ASX Weekly Wrap 29/08 - 02/09
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.
Not a pleasant week for the XJO. The market peeled off -142.70 points or -2.59% during the week and we finished down four of the five days. Investors jumped ship as they start to prepare for another rate hike in the US and a strong US Dollar causing commodity prices to slump. We had a high of 5,516.70 on Monday and a low of 5,316.70 Today.
The last few companies reported earnings this week before the official close of earnings season on Wednesday. There was also a small amount of economic news around locally and abroad. Local retail sales for July were released on Thursday coming in flat. There was an expected rise of +0.3% which didn’t eventuate. Consumer confidence is still low so one would hope that along with its traditional rise leading up to Christmas, retail sales would also get a boost. Chinese manufacturing PMI also came out ahead of expectations at 50.4 (49.8 forecast), whilst non-manufacturing PMI came in at a healthy 53.5. Any read above 50 is considered expansion, so there were a couple of positives there.
The biggest company to report, and only earnings I’ll cover this week, came from Harvey Norman (HVN). It was a very impressive report with profits +30% to $348.6mill from a year ago. Very much buoyed by a strong housing market. Its franchise store increased sales +7.6% to $5.33bill vs growth of only +3.2% last year. Gearing also was down to 18.97% with a net asset value of $2.69bill. HVN also decided to pay a fully franked div of 17cps. With an EPS of 31.33c this gives HVN a PE of 17x, a little expensive in my view. They traditionally sit around the 14-15 range. If you could be assured the company was going to give you 20-30% growth every year then I would be happy to pay such multiples but since HVN is so heavily linked to the housing sector it’s not a risk I am will to take. I feel anywhere around the $4.50 range is good value at the moment for HVN as that will see it revert back to its long term upward trendline. A yield of 5.6% here is very attractive though but unsustainable as well as it sits at a payout ratio of 95% of profits. Happy to sit out of HVN and wait for a pull back. If you already are in the stock it may be worth taking some profits here. HVN provided no guidance for 2017 but did say its lifestyle products, in particular tech, were showing very strong demand.
Just a quick stat on the earnings season overall. Of the top 200 stocks, excluding BHP, 139 companies improved profits by an aggregate amount of +6.8% to $36.8bill.
As mentioned earlier resource stocks have been hit hard this week as a strong USD continues to put downward pressure on commodity prices. Metallurgical coal and Zinc have been the exceptions. There have been some big falls in Gold stocks especially with NCM (-12%), EVN (-22%), RRL (-9%) among others who have been hit hard. I am bullish gold for the next 12-24 months so it’s getting to a point where these are looking attractive again. BHP, RIO & FMG have all come off as well of late after decent rallies too. However I believe there is more downside in them to come so will hold off for now. I will note that FMG is currently trading around 1.0x book value whereas RIO is trading around 0.7x book. This make RIO a much more attractive option if you are looking for Iron ore exposure at the moment.
Just a quick note on the Commsec Economic Update I attended yesterday. They were surprisingly more Bullish about the Australian economy than I thought they would be. They did note they didn’t expect the RBA to start looking at raising rates until 2019 and for inflation to stay below the RBA band of 2-3% until the 2nd half of 2018. They were very Bullish on Tourism and Education due to an AUD they expected to fall to 70c very soon. They expected the housing construction market to remain strong for another 2-3 years. Retail is very soft, as we saw with recent numbers, but specific areas like sporting goods, video games, outdoor leisure were very strong. Overall it was a very informative and entertaining presentation, made even more so due to the fact Mike Hussey (ex-Australian Cricketer) was guest speaker and yours truly got to sit next to him the whole session.
As I mentioned last week there was the possibility of some downside in the short term and that’s how it seems to be playing out. It looks as if our downward move will accelerate into that 5,300 level, in the green circle, in the coming week or two. From there we want to see it hold and then bounce back towards the top red line. This next up move is the one that should see us hit that 5,700 level.
The stock, or more like the Exchange Traded Fund (ETF), I am focusing on this week is the Betashares Australian Dividend Harvester Fund (HVST). Now the basics of an ETF is it’s an investment fund (in some asset type or mix of them), listed on the ASX. This ETF aims to give investors exposure to large capitalization Australian shares along with a franked dividend income. Their aim is to at least double the annual income yield of the ASX. Pretty simple in the whole scheme of things.
There are a few reasons I believe this fund is good value. Over the last two years it has had a yield of 11%+ pa (70% franked). It pays a monthly dividend, which is very unique in itself. The average distribution has been 20c per ETF per month. It has very low volatility with an 8% movement compared to the market’s 18%. It also only invests in the top end of the market with the likes of APA, TCL, SYD, SGP, GPT being some of its top holdings. The price has fallen from a yearly high of $22.50 to now sit around the $20.60 range. Finally its management fees are very low at 0.65%pa. Its low risk nature makes it very attractive for someone looking for a long-term investment with a high yield. More information can be found here.
Big week next week domestically for economic data. We have our current accounts, trade balance, Q2 GDP figures, ANZ Job Ads & housing finance all out. On top of all that the RBA meets to discuss the Australian cash rate on Tuesday. Most will expect them to hold. Plus tonight we have the Non-Farm payroll jobs figures out in the US. Key will not only be the number of jobs added but how much wages have increased, if at all. Strong numbers on both sets of figures will basically confirm the Fed will increase rates by the end of the year. The US markets are also closed Monday night.
Well no footy on this weekend. The less said about the Crows performance last week the better. I am still confident and backing the boys in to have some success in September. It’s also Father’s Day this Sunday, which will be my first as a Father, so I am really looking forward to that. Finally the Royal Adelaide Show is on and it looks like we will have some decent weather for it as well. Whatever you are doing enjoy it and be safe. To all the Father’s out there, have a great day on Sunday. You have earned it! Speak to you all next week.
- Heath Moss
heath@hlminvestments.com.au
(08)8212-9632
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.
