 2015, current market darling A2 Milk (A2M) is trading HUGE volume at its enviably high share price. A2M shares are trading over 1% of issued capital every day lately, which insinuates a significant amount of speculation in my view.
  4. Blackmores (BKL) itself has almost doubled in 2-months despite no change to earnings (arguably a tough task to make current analyst estimates), and now trades on 30x 2019 forecasts which is utterly ridiculous
  5. Platinum Asset Management (PTM) has gone from its lowest forward earnings valuation in 8-years to its highest in 8-years in a matter of 3-months with precious little significance in earnings upgrades – the stock has risen 80% since we recommended it in June.
  6. Australian mining shares continue to lead ASX200 sector performance despite the -25% fall in iron ore prices.

All of these are slightly esoteric, but relevant demonstrations of a bullish investor attitude to risk.

There is much to like about the state of global economic demand, and Australia too is slowly grinding away, but pockets of potential irrational exuberance are creeping in, and readers of this weekly piece know by now that I prefer to avoid this even if it proves I’m too early as is often the case.

The trouble in Australia is simply that economic momentum is still far too patchy, making the already limited investment opportunity set even tighter.

With limited supply, the good stories get bid up ever higher until such time as a small operational tumble elicits an arguably gross over-reaction.

The examples above on Bitcoin, A2M, BKL, PTM and miners are worth watching – the stories are good and have been good, but are they really ‘thaaaat good?’.

We’ll see.

A BIG WEEK FOR THE UNITED STATES ECONOMY & GOVERNMENT

Well, without being political (as much as I am itching to be), we all saw the indictments against Manafort, Gates & Papadopolous.

Thus far share-markets have paid scant attention, preferring to focus for the time being on the prospect of tax-reform and the current economic upswing.

Ignoring the situation however is perilous, as the subtext certainly reads like there is very real potential for further, more significant charges to be laid as the weeks and months drag on.

I will leave you all to read into this and draw your own conclusions, but in my view, this is a very thing end of a very long wedge.

The President announced Jerome Powell as Federal Reserve Chairman, replacing Obama’s pick, Janet Yellen.

Markets are comfortable with the decision, and his remarks in recent history seem to point to a continuation of recent Fed tightening, at a gradual pace, and he similarly favours loosening restrictions on bank principal trading, which is helpful for banks like Macquarie (MQG).

The U.S tax-reform package was announced on Thursday night, but continues to face significant opposition from within conservative Republican ranks as to the impact of cuts on long-term debt.

This is a long row to hoe.

AUSTRALIAN SHARES THIS WEEK

AMCOR (AMC) shares took a modest tumble this week after AGM remarks from the CEO that conditions in their emerging market business remain tough.

AMC have been quite upfront with the troubles facing their emerging markets operation and their ability to recover input cost increases.

This is nothing new.

AMC reiterated their guidance for strong profit growth in 2018, so at a headline level nothing has changed, and we continue to feel that given the dearth of ASX investment opportunities currently, AMC remains a very sound bet at $15.

Woolworths (WOW) Q1 sales this week continued to be sound, and the stock took some heart.

Food like-for-like sales grew +4.9% and well above the +0.3% seen at competitor Coles.

Importantly WOW are seeing both the number of items per basket growing, and the number of visits per customer increasing, and this speaks to volume growth in the order of +6%.

It’s great momentum, and despite price deflation detracting modestly from margins, we think WOW remains in earnings upgrade mode and on target for our $28 price target.

National Australia Bank (NAB) results this week echoed those of ANZ a week earlier with absent earnings growth on offer, however unlike ANZ where revenue growth is slowing, it is NAB’s heavy expense burden announced as part of a major restructuring that took the shine off.

Beyond the announcements relating to some 6,000 job cuts by 2020, NAB’s underlying revenue trajectory was actually ok.

NAB continues to payout an unsustainably high 79% of income as dividend, and we retain the view that NAB (alongside WBC), continue to hold some risk of an absolute dividend cut in 2018.

Telstra (TLS) was the other major in the news this week, holding its Investor Day on Thursday.

There wasn’t a huge amount to report from the day – cost-cutting is ahead of schedule, competition in mobile and fixed line is fierce, with mobile revenues a shade lower in Q1.

The stock remains on the outer, but offers too much value to be selling still, so we await for levels nearer $4.00.

AUSTRALIAN ECONOMIC UPDATE

This week we had some continued mixed messages from the local data.

Encouragingly, Building Approvals are rebounding back and last month recovered to their highest level in a year. The bounce was largely apartment driven, so let’s check its sustainability next month.

Service sector and manufacturing activity continued to soften however – manufacturing is back at a 12mth low, and is bearing the brunt of this year’s rise in the AUD.

Services remain soft too and reflecting this weaker consumer pattern, today’s release of September Retail Sales showed a collapse to only +1.4% growth – one of the 6 weakest months of growth in the last 20 years.

We continue to think rate hikes are well off the table for the coming year, and that the Australian Dollar remains a sure bet to be lower in 6 months time.

That’s all folks.

Jono & Guy

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3rd  November 2017, 10.30am

Australian Market Index

 IndexChange%
All Ordinaries 6002 +19 +0.3
S&P / ASX 200 5932 +16 +0.3
Property Trust Index 1346 -5 -0.4
Utilities Index 8462 +21 +0.2
Financials Index 6586 -84 -1.3
Materials Index 10944 +180 +1.7
Energy Index 10048 +421 +4.4


Key Dates: Australian Companies

Mon 6th November N/A
Tue 7th November Div Ex-Date – Macquarie Group (MQG)
Tue 8th November Div Ex-Date – RESMED (RMD)
Thu 9th November AGM – Flight Centre (FLT)
Div Ex-Date – National Australia Bank (NAB)
Fri 10th November N/A

International Market Index

Thursday Closing Values

 IndexChange%
U.S. S&P 500 2580 +20 +0.8
London’s FTSE 7555 +68 +0.9
Japan Nikkie 22539 +799 +3.7
Hang Seng 28519 +317 +1.1
China Shanghai 3383 -25 -0.7
    

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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.

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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