Weekly Market Update (Issue 561) – 19 August 2019

Securities mentioned this week

  • CSL (CSL), Challenger (CGF), Woodside (WPL), Magellan Financial (MFG), Telstra (TLS), Boral (BLD), James Hardie (JHX), Reliance Worldwide (RWC)

Key market themes

Ongoing tariff uncertainty >

  • Chinese authorities publicly rebuked the United States for threatening to impose a 10% tariff on the remaining $300bn of un-tariffed exports to the United States
  • The United States confirmed they plan to sell US$8bn worth of jet-fighters to Taiwan in a move sure to infuriate the Chinese government
  • President Trump labelled Huawei a national security threat

Shift in Australian market leadership might be underway >

US yield curve inversion >

  • Markets began to fret about future economic growth after the much-watched US 2-10 year yield curve inverted for the first time since the GFC.
  • As a reasonably sound predictor of past recessions, investors are right to concern themselves of this recent movement, albeit history will tell you its not iron-clad and that markets often rally in the intervening period between initial yield curve inversion and economic recession

Economic data released

  • Westpac Consumer Confidence for August bounced a little, but the NAB Business Confidence figures were broadly stable
  • Australian Employment in July posted surprising strength, adding over 40,000 jobs (nearly 35,000 of which were full time) despite multiple indications to suggest that a softening in the Australian employment picture is upon us (job advertisements are running down -10% year-on-year)
  • US economic confidence continues to hold steady despite the global deterioration, with both the Empire Manufacturing survey and the Philadelphia Federal Reserve Economic Outlook indicators bouncing in their August readings
  • US Small Business Confidence posted a small rise in August, with employment and forward order activity solid and not yet impacted by concerns on the trade front

Observations from the past week

Telstra (TLS) profit figures were largely in-line with forecasts, but encouragingly point to emerging rationality and stability in mobile market pricing.

  • TLS continued to post a dominant 60% market share in mobile post-paid subscribers in Q4 which was impressive.
  • Elsewhere, NBN receipts look likely to disappoint in 2020, but the group will endeavor to offset this cashflow softness by lower cap-ex.
  • On the whole there was little to change our mind that TLS is increasingly in a far sounder competitive position than they have been in some time, but that the stock in and around $4.00 (and a 4% dividend yield) looks to be a full and fair price for the medium term.

Challenger (CGF) earnings numbers were in line with levels the company had pre-guided to.

  • Within the figures, CGF saw modest margin improvement coming from a small inching higher in investment portfolio risk tolerance.
  • The solid balance sheet allowed CGF to pay a modestly higher dividend than most expected and to confirm its expectation of retaining this dividend in 2020.
  • On the whole we think the stock looks very cheap and we expect to see annuity volumes improve as the year progresses and as advisor understanding of the Retirement Income Framework legislation supporting annuities becomes more fully formed.

Magellan Financial Group (MFG) posted some terrific profit figures, but that didn’t stop the stock falling -15% last week as it became apparent that future sources of growth in their Australian equity and retirement income were still some way off.

  • News the company would launch a listed version of its High Conviction global equity fund was met with indifference largely since it remains only mildly derivative of the existing global equity strategies.
  • MFG announced the placement of $275m at $55.20 in stock to finance several of these growth initiatives which also contributed to create the share price weakness.
  • The company has had a tremendous success in the past 12 months and now trades on 25x 2021 earnings, which is still awfully steep for an asset manager still heavily dominated by the one global equity strategy.

Woodside (WPL) fell -9% last week after disappointing profit figures related to higher operating costs caught analysts off guard.

  • The main game in town however remains the development schedule for each of WPL’s significant future projects, the Scarborough gas field and its ability to supply gas into an expanded Pluto LNG facility, and a binding gas agreement between the Browse JV partners and those parties involved with the North West Shelf processing facility.
  • WPL held their dividend payout ratio at 80% encouragingly for investors, albeit the dividend of 36cps was modestly below analyst absolute expectations.

CSL (CSL) posted another impressive result with forward earnings guidance of +15% underlying growth excluding the impact of changes to Chinese albumin distribution.

  • CSL deserve praise for their strong vision in building out collection centres in the United States so as to achieve such strong growth in their immune globulin franchise relative to peers, however on 35x earnings and with still significant risks ahead on US healthcare regulation leading into the 2020 US Presidential election, we find it hard to chase.
  • Would love to own it lower.

What’s interesting?

COLLAPSING BOND YIELDS – last week we detailed the potential risks to investor portfolios from the enormous rally seen in global fixed income markets in 2019.

