Weekly Market Update (Issue 500)
25th May 2018, 11.00am
This week we saw the broader equity indices do very little across Australia, the U.S, Asia and Europe, however for the first time in many months, macro concerns began bubbling to the surface and are worthy of our attention.
Debt concerns growing in Turkey and Italy
Firstly, in Turkey emerging market investors saw a rough week with the Turkish Lira rapidly depreciating on multiple concerns all associated with the increasingly authoritarian grip being asserted by the President Recep Erdogan.
This week the Turkish central bank initially failed to raise domestic rates to stem capital flight, further fueling a collapse in the lira, before an about face saw them hike by 3.00% to protect against further falls.
It worked for all of a day before the currency resumed its decline. The Turkish Lira has lost 30% in little over 6 months, the share-market is -15% from its highs and 10-year bond yields have jumped from 10% to just under 15%.
Turkey isn’t a major part of the emerging market index, but given its strategic relevance to major European, Russian and American interests (it is on the border with Syria), and its rapidly escalating foreign debt (net debt US$300bn+, gross foreign debt of $450bn being over 53% of GDP), any significant deterioration in its economy stands to threaten the repayment of this substantial and growing debt, and potentially could have knock on effects to foreign investment across other emerging economies.
There were nervous investors too in Italy this week, and as Europe’s 3rd largest economy, Italy’s precarious debt burden makes it an infinitely greater concern for global markets than the events this week in Turkey.
In Italy this week we saw an explosion in the risk premium attributed to Italian sovereign bonds, with the yield premium on its 10-year debt leaping to 1.90% wider than that of similar German bunds (from 1.15% wider), and to near the widest gap since resolution of the European debt crisis in 2013.
The cause for concern was the formation of government by two peripheral parties, the populist and anti-European Five Star Movement (left leaning) and the anti-immigration league (far-right leaning), and the prospect that this government would shun frugality and instead embark on widespread fiscal expansion in spite of Italy’s massive government debt (130% net debt/GDP – as a guide Australia is around 20% net debt/GDP).
Were the Italians to push forward with this fiscal expansion in contradiction with European policy, there is clearly increasing threat that its northern neighbours (Germany, France, Netherlands) could limit, or force tighter refinancing terms on the massive sums lent to the country.
This is something we all should be watching in the weeks and months ahead. When coupled with the rise in the US-dollar over the past few months (putting pressure on emerging market economies with large US-dollar debt), we are now starting to see a few cracks appearing in the global economy that bear worth watching.
Healthscope (HSO) – a tactical move
I’ll admit it, my heart sunk a little on Tuesday morning when I saw the headlines from HSO declaring a cut to current year hospital earnings (about 5%) and the denial of access to the HSO books for both bidding consortia.
Turns out that when I went through the statement it became entirely clear that this was HSO’s very necessary defensive response to two speculative bids for HSO assets, both burdened by special interests, on the cheap.
We think the move to reduce earnings guidance, promise a full review of the companies $1.3bn property portfolio and to deny access to the books is designed to flush out a real and genuine bid for the company from either BGH or Brookfield on terms amenable to minority shareholders such as yourselves.
Though there is a gamble being played here by the HSO board, we think it’s more likely than not that we will see a formal bid proposed at or around the $2.50 mark, with the faint prospect of a bidding war taking us nearer to $2.60.
For now, we are holders (a little nervous), but we think the balance of probability is a proper bid again in the coming weeks and a resolved share price exit around $2.50 or above.
Vocus Group (VOC) – new CEO
VOC announced their new CEO this week, appointing ex Telstra, Optus & Hutchison senior executive Kevin Russell.
We think the move is a good one, for although Mr Russell has had various shorter tenure jobs in recent years at these major telco’s, they have all been at a senior level and involved significant cost rationalization programs, which is not unlike the job ahead of him at VOC.
We like the hire, and we think VOC is fast finding its feet as a potential for significant turnaround.
I would again commend those of you yet to add it to your portfolio, to talk to your advisor.
Small snippets on each of APN Outdoor (APO), A2 Milk (A2M), Woodside (WPL) and Afterpay (APT)
I will try and keep it brief here.
APO announced a $500m bid for the street furniture advertising company Adshel this week, in a deal we are left a little unsure by. Any deal will likely be accompanied by a rights issue, which isn’t necessarily a problem, but the price being paid does indeed look a full one.
We like the APO story and its exposure to an improving local economy, moreover we like the appointment of James Warburton earlier in the year as CEO. However, such a big deal at this early juncture, could cause the shares to take longer to react to the local economic sensitivity we were hopeful for.
All the same, APO looks a good buy in the mid $4’s again, and a take profit in the mid $5’s – it is now at $5.10 and up on where we bought the stock in the $4.80’s pre its 12.5c dividend.
A2M took a further tumble this week, falling -10% as investors continue to exit the stock following its first downgrade in several years. For the record, we think A2M is a terrific brand with terrific opportunity, it is simply too expensive to be bought.
The -30% or so fall from its highs has further to go, and I am thinking nearer $7.00 is a level at which I would begin to get a little more serious (-25% lower than current).
Woodside (WPL) held an investor day this week at which it spoke more optimistically about global LNG demand, suggesting that the well-known supply glut could potentially be cured a few years sooner than consensus expected.
WPL committed to a larger and costlier expansion of its Pluto LNG plant, fueled by the recent Scarborough gas field, but seemed to do a reasonably good job at convincing skeptical analysts of the economics.
For now, we are sitting with WPL, but think in the region of $36 the stock might begin to look fully valued for the currently optimistic oil price backdrop we have seen emerge.
Lastly, good news on APT. The stock is now up at $7.70 and benefiting from ongoing short covering in the share.
I think the stock will push on to $8.50 or $9.00 before it consolidates ahead of the typical quarterly update scheduled for mid-July.
That’s it! Thanks for reading.
Jono & Guy
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Australian Market Index
Friday 10am values
|S&P / ASX 200||6037||-57||–0.9%|
|Property Trust Index||1404||+54||+4.0%|
Key Dates: Australian Companies
|Mon May 28th||Div Ex Date – Dulux (DLX)|
|Tue May 29th||N/A|
|Wed May 30th||Div Ex Date – NABPB, WBCPD|
|Thu May 31st||Div Ex Date – SUNPE, SUNPF, SUNPG|
|Fri June 1st||Div Ex Date – NABPA|
International Market Index
Thursday Closing Values
|U.S. S&P 500||2728||+8||+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.