ASX Weekly Wrap 05/12 - 09/12

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.

Well that was much unexpected. Saw such strength, and on decent volume too, for the XJO. We finished +116.50 or +2.14% for the week. Our high was 5,566.10 today and our low was 5,383.80 on Monday. The resources and banks did all the heavy lifting this week to continue the theme of the last month or so. This market does feel oddly familiar with a lot of similar trends appearing like in our Bull Run of 03-07 pre-GFC.

Let’s get that elephant in the room out the way…. you know the one I’m talking about… Australian third quarter GDP figures that dropped on Wednesday. There is no other way to describe them except for that they stunk! The consensus forecast Wednesday morning was for a -0.10% contraction and the figure came in much weaker than expected at -0.5% (+1.8% yoy). Now it’s not all doom and gloom as some economic ‘experts’ would have you believe. If you break down the numbers there are some clear one off anomalies that created a perfect storm. First of all we had the election in early July, however the result of the election what not known for almost a month. This put the Government, or public sector, into a standstill. This can be seen in the numbers as public sector spending contracted heavily across the board. If you then look at the private sector figures they were very solid, barring WA, which was terrible on all fronts.

You also had a situation of a wetter than usual winter right across Australia which saw less people going out and spending their hard earned. Finally you had commodity prices close to all-time lows. This accounted for WA’s -3.8% figure. Now I say this is a once off figure as recent economic data, in particular retail spending, is showing that we are in for a strong fourth quarter. As I said last week if you take the last three months of retail spending we are running at an annual pace of +6.8%. Also of note nominal GDP rose +0.5% (+3.0% yoy) in the quarter. This is broadest indicator of income in the economy and signals an increase in company earnings and wage growth. Finally Real Net National Disposable Income rose by +0.8%, an accelerations on the +0.5% in Q2. A better measure of economic well-being and a probably a reason why the economy didn’t feel as weak as the headline number suggested. Once again I believe the fourth quarter this year and 2017 will be very strong for Australia, so whilst it’s a warning to us all, it’s really nothing to get too concerned about.

Now before the GDP figures dropped on Wednesday we had the RBA meet on Tuesday to decide on the cash rate for December. As we all know they decided to hold the cash rate at 1.50%. Some economists are now calling for the RBA to cut again next year, because of this weak GDP figure. I find this a bit narrow minded as 1.) The RBA’s sole mandate is keep inflation in check and 2.) It’s a one off figure and clearly an anomaly. Inflation is still accelerating here in Australia and whilst it may push back a rate hike a quarter or so the next move should clearly be up. I know I have said I expect a rise as early as Q4 2017, but I’ll push that back to Q1/Q2 2018 due to this GDP figure. Remember both GDP and Inflation figures are lagging indicators. This means its data for what’s happened in the past.

The main reason I believe the next rate move is up is similar to the situation in the US. The RBA will have to anticipate a rising inflation figure and be prepared to curb it somewhat by raising rates earlier than in the past. This is due to the fact we have a historically and unprecedented low cash rate and inflation can quickly get out of hand. So if they can gradually increase it in anticipation rather than have to wait on a quarterly figure it will be much kinder on the economy. This is exactly the same as what is happening in the US at the moment. The Australian 2yr Treasury sits at a yield of 1.77% which suggest on one increase in the next 2 years. However yields can quickly change, as they have in the US. I would expect to see that yield hit 2% in Q1 of next year and maybe even 2.25% within 12 months.

The final piece of Australian data out this week was our Trade Balance which was weaker than expected as well. The deficit blew out to $1.541bill for October, much larger than the $1.272bill anticipated. Basically it comes down to a lot more imports coming in than expected and the prices of those imports rising. We also had a delay in some of the commodity prices flowing through to our exports which didn’t help. It was the first rise in the deficit in the year, but it once again is expected to contract in Nov as higher commodity prices flow through.

We had two significant pieces of data come from China this week. The first was yesterday in their Trade Balance. Once again it was a healthy read a very strong signal the economy is bouncing. Exports increased by +0.1% for November vs the -5.0% expected and higher than the -7.3% contraction in October. It was the first increase in exports since March this year. Even better news was imports increased +6.7%, the first increase since September 2014. The overall surplus narrowed to roughly $US44bill due to the much higher than expected imports number. However this is all bullish news for the Chinese economy moving forward.

The second lot of data China dropped were its inflation figures. Their CPI came in at +2.3% vs the +2.2% expected and their PPI came in at a very strong +3.3% vs the +2.2% expected. This means prices are rising at the producer level which will eventually flow through to CPI. This is also inflationary for Australia due to the large number of good we import from China. If their prices start rising then what we pay for them will start to be on-charged here, thus boosting our inflation figures. In effect we are importing inflation. This gives further rise to the notion the next RBA move is up.

Not much company data out but some of what was released was significant. The first was a takeover offer for the utility infrastructure company Duet (DUE). The takeover offer came from a prominent Hong Kong business man and was a full cash offer of $7.3bill or $3 per share. DUE had traded just $2.35 the day before the offer to it was a substantial premium to its last price. The bid is unsolicited so the board is deciding whether or not to allow them access to their books or even if they will back the takeover itself. The market obviously sees many hurdles ahead as the stock closed today at $2.79. Well below the $3 offer. I’m not sure even if the DUE board agrees to the takeover whether the Australian government will allow it proceed. DUE own some very prominent and vital infrastructure assets and I’m not sure the Governments wants them in the hands of an International. Only time will tell.

