ASX Weekly Wrap 25/7 - 29/7

Welcome to the ASX Weekly Wrap. A weekly email that will be sent out to clients, and also made available on my website, with a brief description of the events that moved the local markets during the week and also what I am watching on an individual stock level. Feel free to provide feedback and alert me to any topics that you may want covered.

In a week which had such influential and important economic news the market really did sit on its hands. Although it was still a largely positive move on the XJO is was far from inspiring. We rose 64.1 points or 1.17% for the week. Peaking at 5,561.60 and having a low of 5,498.2.

The big piece of domestic data that dropped this week were the CPI numbers. In the end CPI was +0.4% quarter on quarter and +1.5% year on year. The yearly figure came in slightly higher than the forecast +1.4%. This put a slight dampener on the possibility of a rate cut from the RBA next week, however most experts are expecting a rate cut to 1.50% still.

CPI data saw the Australian 2 & 10 year Bond yields fall to their lowest levels in history, 1.51% & 1.85% respectively, as an unprecedented Australian Bond rally continues. This is mainly because even though we are at historic lows for yields there is still $US12 Trillion invested in Bonds with a negative yield globally. Couple that with an AAA rating our bonds still look very attractive.

Another piece of data that came out to support a cut is our terms of trade. Import prices fell a further 1% taking yearly falls to 2.8%. However in the first time in 2 years out Export prices rose 1.4%. This is thought to be from an increase in oil and iron ore prices. However it does still seem we are still importing deflation.

In overseas economic data drops we saw the Bank of Japan meet and keep fiscal stimulus on hold at current level for the greater part. They will continue to Buy 80 Trillion Yen in Bonds annually, but have increased ETF purchasing to 6 Trillion Yen up from 3.3 Trillion. They have also decided to keep rates on hold at -0.10%. The market was not impressed with this as it had expected a lift in Bond purchasing stimulus. This sent Japanese markets and the Yen down.

The US earnings season continued with big names such as Google, Amazon, Facebook and Apple all beating market forecasts and rising strongly. The later, Apple, was more a case of it wasn’t as bad as everyone thought it would be.

Back at home we are just coming to the end of what people consider ‘confession’ season. This is where companies come out and confess major changes to earnings, usually downward, that are expected for the financial year just gone. Sort of a warning shot before they actually report in the coming months. Our confession season was eerily quiet this year, with the only major news coming from Woolworths (WOW) on Monday. WOW came out and announced more impairments and write downs in relation to its restructuring. In fact there were a further $959mill on top of the $3.25bill it already announced in February. This all comes from restructuring costs, Masters, Big W etc. They also announced 500 jobs to be shed and 30 underperforming stores to be closed. The market reacted positively to this sending the stock up by 8%. Obviously the market liked the short term pain for long term gain method WOW are employing and see a possible turn around in falling sales in the near future.

A couple of larger companies reported earnings this week to help kick off our earnings season. GUD was the first as it announced a $43mill loss on the back of $75mill in write downs. However cash profits were up 44% on last year to $44mill. GUD has rallied 5% since the announcement yesterday.

Resmed also announced earnings today with profit flat at $US352.4mill, however revenue rose 10% to $US1.8bill. They also increased their dividend by 10% to $US0.33 per share. The market saw this in a positive light and its shares lifted close to 7% on the back of it.

Newcrest (NCM) announced strong quarterly production numbers for its gold operations which sees it taking advantage of higher gold prices. Fortescue (FMG) also announced quarterly and annual production numbers, which saw them pump out record numbers. The theme was all about cutting cost of production and increasing margins. They were able to also reduce their debt to $US5.2bill down from $US7.2bill a year earlier and they have $US1.6bill cash on hand. FMG forecast it will produce between 165mill to 170mill tons of iron ore in 16/17. Co-incidentally we also saw Iron Ore spike up above $US60/t again for the first time in a few weeks.

Impressive production numbers continue to come out of the major miners with all of them trying to cut costs and increase those margins. I have the majors such as BHP, RIO & FMG on high alert and am looking for an entry on the next pull back. It seems that commodity prices have stabilized and that the worst is over. However as you will see next there is a reason for me wanting to wait.

