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Securities mentioned this week

• Westpac (WBC), VGI Partners (VG1, VGI), Afterpay (APT), Oil Search (OSH), Woodside (WPL), BWX (BWX), Australian REIT sector, SEEK (SEK), IOOF (IFL)

Key market themes

• Trade tensions de-escalated at the weekend G-20 meeting, albeit little agreement on anything sustainable was achieved. Both China and the U.S agreed to talk, the U.S agreed to allow Chinese telecom equipment giant Huawei to buy certain componentry from American suppliers and Trump proclaimed that the Chinese would buy up big on the agricultural front > but frankly speaking, this can just keeps on being kicked down the road and market’s are likely soon to fatigue on headlines that promise a lot, but in reality deliver little.
• Central bank support has re-injected a fresh bout of optimism into markets – the Federal Reserve seem set to lower interest rates next month (the market has 3 cuts priced in in the coming 12mths), the European Central Bank promised they could further stimulate despite already negative interest rates.
  • Incredibly all major asset classes rallied last week with equities, bonds, gold and base commodities all rallying, which attests to the idea that it’s the prospect of yet more cheap money floating the values of asset markets at present.
  • The S&P just had its best 6-month gain in 20 years, which undoubtedly surprised us.
  • However, with the G-20 now passed, the U.S Federal Reserve and European Central Bank meetings another month away (August 1st & July 25th), and the prospect of a mixed reporting season to come, it feels almost assured that markets spend the coming 2 months consolidating or lower.
• Australia’s domestic economy continues to demonstrate the impact of softer demand and the halo effect of weaker construction activity, however we feel increasingly optimistic about the future outlook for 2020+ given local interest rate cuts, pending tax cuts (and the prospect of more in 2022 and 2024), future fiscal stimulus given excellent iron ore royalty.
• The strong performance of Australian property REIT stocks has seen much of the sector use the share price strength to raise capital. The likes of GPT (GPT, Cromwell (CMW), Mirvac (MGR) and Dexus (DXS) have raised over $2bn in fresh equity over the last 2 months.

Economic data released

• Global manufacturing activity is waning, with June Chinese manufacturing data over the weekend loitering at a 3-year low, and early signs on U.S manufacturing similarly at their lowest ebb since 2016.
• Australian jobs data began to weaken in last months release with much of the rise in employment coming from part-time workers during May. We believe Australian full-time employment is likely to go into reverse in the remaining months of 2019 as construction activity wanes.
  • We should expect to see the RBA cut rates further from 1.25% currently to 0.75% due to the softness in employment.

Observations from the past week

Afterpay (APT)

Afterpay (APT) shares have been even more volatile than normal in the past fortnight, falling -20% on news of an AUSTRAC audit and the placement of new and founder’s stock at $23, before then rallying +40% back to its highs and then collapsing on Friday and this morning on fears over competition from Visa in the instalment payment space.

Frankly its all just noise. We think APT is worth ‘around $30’ which means that the closer it gets to that level the more it becomes vulnerable to negative news-flow. We would consider ADDING to the stock under $20.

IOOF (IFL)

IOOF (IFL) confirmed acting CEO Renato Mota would fill the position full-time which we think is good news, particularly since Mota has been the senior manager dealing with APRA this year in resolving IFL’s regulatory shortcomings.

IFL also announced the sale of its 70% stake in broker Ord Minnett for an excellent price of $115m.

The coming couple of months will see a significant uptick in news-flow for IFL with this week seeing the kick-off of court proceedings between much of IFL’s former (and current) executive team and APRA in relation to these individual’s propriety to stand as trustees. The court case is unlikely to have any lasting impact on the value of IFL but will create headlines.

More important will be IFL results on August 26^th, any word on potential remedial costs for ‘no advice’ by the end of September, and obviously, resolution to the ANZ Wealth merger.

Assuming we get through the coming 2 months with little surprise, then I think IFL shares are likely to be 20-30% higher and a likely takeover target in 2020.

VG1 Partners (VG1)

VGI Partners (VG1) completed their 1 for 3.22 raising last week and saw the successful IPO of their asset management company VGI Partners (VGI) at $5.50.

We were extremely pleased to see the VGI share price double from its IPO price to now trade at $13.00 (+135%) which, whilst it looks a full and fair price, will likely be maintained given the limited free float and strong potential for future growth from VGI in Asia.

Oil Search (OSH), Woodside (WPL)

Oil prices have spiked +15% in the past fortnight as concerns mounted over a potential U.S/Iranian conflict and in advance of the weekends news that OPEC would extend their production cuts into early 2020.

Prime believe Oil Search (OSH) looks particularly attractive at current levels and were encouraged to see Deutsche Bank upgrade Woodside (WPL) to BUY this week as well.

European government bond yields

European government bond yields went deeper into negative territory last week after the ECB promised they could further cut interest rates. German 10-year yields collapsed to a record low of -0.40% and French bond yields are now offering ZERO return for investors.

What’s interesting?

The Australian Dollar ‘feels’ like it is bottoming in the 70c range. Interest rate cuts, the promise of tax cuts and a likely better Federal Budget position all point to the likelihood that the AUD is nearing the end of its long-downtrend.

This has implications for portfolio’s in many respects, be it the potential to shift single-stock exposures, hedge offshore fund positions or indeed to re-think many consensus portfolio positions investors have become accustomed to holding in recent years.

Sukin (BWX) google-trends continue to be strong locally, giving us continued confidence that sales momentum remains sound in Australia.

S and European bank sector performance remains especially weak and provides a glimpse into the future performance for Australia’s major banks as interest rates get slashed here > falling interest rates significantly reduces bank sector profitability.

Several brokers are talking about risks to Westpac’s (WBC) dividend given 90%+ payout ratio and falling profitability > we wouldn’t be surprised to see WBC follow ANZ and NAB in cutting its absolute dividend level at full year results in early November.

The 2020 U.S Presidential campaign is slowly kicking into life and this is relevant for several consensus trades, but most definitely for positions in bell-weather internet and healthcare names. There is bipartisan support for tighter regulation of the internet platforms and for reducing healthcare costs, meaning that each of these two sectors are likely to face rising investor concerns around the prospect of increasing costs.

Looking ahead

• Monday – Australian Industry Group Manufacturing activity (June), China manufacturing (June), US ISM Manufacturing (June)
• Tuesday – RBA Meeting (market expects a rate cut to 1%)
• Wednesday – Australian Industry Group Services activity (June), AUS Building Approvals (May), U.S ADP Employment (June), U.S Services activity (June)
• Thursday – U.S Independence Day Holiday, AUS Job Vacancies (May), AUS Retail Sales (May)
• Friday – Australian Industry Group Construction activity (June), U.S Employment (June)

Australian corporate results season commences properly in early August and we have already begun to see the number of earnings pre-announcements rise for those companies failing to match analyst expectations.

Thus far we have seen Viva Energy (VEA), CALTEX (CTX), Adairs (ADH), Wesfarmers (WES) warn on current earnings and we would expect more to come.

We are worried that the falling jobs market could cause downgrades to SEEK (SEK), and we are worried that Westpac (WBC) may be forced to lower its dividend at its results in early November.

Regards, Jono

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