However, for equity and property investors the collapse in bond yields has the potential to significantly improve sentiment in property and construction markets.

In Australia, mortgage rates are now under 4% and auction clearance rates have begun to rebound as per the chart below.

Building Approvals for private dwellings have stabilized for the past 4 months, even though the headline rate points to a fall of -25% annually.

We think domestic Australian construction is bottoming and will turn up again early in 2020.

In the United States, the collapse in 30-year treasury yields under 2% is a boon for mortgage holders there as well, dragging mortgage refinance activity to its highest level in 6 years and new mortgage purchase activity to its highest level since the GFC.

This is great news for the housing construction sector, and we think for Australian companies like Boral (BLD), James Hardie (JHX) and Reliance Worldwide (RWC).

Australian national auction clearance rate

Looking ahead

  • Monday – Lend Lease (LLC) earnings
  • Tuesday – Oil Search (OSH), BHP (BHP), SEEK (SEK) earnings, Sonic Healthcare (SHL), AU RBA Meeting Minutes
  • Wednesday – Crown (CWN), AMCOR (AMC), Worley (WOR), Vocus (VOC), Dominos (DMP), Carsales (CAR), Brambles (BXB), A2 Milk (A2M) earnings, AU Westpac Leading Index (July), AU Skilled Vacancies (July)
  • Thursday – QANTAS (QAN), SANTOS (STO), QUBE (QUB), Medibank (MPL), Flight Centre (FLT), Coles (COL), Downer (DOW), Webjet (WEB) earnings, AU CBA PMI Services & Manufacturing data (Aug), US Federal Reserve Meeting minutes, US Markit Services & Manufacturing data (Aug)
  • Friday – Afterpay (APT), Platinum (PTM), Costa (CGC) earnings

AMCOR volumes, Downer’s outlook, Afterpay’s US profitability and Webjet guidance will the key focus for us this week.

Trade discussions remain a key focus and the strength in the USD is the other major factor for market sentiment near term.

The following week we have earnings from IOOF (IFL), BWX (BWX), Boral (BLD) & Reliance Worldwide (RWC).

Regards, Jono

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (available here)  for contact information and information about remuneration and associations with product issuers.

This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.




Weekly Market Update (Issue 560) – 12 August 2019

Securities mentioned this week

  • Commonwealth Bank (CBA), Transurban (TCL), AGL Energy (AGL), Insurance Australia Group (IAG)

Key market themes

Pressures on risk assets began to intensify last week >

  • Iron ore prices fell -20% last week
  • President Trump doubled down on the previous week’s threat to levy a 10% tariff on the remaining US$300bn in Chinese exports to the United States from September 1st, by saying on Friday night that he wasn’t even sure if the scheduled trade negotiations between the two countries penciled in for next month would occur

Shift in Australian market leadership might be underway >

  • One week isn’t necessarily the start of a trend, but it was notable to observe that last weeks ASX200 saw miners and leading small-cap technology stocks such as Altium (ALU), Wisetech (WTC), Afterpay (APT) etc all significantly underperform, whilst out-of-love names such as JB Hi Fi (JBH), Ansell (ANN), Aurizon (AZJ) and James Hardie (JHX) have been the best gainers.
  • We feel quite strongly that the best chance of making a sound Australian equity return in the coming 12 months will come from being prepared to look through near term earnings momentum and to consider long term franchise value.
  • Much of the leading edge of the market looks expensive and with perhaps unrecognized earnings risk and we feel there is much better value in parts of the market lacking in near-term earnings momentum, but still with sound and often undervalued long term earnings streams.

Economic data released

Australian Industry Group data on service sector and construction activity for July collapsed during the month to 5 and 6-year lows respectively.

  • Whilst the data-sets can be volatile they indicate that despite successive rate cuts, a stabilising housing market and the promise of tax-cuts for small and middle-income earners, Australian households are of a conservative mindset right now, and the likely reason for that continues to be the softening employment environment.
  • We feel that Australian construction will bottom in the current half and note that building approval volumes for private houses have been largely stable for the last 4 months.
  • However, we have alluded to the deterioration in Australian job advertisements year-to-date (-9% annually) as being a likely lead indicator for falling employment prospects, but we have yet to see this emerge in the official ABS Labour Force data.
  • This week’s Australian employment report will be closely watched as it feels inevitable that we see the softening demand for jobs as witnessed in the advertisement data emerge in the official figures shortly.