BHP gave the market an update regarding the dam failure in Brazil last year. It announced it would book a further $1bill plus of write downs in relation to it in its upcoming earnings report. If this is where it ends no one knows as at this stage as it is still being fought in Brazilian courts.

Last Week’s Chart 22/7

This Week’s Chart 29/7

I won’t say much from a technical perspective about the XJO as I said most of what needed to be said last week (Click here for the article) and the upward trend theme continues. We are now approaching the top of the upward band’s trend line. From there we should see it reject it and have the market pull back. A pull back to that previous resistance of around the 5,400 would be very healthy before our next move up. I am still forecasting, all things being equal, that the XJO will see 5,700 before Christmas. We will need a very strong earnings season and strong macro news for us to punch through that though.

As I stated last week earnings season is on our doorstep so we will be looking for guidance there for the top end of the market. At this point, on current numbers, the top end looks fully valued so we need to see some upward guidance there for a re-rating. I also mentioned before I do have BHP, RIO & FMG on a close watch. I am looking for a decent pull back to gain entry. I have added one top end stock the list below but the other 3 remain the same from last week and all look to hold some value at current levels:

Amaysim Australia Limited (AYS) - $1.89 AYS run a BYO mobile phone carrier business and already have close to 1mill users in Australia. They focus on cheap plans with large data bundles. They recently have acquired a Broadband/Optic Fibre company that will also help them break into the internet market. Only capped at around $360mill they paid out a dividend of 3c in March and another div is expected this coming earnings season. Earnings are expected to grow aggressively over the next few years.

Shaver Shop Group Limited (SSG) - $1.14 this once family run company listed on the ASX only a couple of weeks ago. Management are prudent and smart operates delivering 14 consecutive quarters of like for like growth and providing the best revenue per sq. metre of any chain in Australia. They have distinct advantages of being able to get exclusive rights to certain products the big boys cant. Growth is to come from further expansion, franchise buy-backs and online sales expansion. Also small in nature as they are capped at roughly $140mill.

Vocus Communications Ltd (VOC) - $8.93 VOC have been around a long time but have only just started to make up ground in the Internet, Fibre, Data Centre and telecommunications market. They recently have taken over Ammcom, M2 Communications and Next Comm. The later providing them with the Optic Fibre Infrastructure to compete with the likes of Telstra and Optus. Capped at $5bill+ they are larger than AYS and SSG but are expected to grow earnings at the same aggressive rate. They look undervalued when compared to peers such as TPG. Growth will come from increasing market share, cost synergies and new product offerings.

Macquarie Group Limited (MQG) - $74.39 MQG is Australia’s primary investment bank. It conducted its AGM yesterday and revealed its 2017 profit should be in line with its record 2016 profit. If you look a little deeper you will now see 70%+ of MQG business is annuity based and < 30% market/transactional based. This means there is a lot more stability in MQG earnings now and we will see less volatility. Great for investor confidence going forward. This also means that MQG is currently trading on 12.2x pe 2017 earnings and yielding 5.4%. This seems cheap when compared to global peers.

Earnings season ramps up next week with NVT, RIO, BWP, DOW, SUN, TAH & VAH all reporting. We also have the all-important RBA policy meeting on Tuesday where it will be decided if they will cut the cash rate or not. Australian manufacturing, services & construction PMI are also all released and our Trade Balance and retail sales numbers are also revealed. Globally it’s quiet for economic numbers except for the US job figures which are out Friday night our time.

Another week done and dusted as we eagerly await another very exciting reporting season here. Have an enjoyable and safe weekend and as always Go Crows!

- Heath Moss

heath@hlminvestments.com.au

(08)82129632

Important Notice

Any advice in this article should be considered General Advice only and does not take into account your personal needs and objectives or your financial circumstances. You should therefore consider these matters yourself before deciding whether the advice is appropriate to you and whether you should act upon it. I am happy to assist you in this process. To do so, I will need to collect personal and financial details from you before providing my recommendations. Please note the author may own shares in the companies mentioned in the above blog.