Next off the ranks is the TPG Telecom (TPM) who, for well-known reasons, have been hit hard of late. They had their AGM during the week and whilst not much said they did reiterate their new guidance figures for 16/17 and said they were on track to meet them. Their EBITDA guidance remains in the range of $820 - $830million. The market gained some confidence from this and TPM is now trading off their recent $6.70 lows to close around the $7.41 mark. It’s interesting to note that the Telecommunications sector in the US has recently been hit hard as well, like the Aussie version, and has since had a sharp bounce. Let’s hope this flows through to the Australian sector as there seems to be a bit of value down here now.

The final major bit of company news came from Sirtex Medical (SRX) today. They updated the market on their current earnings for 16/17 and they were rather soft numbers. Profit is expected to be between $30-$32mill for the first half this year which would mean its down 9-16% on last year. They also noted that sales will only grow at between 4-6% as opposed to the 16% growth it also saw the same time last year. The company has declared its due to slower uptake in the US, Europe, Middle East and Asian markets. The market sold it off hard today as the stock finished down 37%. Like many of these high growth companies before it trading on high multiples, they are savaged when they fail to meet expectations. Its worth letting it consolidate from here and reviewing the company and their financials when the picture is clearer. The way I understand how their treatment is classified, by the FDA, is as a drug of last resort. This means it can only be used when every other possible alternative has failed. This to me puts a cap on their current earnings and they need to get a better classification than this to grow.

The Aged Care Sector got a boost this week as the Government announced it would not proceed with some of the major funding cuts to the sector. There are still cuts to be made, but they will be less of an impact and spread more across the industry rather than just focusing on the bigger more profitable guys. This is important as companies like Regis (REG) gain 70% of their revenue from government funding. This caused the whole sector to bounce and in particular Regis (REG), Japara (JHC) and Estia (EHE) all climbed between 6-13% for the day. They have since settled and come down a bit again. It’s a sector I’m very interested in as as it stands now its highly profitable and growing rapidly. If the cuts on the sector are minimal and don’t harm EPS too much a company like REG looks very good value down here. We will have to wait and see how these new cuts take shape and what effect they will have on the sector.

Commodities had another solid week as Iron Ore cracked 2 year highs to sit above $82 a tonne. Fortescue (FMG) announced it has continued strong cashflow and is using these better times to accelerate their debt reduction. They also noted that they are now the lowest cost exporter of Iron ore into China in the whole world. A Testement to the whole team there.

Oil continued to loiter around the $50/barrel mark and looks like it is due to breakout within the next few weeks. A colder than average winter is forecasted for the US/Canada so if this turns out to be true could help put upward pressure on the price. I will also not in the trade balance figures from yesterday that China has increased its consumption of oil from 28mill barrels in October to 32mill barrels in Nov. Not only are we seeing a possible cut to production, but also increased demand from two of the worlds largest consumers of oil. This is very bullish for the price.

Zinc hit 9 year highs as it correlated to Iron Ore/Coking Coal etc. Over half of zinc produced is used to galvonise steel to stop it from rusting. This gives it the current correlation as China ramps up its steel production on its increased infrastructure spend.

Gold had another iffy week and looks as if it could break down again at any moment. Remember we are now seeing Gold inversely correlate to the US treasury yields which now sit around the 2.44% (10yr) mark again. The point is people start moving back in treasuries and out of gold as it’s a lower risk investment asset which now starting to yield better returns and these are only getting better.

Finally copper had another good week finishing up at roughly $2.65/pound. Recent highs are around the 2.72 mark so it looks like it could give them another run next week. Import numbers for Copper were also up very strongly in China’s latest drop of data. It imported 380,000 ton in November vs 290,000 ton in October. This puts some real strength behind China’s increased infrastructure spend theory and is another bullish sign for the Australian economy.

This is one I got clearly wrong, but I am happy to be wrong in this instance. The XJO has gone from strength to strength since I said there would be some weakness and a pull back to 5,250-5,300. It now sits at above the 5,550 mark and has broken out of that downward trend. The Banks and Resources are pushing it up hard and 3 of the big 4 have matched their 12 month highs now. It does seem as if the Santa rally is well and truly here as any weakness is being bought up as we push higher. The 5,600 mark could provide some resistance but at worst I feel we track sideways from here and at best we continue to push up. There could be some headwinds if commodities come off due to a higher USD next week, but we will have to wait and see how that plays out.

I am still of the thought that we will see 6,200 some time in the second half of 2017. If this is the case then we could get a return of approx 12% from here plus dividends over the enxt 12 months. It of course wont be without its hiccups so I feel buying the big end of town on any small corrections we have it key. Speaking of great performance the All Ordinaries Accumulation Index hit record highs yesterday. This index measures the All Ordinaries plus dividends so it’s a better indicator of returns for investors. The chart below tells the story.

Another busy week with plenty of data to consume next week. We have Australian consumer and business confidence out along with our Jobs numbers. China release its Industrial, retails and fixed asset investment numbers. The big one of course if the Fed meeting which start Wednesday night our time. It almost certain they will raise rates which means we could see the USD and Treasury yields go higher. If they hold off then we could see the USD plummet and commodity prices spike. I hope you all took notice of my stock in focus last week in QBE. I have been accumulating for clients in the $11 - $11.30 range and it closed today at $12.58. That’s an 11.33% return in just over a week for investors. I have a 3-5 year horizon on this one so as long as US Treasury yields keep increasing I will continue to hold QBE. ANZ, NAB and BTT also hold their AGMs next Friday so it will be interesting to see if conditions are improving yet or not for the financials.

Not much scheduled for the weekend for me. Have a small Xmas party I have to attend as part of a class we have been taking our 6 month old to. No doubt there will be Christmas shopping done at some point as well. Hopefully I can rest up before the real festive madness kicks in and enjoy my new lawn out the back. Hope you all have an enjoyable and safe weekend. Will speak to you all next week. Hopefully we have more of that Santa Rally….. Ho Ho Ho!

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.