Observations from the past week

Iron ore prices continued to crater, closing on Friday at $85/ton and down -20% on the week.

  • Australian mining stocks have begun to underperform the wider market unsurprisingly, with Fortescue (FMG) now down from the high $9’s to be at $7 today and both BHP (BHP) and Rio Tinto (RIO) down well over -10% from their highs also.
  • As the leading edge of the market in Australia for much of the last 2 years, any protracted softness in the mining industry has the potential to paint a darker outlook for Australian equities more broadly.
  • As an economic cyclical, the health of the mining sector is often a reliable barometer for investor expectations on the wider economy.

Commonwealth Bank (CBA) earnings numbers disappointed analyst forecasts due to the nasty combined impact of falling revenues and rising operational costs.

  • Net lending across all business lines fell year-on-year and non-interest income attached to these loans fell -8% annually.
  • The top-rated banks analyst in the market, Jonathan Mott at UBS, cut his expectations for group earnings by around -10% out to 2022, nominating the significant decline in domestic bond yields as having a huge impact on the bank’s ability to earn income from off of its deposit base.
  • UBS cut their forecast for the 2022 CBA dividend by almost -15% from the current $4.31 a share to $3.72 citing falling earnings.
  • This would make CBA the last and final Australian major retail bank to cut its absolute dividend, following on from ANZ (ANZ) and National Australia (NAB) in the last 18 months, and the overwhelming likelihood that Westpac (WBC) will do the same at their full year results this November.
  • These banks are seeing earnings fall, dividend pressure, and in spite of this are trading on elevated valuations relative to the market due to the erroneous belief in their dividend security.

Transurban (TCL) posted largely in-line earnings last week, albeit the cash coverage from underlying earnings was a touch disappointing.

  • The company guided to a 62c distribution in 2020 which was in-line with forecasts and the company also announced a $700m capital raising ($500m to institutions and the remainder via share placement to retail) at $14.70 as a means to fund an increased stake in the M5 Motorway in Sydney.
  • The stock yields around 4% unfranked with some growth but remains highly dependent on continued bond market strength.
  • We would readily consider adding TCL to portfolios again, but only at improved valuation levels.

AGL Energy (AGL) fell -5% last week after giving 2020 forward guidance that disappointed the market by some -10%.

  • In truth, the results weren’t nearly as bad as the guidance implied with the vast majority of the softer outlook contributed by non-cash items.
  • The stock now looks a fairer value and the company have promised to buy back $650m in equity during the 2020 financial year, however faced with a deteriorating outlook for pooled electricity prices, and as one of the most levered producers to the fall, its hard to get excited by the prospects for AGL even after the share price pullback.

Insurance Australia Group (IAG) was another well-owned stock to disappoint optimistic forecasts, and unsurprisingly fell almost -10% last week.

  • Subdued volume growth in domestic personal lines, the impact of falling yields on portfolio returns and the guidance of a return to more normalized levels of reserve release all contributed to disappoint analysts.
  • Earnings forecasts were marked down almost -10% and with the stock on 20x and with a ~4% dividend yield, it offers little attraction at current levels.

What’s interesting?

FIXED INCOME RISKS – with share-markets globally within shooting distance of all-time highs, perhaps its unsurprising that the vast majority of discussion around valuation focusses on equities and not fixed income.

In spite of this, we think its highly relevant to consider the risk to investor portfolios from where fixed income currently trades, since any major sell-off in global bond markets could not only cause investors to lose money in their defensive positions, but in their riskier asset holdings as well.

Right now, as we have discussed in recent weeks, over US$15tln in global bonds currently trade with a negative yield – or a guaranteed loss for anyone buying them now.

Not only are you locking in a loss on these bonds by buying them, but your loss could be even more should any of the issuers of these bonds default.

Though much of Australia’s bond market still trades with a positive yield, that doesn’t mean investors are immunized to loss here in the event of a sell-off.

Not by any stretch.

In fact, Australian fixed income investors currently have the most leverage to a change in bond yields than ever before, as demonstrated by the chart below.

The chart below reflects the so-called ‘duration’ of Australian bond markets, with ‘duration’ reflecting the price sensitivity of bonds to a 1% change in interest rates.

As you can see below, should Australian interest rates rise collectively by 1%, investors stand to lose 5.5%, making this sensitivity the greatest on record.

5 years ago, when duration was a mere 4%, Australian Government bond yields were similarly around 4%, meaning that investors lost 4% from a move to 5% in yields.

As you can see, the leverage is significantly greater now with yields under 1%.

