ASX Weekly Wrap 31/10 - 04/11

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.

The markets have really tested investors resolve over the last month and this week produced more of the same. We ended the week down 103 points or -1.95%. Our high was 5,328.90 on Monday and our low was 5,178.20 today. Since the close of 5,484 on the 4th of October the XJO has lost 5.53% or 303.20 points.

The XJO got the jitters due to the US elections and some polls showing Trump was ahead in the voting. Now this needs to be taken into context somewhat. There are many polls taken in the US a lot are influenced by their own agendas. Most of the trusted polls still show Hilary leading by 4-6 points, but that has come in from an 11 point lead only a few weeks ago. The FBI re-opening the case against her and the use of her private email server seems to have halted her momentum.

Whilst on the face of it Trump gaining power doesn’t seem the best outcome it’s not the end of the world. Neither candidate, if elected, will have enough power in congress to make meaningful, outrageous changes. In fact it will probably be more of the same of what we have had with Obama where his hands have been tied and not much has been achieved. There certainly won’t be any walls built.

My take is the market is factoring in a Trump victory now. It’s a case once bitten twice shy. Markets were fooled by polls suggesting a Brexit wasn’t a likely outcome in May and came off hard when eventually Brexit won out. Thus I can see a short sharp drop in markets if Trump were to be elected but I also feel we could get a really healthy rally there afterwards once markets realize not much will change.

US politics weren’t the only thing forcing global markets down. The threat of higher rates also weighed on them this week. US GDP came in much stronger than forecast on Friday night, +2.9% v forecast of +2.5% year on year. As I have been harping on about for some time now, higher rates are general negative for equity markets and most asset classes.

In some positive economic news we had a very strong Chinese PMI print on Tuesday. The October PMI number came in at 51.2, +0.8 on September’s number and the largest number we have seen since July 2014. This suggests manufacturing growth in China is once again accelerating and again adds to the notion that the Chinese economy has experienced its soft landing and is starting to turn.

This resurgence in the Chinese economy is helping us boost our own numbers as well. Australia’s September trade balance came in well above expectations. Our deficit shrank to $1.227bill after our $1.9bill read in August and $1.7bill forecast. Higher Oil, Iron Ore and especially Coal prices have helped shrink the deficit and many are expecting it to be wiped out by the end of the year. This is great as it means more money in the government’s pockets, more people in jobs etc. One would be forgiven as to being a little perplexed as to why our market is performing so badly yet our economy seems to only gaining in strength.

ANZ reported its full year results today and they were less than inspiring. Its cash profit was -18% to $5.9bill, Revenue -3% to $20.5bill and final dividend came in at 80cps down from 95cps a year earlier. A notable change in policy was their dividend payout ratio. The bank lowered it to 60-65% of profits as opposed to 65-70% a year earlier. If you remember last week NAB’s payout out ratio was at a much higher 88% and as it has been signaled for a while the big four will have to curb dividends to maintain capital levels. It seems as if ANZ is the first to take that step. Tier 1 capital ratio came in at a very healthy 9.8% also suggesting ANZ wouldn’t be seeking more capital from shareholders. Finally net interest margins came in at 2% v 2.04% once again, similar to NAB, coming under pressure due to the low rate environment and increased competition.

So once again the theme with the big four, with only WBC to report next week, are earnings are still under pressure, bad debts are increasing, but nothing to be concerned about, margins are being squeezed and Tier 1 capital ratios are very healthy and well above regulatory requirements. I am more than happy to add ANZ, WBC, NAB and CBA to portfolios at current levels with a longer term outlook.

Another financial to report this week was BT Investment Management (BTT). Profits came in at a record $156mill, up 18% on a year ago. This is the fourth consecutive record profit for BTT. Profits were boosted by fee revenue (+13%) and performance fees (+49%) whilst funds under management grew to $80.5bill, +7% on a year before. BTT saw fit to increase their final dividend to 24cps which makes total dividends for the year 42cps. Trading on a PE of 18.6x it is at the expensive end of the scale, however growing profits by double digits year on year it may be deserving. BTT boasts a healthy yield of 4.4% (83% payout ratio) and a Return on Equity of 18%+, suggesting they are spending their money wisely. Whilst a PE 18x is on the pricey end of the scale BTT are performing in a sector where peers such as IOOF and AMP are struggling to grow earnings.

Harvey Norman (HVN) and Qantas (QAN) both gave quarterly updates this week. HVN came in with some strong numbers. Profit for the first three months of 16/17 were +26% to $115mill which came with +5.4% in comparable sales against the first quarter in 15/16. HVN has been consistently sold down since the end of October. It peaked at $5.30 and has been sold down to $4.80 in the time since. Obviously the market expected more from these quarterly results and are concerned with the Australian property market. It is widely known HVN sales have a high correlation with new builds. HVN trades on a PE of 15x which seems a little high for a business that could be facing some serious head winds. Technically this $4.80 area needs to hold otherwise HVN will see $4.20. At $4.20 HVN seems an attractive proposition.

