Weekly Market Update (Issue 480) – 21 December 2017

21st  December 2017, 4.00pm

Weekly Market Update

So, this will be our final missive for 2017. We will return in print on Friday the 12th January 2018.

Obviously, this is a great chance for Guy and myself to thank you all for reading, and particularly to thank all the clients of PRIME for again affording us your goodwill in 2017.

We would like to wish you and your loved one’s a very ‘happy holidays’ and the best of health, wealth and happiness in the year to come.

2018 YEAR AHEAD

I fully intend to do our usual ‘year-ahead’ piece in mid-January upon everyone’s return from summer break, but perhaps a brief precis of our thoughts for the 12-months to come –

  1. The local Australian economy is finally on the improve, and we would expect 2018 to see improved business and consumer confidence translating to continued jobs growth
  2. Australian and global share-markets can push higher in the 1H of 2018 as optimism around U.S. tax cuts further fuels economic growth
  3. Bond-yields will rise as expansionary fiscal policies and contracting monetary policies clash, making interest-rate sensitive assets prone to volatility and underperformance. Rising bond-yields will ultimately curb the performance of equity markets mid-2018, but will contribute to increased volatility in the interim
  4. The AUD will weaken back to 70c due to slowing export momentum (China) and stronger relative economic growth ex-Australia
  5. We will continue to advocate for more active asset management as bond and equity indices reach higher valuation levels and enter their 10th year of a bull-market. We will continue to reduce our ‘passive’ index holdings to mitigate against asset-market risks.
  6. Some of Australia’s unloved major stocks and domestic cyclicals can recover well – bank stocks could actually perform OK in the first half of 2018 as the market around it gets more expensive, and as fears of a housing correction ameliorate
  7. Share-markets will focus on politics from the second quarter of 2018 as the U.S mid-term congressional elections loom, and as Australia’s 2019 Federal Election comes into focus.

As I have conveyed in recent weeks, I am undeniably more optimistic on Australia’s domestic economy than I have been in 18 months, and think the improving outlook for capital investment will reflect itself well certain industries. We have long advocated for SEEK (SEK), but feel confident we will be adding other domestic cyclical exposures in the months ahead.

A RE-CAP of MAJOR TRENDS YEAR-TO-DATE in 2017

To give you all a guide for the sorts of returns across various asset classes and portfolios, I thought I would summarize them as follows below –

  1. The PRIME Recommended Balanced Portfolio as a proxy for portfolio returns is +11.27% for 12-months to November 2017 (Morningstar benchmark is +10.24%)
  2. ASX200 Accumulation index is +11.8% year-to-date to the close of business yesterday, 20th December 2017 & the PRIME Australian Equity Growth SMA is +10.9%
  3. Within the Australian market, large-caps are +7.2% only, mid-caps +22.2% & small-caps are +19.1%
  4. As a guide for International equity performance, the PRIME International Growth SMA is +18.9% after AUD currency adjustment to yesterday, with the S&P500 +20% (+12% after AUD adjust), NASDAQ +29% (+21% after AUD), Euro-stoxx 50 +8% (+14% after AUD), Hang Seng +33% (+24% after AUD) & Nikkei +19% (+15% after AUD)
  5. 3-month term deposit rates are now 2.4%, Australian 10-year government bonds yield 2.6% and the average Australian 5-year investment grade corporate bond yields 3.62%

In a nutshell, being invested purely in Australian ‘blue-chips’ would have seen serious underperformance in 2017.

Small-caps dominated performance locally, and offshore equity performance was stronger even despite a rise in the Australian Dollar.

THE WEEK GONE

The Liberals (and the market) had a win with the outcome of the Bennelong by-election, and markets globally enjoyed the US tax legislation that will see an earnings upgrade of as much as 10% for the US stock-market as the corporate tax rate is cut from 35% (though the effective tax rate is 28%) to 21%.

Interestingly, Australia has now got the 3rd highest corporate tax-rate amongst all OECD nations, and this will surely rapidly become an election issue in 2018 – a positive no doubt for markets and the economy if the Liberal Government can drive this as a new theme.

The mid-year economic and financial outlook was constructive since corporate tax take was better than expected, smoothing the glide path back to supposed budget surplus in 2021.

THE COMING MONTH TO COME, AND A BUSY Q1 EXPECTED

It will be extremely quiet obviously over Christmas and New Year (pending outlier events like North Korea or the Mueller investigation into Russia’s election meddling), but we are watching a couple of Australian portfolio names lest they reach price targets of ours.

Woolworths (WOW) is probably the main one given it is within 3% or so of our $28 target price. Feel free to speak to your advisor if you would like to leave a limit in.

We are also watching share prices in SEEK (SEK) to add, IOOF (IFL) to re-enter, and some of the domestic economic cyclicals we think might benefit in 2018.

As a heads up, the first quarter of 2018 will be extremely hectic since we have several new issues likely to come to the market (venture capital, fixed income, multi-asset, international equity, small-caps and Australian long/short equity). All of the issues we are looking at are of a high quality and we think can play a meaningful portfolio role for investors.

Exciting times!

Again, wishing you all a safe and happy Christmas season.

Jono & Guy

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Interest Rate Commentary & Update

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21st  December 2017, 3.00pm

Australian Market Index

 IndexChange%
All Ordinaries 6158 +62 +1.0
S&P / ASX 200 6063 +52 +0.9
Property Trust Index 1428 -34 -2.3
Utilities Index 8356 -114 -1.3
Financials Index 6532 -1 –
Materials Index 11381 +423 +3.9
Energy Index 10733 +177 +1.7


Key Dates: Australian Companies

Mon 25th December Christmas Day
Tue 26th December Boxing Day
Tue 27th December Div Pay-Date – NABPC, WBCPE
Thu 28th December Div Ex-Date – APA Group (APA), Magellan Global Trust (MGG), NABPD, Transurban (TCL), Vicinity Centres (VCX)
Fri 29th December N/A

 

International Market Index

Thursday Closing Values

 IndexChange%
U.S. S&P 500 2679 +27 +1.0
London’s FTSE 7525 +77 +1.0
Japan Nikkie 22881 +187 +0.8
Hang Seng 29381 +215 +0.7
China Shanghai 3303 +11 +0.3
    

 

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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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