Even in a low-growth environment its surely plausible that we could see events conspire to see bond yields higher at some point, inflicting an absolute loss on the one major asset class that is supposed to protect portfolio returns.

Currently, the risk/reward scenario in major bond markets is arguably looking just as precarious as that in the equity market.

Looking ahead

  • Monday – Aurizon (AZJ), Ansell (ANN), GPT (GPT), JB Hi Fi (JBH) earnings
  • Tuesday – AU NAB Business Confidence (July), US Small Business Confidence (July), Challenger (CGF) earnings
  • Wednesday – AU Westpac Consumer Confidence (Aug), Computershare (CPU), CSL (CSL), Magellan Financial (MFG), Telstra (TLS), Tabcorp (TAH) earnings
  • Thursday – AU Employment (July), US Empire Manufacturing (Aug), US Philadelphia Business Outlook (Aug), Woodside (WPL), QBE (QBE), Blackmores (BKL), ASX (ASX), Treasury Wines (TWE), Sydney Airport (SYD) earnings
  • Friday – US NAHB Housing Confidence (Aug), US Housing Starts/Building Permits (July), Cochlear (COH), Domain (DHG), Newcrest (NCM) earnings

Australia’s jobs report this Thursday is a big one since we have yet to see any real evidence yet of the loss in full time employment indicated by the recent slew of slowing job advertisement figures.

The softness in Australian consumer activity suggests it is evident, but as yet unseen in the official data.

Profit guidance from Nufarm (NUF) and Telstra (TLS) will also be a focus for our portfolios.

Regards, Jono

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (available here)  for contact information and information about remuneration and associations with product issuers.

This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.




Weekly Market Update (Issue 559) – 5 August 2019

Securities mentioned this week

  • Downer (DOW), Nufarm (NUF), Adelaide Brighton (ABC), Boral (BLD), Rio Tinto (RIO), Commonwealth Bank (CBA), Reliance Worldwide (RWC)

Key market themes

Pressures on risk assets began to intensify last week >

  • US Federal Reserve cuts interest rates but prefers to call this a ‘mid-cycle’ easing and ‘not the start of a long easing cycle’
  • President Trump threatened to raise a 10% tariff on those US$300bn in Chinese exports to the U.S that are as yet un-tariffed should the Chinese fail to acquiesce to U.S trade demands
  • On Monday morning, the Chinese currency tumbled through 7 to the USD for the first time since 2008, suggesting Chinese authorities were retaliating to Trump’s threat by allowing their currency to ease
  • Hong Kong remains a tinderbox with the Chinese authorities promising that the civil disobedience will not be allowed to continue indefinitely, prompting concerns of Chinese military intervention or imposition of martial law
  • The Australian Dollar fell to a post-GFC low and as of Monday morning is now trading under 68c
  • Iron ore prices have fallen -15% in a week and are trading under $98/t in China this morning

Economic data released

Australian building approvals remain under pressure with the June figure still down over -25% annually, however the monthly absolute rate of approvals does appear to be stabilizing, particularly for private dwelling construction.

With the rising auction clearance rate, we think we are nearing a low point in sentiment for Australian construction and would expect to see building approvals slowly rebound as the year progresses, which should see an actual physical level of activity improving by early 2020.

Chinese manufacturing & U.S Manufacturing ‘idled’ last month, with U.S activity measured by the ISM showing a modest gain on the previous month, and with new orders barely keep inventory from accumulating.

Chinese activity also flat-lined, with non-manufacturing activity continuing to provide the one ray of positivity on China’s economy right now.

Observations from the past week

Iron ore prices have plummeted -15% in the past fortnight as several brokers have begun to question the longevity of this rally as supply shortages seem set to ease.

  • We made note of the rising Chinese steel inventory in last week’s piece.
  • Futures markets on iron ore currently forecast a fall to $80/t (from $98/t today, and $112/t last week) in 12mths, and a further deterioration to $60/t 2 years from now.

Though much has been made of the ASX200’s rise to record levels in recent days, even at the highs, the ASX200 in USD terms was still -4% below the value it reached in January 2018 when the AUD was north of 80c.

Downer (DOW) reaffirmed earnings guidance and quantified the size of the one-off hit from the Senvion bankruptcy as being $45m pre-tax.

  • We were encouraged by this update and by the 4% jump in DOW’s share price last week.
  • Recall that the stock tumbled over -15% in late May when the company informed the market of financial liabilities associated with the collapse of their partner in the construction of a wind project in north-western Victoria.
  • We thought the market reaction was significantly overdone and so are pleased to see the stock recovering lost ground in recent weeks.