Qantas’ (QAN) numbers were nowhere near as impressive as HVN. QAN reported that revenue for the first quarter of 16/17 was -3% ($3.98bill v $4.11bill) compared to the same time last year. It claims that lower international airfare prices are what mainly contributed towards this. I’d suggest this was from increased competition. It also forecast its first half profit would be in the range of $800-$850mill. This is down from the first half last year which saw a profit of $921mill. Trading at 5x current PE and with an outlook for lower for longer oil prices I see a lot of value in QAN as an 18 month to 2 year play. There is also the chance for large capital management initiatives in that time considering the free cash flow QAN is generating.

Flight Centre (FLT) brought out their earnings update and guidance for 16/17 this morning. The first comment was that their profit for the first half would roughly around $120mill, down from the $146mill last year. They also noted that profit for the full year should come in at between $320-$355mill meaning profits could be down on last years $352mill result. The reason they are stating that profits may not meet expectations are that international airfare prices are down 7% on last year in key areas such as the US, Australia and India. FLT is one I have avoided for some time due to the competition they face from online retailers. They do have their own niche that they do very well but they are pricey to me at current prices. The market didn’t like the update sending the stock down 10% before it made a small recovery.

Looking towards commodities now, it’s been a great week for most with the exception of oil. Coal, both met and thermal, continues to climb, Iron Ore made small gains to sit above $65/t, Gold climbed above $1,300 per ounce again for the first time in a few weeks, Copper continued its grind higher to $2.21 per pound, but oil was sent crashing down to $44 a barrel due to no concrete plans by OPEC to cut production.

We find gold moving back up again as fears and uncertainty set in with the US election next week. In order for Gold to move higher it needs to break out from the downward pattern started in October of 2012. What Gold should do is trade, and become tighter, in that wedge highlighted by the red circle before an eventual break above the downward trend line (green). This looks as if it may happen early in 2017. We must be cautious as the USD has eased off in the last week or so helping commodities move higher. Any rate increase would see the USD climb higher again and put pressure on commodities.

The XJO movement is now clear. If we can’t hold the 5,150 area (blue), since we broke 5,225, then 4,900 will be a formality. In order for us to move higher again we need to hold 5,150, consolidate and then move above that short term downward trend line (red) which we failed to do in our last run upwards. Barring a major event such as Chinese debt imploding or an Australian property crash, I cannot see why we eventually wouldn’t break this downward trend in the first quarter of next year. Economic numbers here in China and the US are improving, hence company earnings should eventually follow. One thing I will say is if Trump does get in and there is a sharp selloff we could see that 4,900 next week. This immediately would be a Buy signal for me on the XJO as at 4,900 the market does look value.

I was going to talk about a few stocks I am focusing on of late, but will keep them for next week. I’m not really keen on entering too many new positions over the coming days with the US election looming. Sometimes it’s just as important to sit on the sidelines and preserve you capital than it is to enter new opportunities.

I wanted to point out a couple of websites I have stumbled across in recent weeks that have great information regarding Australian and global markets. The first is www.tradingview.com. This site is great for everything US market related. You can bring up pricing on any stock, commodity, bond, currency etc. you like. Also the charting capabilities are brilliant. It almost has as much functionality as my charting software. The other site is www.marketindex.com.au. This is great for everything Australian market related. It has a much better design and layout than the ASX site and it’s easier to navigate. Data is 20 minute delayed but that’s the usual. However just a reminder to every one of my clients is that you do have a log in for either Commsec or ANZ Australian Share Investing (the old ETRADE) to view your portfolio and market information that will give you most the information you crave. If you don’t have one already send me an email and I can organize one for you.

Next week is a quiet week for data. We have the US jobs numbers out tonight. Other than that there is not much to speak of here or abroad. Obviously the big one is the US election next week. I really feel sorry for the people of the USA. Neither candidate is that inspiring, both have big question marks hanging over their heads. Kind of what we have had to endure here for the best part of a decade. The election occurs in the US on Tuesday their time so by about Wednesday, at lunch, in Australia, we should have a decent idea of who is going to win. My thoughts are Hilary pulls through with a comfortable victory, but not large enough to give her a decent power in congress.

That closes it out for another week. Now I have been made aware some people received last week’s wrap email twice with another copy of it going out last night. I do apologize for that. Looks as if something went wrong on the email server side of things. If it happens again I will be in contact with IT. The first test match of the summer crept up on us, well at least me, real quick. Didn’t even know it started yesterday until the morning of. May plonk myself on the couch for a few sessions over the weekend. Getting a bit warmer now so it’s starting to really feel like summer is around the corner. Won’t be long before we are in a stretch of multiple days in high 30s that we start wishing for those cooler days to return. If you’re outside don’t forget to slip, slop, slap. That sun can be vicious. Hope you all have a great weekend and I’ll speak to you all next week. Go Crows!

heath@hlminvestments.com.au

0413 799 315

PO Box 6014

BURTON SA 5110

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.