Weekly Market Update (Issue 542) – 8 Apr 2019

No Federal Election announcement over the weekend, so we now look towards the 18th of May, or worst case the 25th May.

There seems little evidence of a ‘budget bounce’ for the government if the AFR/Ipsos poll taken last week is any guide, and as a result, it feels like Australian share-markets will continue to underperform global indices in the lead-up and aftermath of a likely change in government here in 6 weeks’ time.

I would repeat the view that very few private investors have sought to pre-empt the likely change in government by reducing franked income exposures, meaning that markets will likely see a rush of activity in June as investors seek to address any loss of franking credit rebates with unfranked income streams.

Again, our managed and recommended portfolios have in large part sought to mitigate these risks, but for those amongst you yet to adhere to our concerns, we strongly advocate for a conversation with your advisor ahead of time rather than risk joining in with the herd pre-June 30th.

Afterpay (APT) – strong operational momentum seen to be continuing

Late last week Goldman Sachs published additional research on APT highlighting the continued strong user momentum within its business, notably in the United States, and the record number of monthly downloads of its mobile app there during March.

APT are currently adding 9,000 to 10,000 users per day to the platform.

GS flagged the potential upside valuation on APT as being just over $35 were the company to be successful in penetrating 25% of the millennial user cohort in the US and UK, much like they have in Australia.

We think the stock is worth somewhere between $25 and $30 in the very near-term, but we will continue to keep a close eye on operational momentum and what is reflected in the share price, because inevitably a stock with such strong share price appreciation and rapid user adoption will reach a degree of maturity and with it, share price consolidation.

However, for now, the momentum only seems to be stronger, and with the imminent launch of the UK platform, we feel like news-flow remains unequivocally positive.

SEEK (SEK) – make an excellent hire in Ian Narev

We really liked the announcement from SEK last week to appoint former Commonwealth Bank (CBA) CEO Ian Narev as COO at the fast-growing international employment platform.

Narev will be seen to be a strong set of operational hands on the tiller of its maturing Australian and Asia Pacific assets, and will allow CEO and founder Andrew Bassat to dedicate more of his time in growing the value latent in the group’s large Chinese employment operation, Zhaopin.

Employment trends locally are beginning to wane, and this will probably hold back the SEK share price near term, perhaps negating much of the positive we expect to see in the coming 12 months from China.

However, the medium-term story in SEK is a good one, so we are continuing to advocate holding our modest equity position for the time being with a view to growing its significance on any share price weakness.

Woolworths (WOW) – announce the highly anticipated $1.7bn off-market buyback

WOW announced their plans for a $1.7bn off-market buyback as a means to repatriate back proceeds from the sale of its service-station assets and to shuffle over $600m of its franking credit store back to shareholders ahead of a potential change in Federal Government in May.

The move was widely expected and gave the stock a brief lift on the day, however the additional announcement that it would be seeking to close some 30 of its Big W discount department stores at a pre-tax cost of $370m will bring with it modest earnings downgrades.

WOW has done an enviable job of turning around its core supermarket division, however at current levels over $30 the stock does look and feel fully-priced.

The stock trades on 21x future earnings with a 3% dividend yield, which is far from compelling.

In the week ahead … U.S reporting season and some interesting economic data

In the coming month we will again see U.S companies report quarterly earnings, and it is hard to expect much relative optimism given ongoing political uncertainty on trade and in Europe on BREXIT.

The U.S economy remains afloat to be sure, but incrementally has been damaged by the trade war and by the slowdown in activity in each of China and Europe.

With share-market levels barely 2% from their all-time highs in the U.S, it is hard to see the earnings reports pushing share prices higher.

Only a convincing and robust U.S/China trade deal can do that, and the discussion on this front continues to drag.

We just had Australian March job advertisements released, and the numbers look very concerning for future employment trends here locally.

The YoY figure showed a -6% fall in job ads, making this the worst figure in almost 6 years, and precariously pointing toward a fall in the unemployment rate from its current cyclical peak now just under 5%, to a figure closer to 6% by the end of 2019.

We should expect to see the RBA cutting rates as soon as the June or July meetings as an offset to the slowing economic momentum, and the likely economic shock of a new Labor Government near term.

A potential idea on the horizon… U.S housing

We have more work to do, but it has come to our attention that U.S mortgage applications have spiked in the past few months in response to the collapse in U.S long bond yields and related mortgage rates.

U.S 30-year mortgage rates have fallen from 4.8% to almost 4% since late last year, and this fall has sparked a surge in the number of people seeking to refinance at the lower rate, as well as in the number of people seeking to purchase a home.

Strong wage growth and low rental vacancies also underpin the U.S housing market which means we think there could be reason to explore the idea of adding James Hardie (JHX) and/or Boral (BLD) to portfolios in the coming weeks or months.

Watch this space.

Have a great week.

Regards, Jono

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Key Dates: Australian Companies

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