Nufarm (NUF) cut earnings guidance last week in a move that was largely expected by markets following what has been an unequivocally poor year for the agricultural industry globally.

  • NUF cut EBITDA guidance from $440-470m in 2019 to a figure of $420m, but one aided by the companies debatable decision to remove additional costs from their new guidance.
  • What was encouraging for the share price was NUF’s decision to place $98m in convertible notes to its largest shareholder, Sumitomo Chemical, that can be exercised at any time in the coming 2 years at a price of $5.85, some +20% above the last traded price.
  • We think NUF is near a cyclical low point and believe there is significant upside from todays $4.70 share price.

Adelaide Brighton (ABC) cut earnings guidance by ~-20% last week, signaling a deeper correction in Australia’s construction industry than perhaps many had expected.

  • Earlier in the week German construction giant Heidelberger Cement had spoke of a -20% fall in volumes in Australia.
  • All Australian construction stocks saw heavy selling, including our favoured play, Boral (BLD), which fell -5%, however we feel like the sector is nearing its final downgrade and we expect to see industry momentum improve early in 2020 (see comment above on building approvals).
  • We would be looking at adding to BLD should it fall back under $5.00 having bought our initial position in the $4.70 range.

Rio Tinto (RIO) reported a slightly softer than expected profit for the half with earnings leverage in its core iron ore division failing to meet admittedly high forecasts.

  • With iron ore contributing 70% of RIO earnings, the stock remains highly leveraged to the Chinese steel industry and to concerns of rising inventories and rebounding iron ore supply.
  • The company declared a special dividend of US$1bn which was to be expected.

Commonwealth Bank (CBA) was downgraded to Sell/Underweight by two major brokers last week ahead of earnings this Wednesday.

  • UBS highlighted that CBA was now one of the most expensive developed market banks in the world, and incongruously priced for a bank facing significant interest margin pressure from falling domestic cash rates.
  • We concur and think that on almost 17x earnings, CBA is incredibly overvalued and one of a handful of Australian blue-chip stocks domestic investors are huddling in as they worry about near term earnings risks elsewhere in the market – the other stocks being in healthcare, grocery and health insurance sectors.

Reliance Worldwide (RWC) shares softened up near -10% last week after the election of Boris Johnson as Britain’s new Prime Minister.

  • After the acquisition of UK rival John Guest in June 2018, RWC now have significant European earnings and have acknowledged that a forced British exit from the European Union could have a modest impact on group earnings.
  • Investors are clearly expecting a further downgrade to guidance at the upcoming results, and we certainly wouldn’t rule it out given the slowing European economy and specifically the construction industry.
  • However, we believe any cut to earnings will be <10% and that the stock is already starting to demonstrate longer-term value given its excellent market share and above-market growth from its dominant push-to-connect franchise, Sharkbite.
  • We would add again in the low $3’s should the opportunity arise.

What’s interesting?

The CHINESE RENMINBI has surged through CNY7 to the USD this morning for the first time since the GFC. This is widely seen as a deliberate response from the Chinese government to President Trump’s tariff threat of last week.

The prospect of a sustained trade and currency war is increasing and this has significant risk for economic growth and corporate earnings.

Chinese RMB through 7

Looking ahead

  • Monday – AU Australian Industry Group Services Index (July), US Markit Services & Manufacturing activity index (July), US ISM Non-Manufacturing activity index (July)
  • Tuesday – AU ANZ Job Advertisements (July), AU Trade Balance (Jun), AU RBA Meeting (no change expected)
  • Wednesday – AU Australian Industry Group Construction Index (July), Commonwealth Bank (CBA) earnings, Transurban (TCL) earnings
  • Thursday – AU Home Loans (Jun), AGL Energy (AGL) earnings, AMP (AMP) earnings
  • FridayAU RBA Monetary Policy Statement, James Hardie (JHX) earnings, REA Group (REA) earnings

Big focus this week and for the coming month is on Australian corporate reporting, and it will be a minefield to navigate.

Regards, Jono

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (available here)  for contact information and information about remuneration and associations with product issuers.

This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.




