ASX Weekly Wrap 19/9 - 23/9
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.
This week we saw a solid return to form for the XJO. As I mentioned last Friday all eyes were on the Bank of Japan decision early in the week, but ultimately everyone was waiting for the US Fed decision which was released Thursday morning our time.
The BoJ decided just to leave their rates on hold at -0.10% and to tweak their stimulus package. Basically they are moving to QQE with a yield curve control. This drops certain bond buying targets and adds more flexibility to their stimulus package. The big takeaway from their meeting though was they are happy to keep expanding their monetary base until inflation is back in check and above 2%. This suggests they will be continuing to provide stimulus for some time to come.
The US fed released their decision early Thursday morning our time and like the BoJ they decided to hold their cash rates steady at 0.50%. However from Janet Yellen’s commentary it does seem more and more likely we will see another rate increase in December this year. In fact it is now put at a 61% possibility.
The markets reacted positively to both these decisions. After trading in a very tight range on Monday and Tuesday the market did most of its heavy lifting on Wednesday to Friday after both decisions were made clear. The XJO ended up +134.60 points or +2.54% for the week. Our low was 5,273.00 on Monday and our High was 5,434.30 today.
As I said earlier it was overall a very bullish week for the markets and an important one technically, which I'll elaborate on further later. Resource stocks lead the way with the sector gaining roughly 4%. This was a result of most commodities rallying despite a higher USD. The next best sector was the Financials (Banks) which rose almost 2% for the week. As I stated a few weeks ago I felt a lot of risk had come out of the Australian banking sector and that it was due to turn itself around. It seems as if this has started to come to fruition.
One sector that seemed to do it tough this week is the Telecommunications/IT sector, including one of my favourites in Vocus Communications. It all started on Tuesday after TPG Telecom (TPM) released their earnings for the year. Despite record profits (+69%) and revenue the market reacted disappointingly to FY17 guidance which TPM said would be around $820-$830m EBITDA. The market had sat on a consensus EBITDA for FY17 of around $880mill. The breakdown of TPM’s earnings were also interesting. The recent acquisition of iiNet is where the most of the earnings growth came from and there was nothing spectacular to come from the TPG side of business. Finally capital costs for FY17 will be up roughly $281mill on this year as they look to add capacity for future business.
As a result of all this TPM was re-rated by the market and sold off. It was trading on a PE roughly 24x FY18 forecast earnings and now that has dropped to roughly 17 times earnings. It seems TPM earnings have matured and we shouldn’t expect the exponential growth we have seen in years past anymore. Looking forward though with extra capacity being brought on we should see them start to take away market share from the likes of Telstra and increase organic growth. TPM are also looking to enter the Singapore mobile market and diversify its earnings. To me, and other analysts, the +6% in earnings growth forecast seems very conservative from TPM and I feel management were just being overly cautious. David Teoh, TPM CEO, is an experienced and quality leader in the sector and has the runs on the board to continue TPM’s excellent growth. It is definitely possible we will see +10% growth in FY17 and beyond. As a result I believe TPM are excellent long term vale around current prices ($9.15) and should be looked to be added to any portfolio seeking a quality growth company.
It seems the re-rating of TPM also spread to VOC, which was hammered down to sub $6 at one stage, on the belief that VOC too would not be able to maintain current earnings growth. Also the fact the CFO suddenly resigned gives the stigma that all is not right at a management level for VOC. This compounds with the old VOC CEO leaving to start his own fund leads to a lot of uncertainty in the stock.
However this uncertainty is surely to be short lived and like TPM, VOC has excellent prospects ahead of it. VOC’s earnings are far from as mature as TPM. They still have to integrate M2 and NEXTGEN which includes more earnings and cost savings. This will also open up new markets for VOC such as the mobile phone space. Also VOC’s own earnings (ex Amcom, M2 & NEXTGEN) are still growing at a fast pace. This fall in share price offers an excellent opportunity to enter the stock or top up on an existing holding as VOC is now trading at just 14x FY18 forecast earnings with a 25% growth profile.
As I stated last week, and again today, it was a very important week technically for the XJO. We were either going to reject the 5,300 underbelly of the channel, and fall towards 5,100, or reclaim it and climb towards 5,700. It seems we have done the latter. It bodes well for our market we have been able to do this, and is a very bullish movement. As I suggested a few weeks ago the banks and resources would be behind this move and it seems this has played out to perfection.
Over the lead up to Christmas I expect the XJO to be very bullish. Nothing goes up in a straight line, so do expect there to be a few bumps along the way. As I have stated before I believe the banks will be a big proponent of this move especially towards the end of Oct/Nov when ANZ, WBC & NAB all report full year earnings. Tier 1 capital, bad debts and earnings growth will all be in focus again. I expect resource stocks to be in favor again as commodity prices remain stable. I also expect the high yielding stocks to rebound after their recent sell offs as the ‘buy the dip’ crowds pounce on discounts.
In the small cap/speculative end of town there has been little movement to speak of mainly due to a lack of volume/liquidity. I see this changing now that earnings season is over and the focus will come off the larger cap stocks. One sector I believe that will have a solid run are the Gold stocks. The gold price is starting to move upwards again and we are on the doorstep of Indian wedding season. Traditionally a very bullish time for gold. Also keep an eye on new age metals like Lithium, Cobalt & Graphene. Finally I would expect a tech stocks, which have been subdued for the last 6 months, to come alive again. This is due to the fact a lot of quality, income producing, assets are being bought into the sector via acquisitions, IPOs and back door listings. Australia certainly has some of brightest and promising IT minds in the world and a lot of them are yet to be recognized.
Not much to speak of economically next week. In fact it’s probably as quiet as they come. US trade balance is out on Thursday night and Chinese PMI numbers are out on Friday. Outside of those there are no earnings to speak of and very few stocks going ex-dividend. The market may take a breather after the strong week it has delivered this week.
Shorter than usual wrap up this week as stock news was fairly benign. Well footy season is over again for another year. I’d like to say at least they went out with some fight but there was little of that to be seen Saturday night. Good time now to spend some quality time with the family and get out and about. Although the wife and I have finally been able to get into the Netflix series ‘House of Cards’ over the last few weeks. We have only just started watch season 3 so no spoilers please. I am enjoying it immensely and highly recommend it to those who love a political drama that doesn’t hold back. For me Kevin Spacey is the star and his character is an absolute bastard to most in the show. However you can’t help but like him for it. Whatever you plan to do this weekend enjoy yourself and please stay safe. Go Crows (in 2017)!
- 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.