Weekly Market Update (Issue 558) – 29 July 2019

Securities mentioned this week

  • Rio Tinto (RIO), RESMED (RMD), Macquarie Bank (MQG), IOOF (IFL), Mineral Resources (MIN), Latrobe 12-month term account

Key market themes

  • Earnings season has begun in the U.S > thus far it has been a mixed bag with general industrials seeing a clouded outlook and those exposed to technology and the future of 5G deployment more optimistic > Google and Facebook earnings last week were solid, Amazon was mixed and this week we have Apple earnings on Wednesday night
  • Reach for yield remains a priority > investors are chasing higher returns from riskier assets such as equities and corporate bonds as cash returns diminish.

Economic data released

Australian skilled vacancies fell further in June and are now down over -6% annually.

As the chart below shows, June was the 6th month on the trot of falling demand for skilled workers and points to a worsening in Australia’s employment conditions for at least the remainder of 2019, as have mentioned on multiple times in recent months.

Observations from the past week

Alphabet (GOOG), Facebook (FB) & Amazon (AMZN) all reported quarterly profit figures last week with the former two stocks delivering strong figures, and AMZN showing a little disappointment once again with rising costs.

  • Investors loved the rebound in GOOG operating margins and the confidence of management in authorizing a US$25bn buyback given the significant cash pile accumulated.
  • The stock ended up +10% on the week and just shy of an all-time high.
  • AMZN on the other hand were a little disappointing to investors as operating costs associated with one-day delivery to Amazon PRIME customers exceeded initial expectations and the company noted that this was likely to continue for a period of time.
  • Investors were left wondering if this is the start of another heavy investment cycle by AMZN and are also concerned by the slowing rate of growth in the group’s cash-cow, Amazon Web Services, which generates the vast majority of cashflows with which AMZN is able to utilize for growth in their wider retail franchises.
  • FB was also well supported after demonstrating solid earnings and providing excellent commentary around future advertising revenue market share gains.

Latrobe Financial Group notified advisors and investors alike that in response to the 0.50% cuts to Australian domestic interest rates, it had lowered the variable rates paid on its suite of products to investors.

  • Notably, the 12-month term account had seen its rate fall from 5.20% (5.70% for platform investors) to 5.05% (5.55% for platform) after fees.
  • This shouldn’t be a surprise, and in light of the 0.50% official interest rate cut, it is actually not too bad an outcome for investors.
  • I would expect to see more rate reductions on variable income products associated with mortgage lending in the months ahead.
  • Offers from Metrics and Qualitas both have the potential for minor adjustments lower given the nature of their lending.

Macquarie Bank (NAB) – reaffirmed guidance last week that profits would be slightly down for the current financial year relative to 2019.

  • MQG is not overly cheap in absolute terms on 14.5x P/E, but interestingly it has underperformed a rising market and in particular it has underperformed the big-4 by around -10% since giving guidance back in early May.
  • The big-4 retail banks have all rallied hard on relief that Labor’s policies to ban excess franking have been abolished, but now look fully valued and arguably staring down the barrel of more earnings risk as interest rate cuts bite on interest margins.
  • Whilst it’s not obvious to say MQG looks like a BUY yet, its period of underperformance relative to a rising and arguably expensive set of comparable stocks is worth watching.

IOOF (IFL) – was the best performing stock in the ASX200 last week rising +12% after it released its quarterly fund flow statement.

  • Whilst the rate of fund flow growth to its advice and administration business was well below last year, the fact was it continued to grow on a quarterly basis and was nowhere near as bad as the current stock price implies.
  • IFL continues to have almost $150bn in funds under advice, management and administration, making it one of the industry’s biggest and still a franchise of considerable value in a sector facing short term issues, but still with excellent long-term growth potential.
  • Whilst we have several key events pending in the coming month or two, such as results and the company’s estimate of compensation due for ‘no advice’, we expect the stock to end the year higher as investors fears subside.
  • Further, the ANZ Wealth deal should be resolved in the coming months, with it quite possible that IFL seek to renegotiate terms for a better deal in light of industry changes post Royal Commission, potentially offering investors a POSITIVE, not negative surprise on this front.

RESMED (RMD) – reported sound quarterly profit figures with excellent revenue progress in American mask/accessories following product launch and encouraging margin expansion on account of the strong sales growth.

  • That said, RMD now trades 34x current earnings and must surely pose some risk to any or all of the following a) a strengthening Australian Dollar, b) risks in relation to competitive bidding for 2021 and falling reimbursements or c) wider investors concerns in relation to the need for reduction in US healthcare industry costs as we head into the 2020 Presidential Election.

Mineral Resources (MIN) bounced +8% last week after confirming it had received Chinese anti-trust approvals for its agreement to sell down half of its Wodgina lithium prospect to US specialty chemical giant Albemarle (ALB).

  • This is good news for MIN as the future expansion of Wodgina to include significant downstream lithium processing should yield a significant and ongoing cash earnings stream for the group from 2023-2024 that has the potential to double the share price.
  • We have had our eyes on MIN and would love to have it in the portfolio, however the option on lithium expansion is long-dated and we would prefer to see a bottom in the lithium price emerge before committing funds to a position.

What’s interesting?

CHINA STEEL INVENTORIES CREEPING HIGHER – a couple of broking firms have begun to temper their optimism on Australian iron ore miners, with Credit Suisse in particular, downgrading Rio Tinto (RIO) to underperform last week.

  • CS noted in their research that the drawdown in Chinese port inventory of iron ore seemed to be ending with Chinese finished goods steel inventories rising (see chart below) and supply of iron ore from both Australia and Brazil recovering after months of significant shortfall.
  • RIO will make 75% of its operating income from iron ore in 2019.

Chinese Steel inventories (in blue) creeping higher

Looking ahead

  • Monday – N/A
  • Tuesday – US Consumer Confidence (Jun), AU Building Approvals (Jun)
  • Wednesday – US ADP Employment (July), US Chicago Purchasing Manager Report (July), CH Purchasing Manager Report (July), AU CPI (Q2), AU Private Sector Credit (Jun), APPLE earnings
  • Thursday – US Federal Reserve interest rate decision, AU AIG Manufacturing survey (July), Rio Tinto earnings
  • Friday – US ISM Manufacturing survey (July), US Employment report (July), AU Retail Sales (June)

On top of the data, this is a key week as US and Chinese trade representatives will sit down for the latest session on current disputed trade terms.

Regards, Jono

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (available here)  for contact information and information about remuneration and associations with product issuers.

This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.




Weekly Market Update (Issue 557) – 22 July 2019

Securities mentioned this week

SEEK (SEK), National Australia Bank (NAB), Oil Search (OSH)

Key market themes

  • Earnings season has begun in the U.S > thus far it has been a mixed bag with general industrials seeing a clouded outlook and those exposed to technology and the future of 5G deployment more optimistic
  • Reach for yield remains a priority > investors are chasing higher returns from riskier assets such as equities and corporate bonds as cash returns diminish.

Economic data released

Australian employment continues to soften with a flat month for hiring in June.

  • Admittedly, it could have been worse as there were +21,000 new full-time jobs created only for them to be negated by a similar sized fall in part time work.
  • It feels inevitable to me that full-time employment gains are done for 2018 as every indicator on job vacancies is pointing to a loss of full-time workers as the year progresses and a shift higher in the unemployment rate from 5.2% to north of 5.5%.
  • The RBA in the minutes from their most recent meeting indicated that jobs growth was likely to soften.
  • SEEK (SEK) as the most obvious play on Australian employment fell -3% last week and we think the stock is vulnerable to disappointing 2020 earnings guidance when it reports on the 15th August.

CBA June Business Sales indicator posted another disappointing figure with the worst monthly performance since February 2017.

  • This indicator reflects the consumer softness we have picked up in other service and manufacturing sector indicators post the very short and brief bounce after the Federal Election outcome.
  • The jobs outlook remains the single biggest driver and we believe that is unlikely to turn until 2020 at the earliest

Observations from the past week

Initial earnings reports from companies proved mixed with those exposed to general industrial activity largely disappointing (CSX, Textron, Alcoa), but some pockets of good news also emerged (ASML and TSMC).

  • The CEO of CSX, one of the largest North American railroad operators, described the current economy as ‘one of the most puzzling’ he has seen, and that there is a ‘slow drift down, but no doom and gloom’.
  • Technology giants ASML and TSMC both delivered good profit figures, with ASML (the largest maker of advanced lithography machines for the manufacture of semiconductors) posting an optimistic forward outlook claiming that the shift to 5G was driving strong activity.
  • TSMC echoed this sentiment 2 days later.

Central banks remain in focus with the ECB meeting on Thursday and likely to signal further easing before the end of the year.

  • Markets are looking for the ECB to lower rates from their current level of -0.40% perhaps as soon as September, alongside a resumption of quantitative easing around a similar time by reinstating the LTRO (long-term refinancing operation) for European banks, aimed at stimulating lending.
  • Funny fact (or scary) on the LTRO, and indeed on QE and money printing in general, but the ECB have expanded the European monetary base by well over 250% since the GFC, but total aggregate bank lending has grown by less than 5%!
  • The U.S Federal Reserve last week came under fire for confusing commentary from several voting members on the future direction of near-term rates with the New York Fed President seemingly advocating for large rate cuts (in others 0.50% at the July 31st meeting) before then walking these views back hours later.
  • James Bullard, the St Louis Fed President, was quoted as calling for an 0.25% rate cut in July but that he wouldn’t call this an ‘easing cycle’, more a re-calibration.
  • With markets factoring in well over 1.0% in rate cuts in the coming year, these weren’t necessarily as optimistic as markets perhaps were anticipating and certainly aren’t in spirit with the optimistic tone painted by the Fed Chairman Powell only a week earlier, so there was some sharp selling of interest rate futures on Friday and it remains to be seen if this continues this week.

National Australia Bank (NAB) – investors liked the appointment of Ross McEwan as incoming CEO of the bank.

  • McEwan has earned himself a strong reputation for returning the UK’S state-controlled lender, Royal Bank of Scotland to profit and to dividend payment.
  • He also used to head up Commonwealth Bank’s retail banking franchise, unequivocally the strongest domestic bank operating division.

Oil Search (OSH) – fell -10% last week as oil prices slid, but also as investors concerned themselves about a modest delay to approvals and planning for both the Papua LNG development and the expansion to Train 3 of the existing PNG LNG infrastructure.

  • The new Prime Minister has announced a review of the Papua LNG gas agreement and that following that it would assess the P’nyang gas agreement.
  • P’nyang is the large reserve key to providing the gas for expansion of the PNG LNG project to a 3rd processing train and is significantly valuable and high margin to OSH.
  • Though its almost assured that OSH and its development partners in PNG LNG will likely pay a slightly higher royalty on the gas than previously expected, we feel it is highly unlikely that current reviews will drag on for longer than a few months and thus imperil the competitive positioning of the expansions relative to other soon-to-be green-lighted global LNG projects.
  • For this reason we think OSH is looking increasingly good value at current levels.

What’s interesting?

NEGATIVE BOND YIELDS & GOLD – As global growth begins to lose ground and as central banks globally have pivoted towards future easing, global bond markets have rallied significantly.

Yields on Australian 10-year government bonds have halved year-to-date from 2.60% to 1.30% currently, but in the rest of the world, and particularly in Europe and Japan, many government bond issues and even significant tranches of corporate debt now trade with negative yields.

The chart below shows that over US$13 trillion dollars in global bonds now trade at levels offering investors a negative return.

In other words, buying these bonds locks you into a loss when you redeem them.

You might ask why anyone would do this when cash rates in the U.S are still over 2%, but in Europe, cash rates are already at -0.4% and arguably heading lower.

Buying many of these bonds is a bet that interest rates fall deeper into negative territory and is explicitly a bet on disinflation and softening global economic growth.

Global equity markets are currently ignoring the bond market’s fears, with investors preferring to believe that corporate earnings will hold up well enough to justify the higher return offered by these higher risk securities.

Clearly the most significant risk, and the circuit breaker for the bond market momentum will be defaults should economies and corporate earnings fail to improve.

We think high yield corporate debt remains the single biggest risk in the years to come and believe this will be the epicenter of any future market issue.

Unsurprisingly with the plunge into negative yields and the prospect of yet more easing by central banks, gold prices, along with alternative currencies such as Bitcoin, are moving higher.

Investors are buying gold and other physical commodities alongside bitcoin and other non-traditional currencies on the belief global central banks are set to devalue the inherent value of fiat currency as a means to both avoiding global recession and to deflate the massive amounts of government and corporate debt issued in the past decade since the GFC.

Scary stuff.

US$13 trillion + of bonds currently trade with negative yields (chart below)

Looking ahead

  • Monday – US Chicago Fed Activity index (Jun), US Richmond Fed Activity index (July)
  • Tuesday – US New Home Sales (Jun), US Markit Manufacturing & Service Activity index (July)
  • Wednesday – AU CBA Manufacturing & Service Activity index (July), AU Skilled Vacancies (Jun), Xilinx, Paypal earnings
  • Thursday – EU European Central Bank meeting, US Kansas City Fed Activity index (July), Tesla, Amazon, Facebook earnings
  • FridayStarbucks, Google, Intel, RESMED earnings

The focus this week will be on earnings, particularly from the major U.S technology stocks, but also markets will closely listen to the ECB and their plan for future stimulus (rate cuts in September? Further QE?)

Regards, Jono

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (available here)  for contact information and information about remuneration and associations with product issuers.

This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.