ASX Weekly Wrap 06/02 - 10/02

After some initial weakness the XJO was able to fight back with some momentum late in the week. We ended up 99.00 points or 1.76%. Our high was 5,721.40 today and our low was 5,582.70 on Tuesday. Much of the week was dictated by earnings so we have a few companies to cover in this week’s wrap. However first we will touch upon the few important economic data points.

The data the market focused on the most was January’s US employment data that was released last Friday night. In the end it was a real bullish report with +227,000 jobs being added to the economy. This was well beyond the +180,000 forecast. The unemployment rate did tick up a little to 4.8%, but that was mainly on the back of the participation rate jumping to 62.9% from 62.7%. Probably the only downside of the report came from the wage growth which only grew at +2.5%. This was below forecasts of +2.7%. Overall all the report was received well and shows the US economy is ticking along nicely.

Just a quick look to China’s trade balance figures which were released today as I was typing this up. The numbers came in very strong and ahead of forecasts. Exports were +7.9%, imports were +16.7% and the total surplus was $US51.3bill. Well up on the low forties figure it printed last month. Again this is bullish news for China, Australia and the globe really. It shows china is consuming a lot with its imports and equally the globe is demanding a lot from its exports.

The only other piece of economic news I’ll touch upon is the RBA meeting on Tuesday. As we all know the RBA kept the official cash rate on hold at 1.50% but their media statement that went with it had a completely different tone. The statement was overall very bullish on the Australian economy, where we were at and where they expected us to go. They also were more hawkish on inflation expecting it to get back to the 2-3% band sooner than first thought. I have said for some time that inflation had bottomed and was gaining momentum globally since mid-2016. It we continue to see strength from China and commodity prices and add to that a strong US it could creep right back up on us very quickly. It also seems most economists are now expecting our next rate move to be up and as soon as the end of 2017. Something else I have been suggesting for a good 6 months. It’s good to see them finally catch up.

National Australia Bank (NAB) gave the market a quarterly update on earnings first thing Monday morning. It wasn’t here nor there but probably did sit on the better side of the ledger. Its earnings were down 1% to $1.6bill compared to the same time last year. They cited major layoffs (483 people) and hence some salary payouts as the major reason. Its tier one capital ratio sat steady at a comfortable 9.5%, but in a surprising stat bad debts were down 23% to $164mill. The trend there had been rising to steady but for it to be down so much did come out of the blue. It also mentioned its net interest margin remained steady. Like I said it was a solid set of numbers that will probably see them hit most earnings forecasts if continued. I am expecting the second half of 2017 to see a real improvement in bank earnings as confidence grows in the economy. Once again I see a lot of long term value in the banks here on a 5 year horizon. All the big four have PEs below 15x and yields of around 6% or more. Historically that suggests they are value.

Like NAB, Macquarie Group (MQG) updated the market on its quarterly earnings, but for their third quarter, on Tuesday. Like NAB it was straight down the middle with MQG citing they expected full year results to be in line with 2016. The market was concerned with a slight drop in earnings from its Capital Markets business and sold it down heavily. However overall the update was solid it there were no surprises. MQG has become somewhat of a boring earner these days due to the fact that 70% of its business now is annuity style so is fairly predictable. At least investors know what they will get and can rely on a healthy dividend. MQG sits on a PE of just 13.64x here and a yield of 5%. This suggests we could see more upside yet.

Next out of the blocks was Transurban (TCL) which surprised the market with a better than expected bottom line and outlook. TCL announced its first half profit jumped 36% after the acquisition of the Brisbane freeway and higher traffic on its existing roads. The profit was $110mill up from $81mill the year before. Their dividend also was higher than expected coming in at 25cps rather than the 24.5c expected. There are a few headwinds around the corner for TCL. Higher treasury yields and higher rates mean higher costs for TCL. This will squeeze their margins and make increasing earnings so much harder. They are also expected to have to go to the market for cash to fund the Western Distributor freeway in VIC, should they win the contract. Whilst the profit was better than expected the market pushed TCL back up the $11 mark, I am looking for an exit to TCL as I believe tougher times are ahead for Infrastructure stocks.

There was a lot to like about RIO Tinto’s (RIO) full year results this week. I am really liking how RIO & BHP are stripping their companies back to what they were pre the height of the mining boom. Just highly profitable, low cost, efficient miners with massive cash flows. RIO’s result beat the market on almost every metric. Annual profit came in at $US4.62bill. A turnaround from the previous year’s $US866mill loss. Operational cash flows were $US8.5bill. Net debt was down 30%. They made cost savings of $US1.6bill. Their final dividend was $US1.10 or about $1.63 AUD due later in the month. Obviously higher commodity prices helped their bottom line but also the cost cutting and narrowing their focus to what they do best was also a major reason. I have put a table below, RIO released, on how a 10% move in certain commodities and currencies affect its bottom line. It really gives a good idea of how volatile this business can be.

I have said for some time I have been looking for an entry into RIO, BHP & FMG via a substantial pull back, but one really hasn’t come about. As long as Iron ore prices stay around where they are I don’t see one coming. I may have re-evaluate my position.

The final stock I wish to touch upon is AGL Energy (AGL). Its first half results were released to the market yesterday and they were solid. They produced a profit of $325mill, up from a $449mill loss, but on a base line earnings metric they only grew 3.7%. However they did state that full year profit would now be in the high end of the $720-$800mill forecast they set out last year. This had mainly come from cost cutting and increased electricity prices. They also increased their div to 41cps from 32cps in the previous half. The price has run hard from here and where I got a lot of you to enter the stock. I may be looking to lighten the load a little in the short term.

Won’t touch on commodities this week. I gave a pretty good round up of them last week in the 2016 review. I will say it does look like Gold is headed towards that $US1300/ounce mark again and that Iron Ore prices could be in for some soft trading as Chinese stockpiles are at all-time highs. Will have a better look at the lay of the land next week when we have more information.

It really turned out to be a very bullish weak technically for the market. It showed signs on Wednesday when we started the day around 30 points down to end up 10 or so points. Then yesterday we broke through that downward trend (where the red circle is) to only confirm it with a super bullish move today. I wrote about this move in last week’s note and it’s good to see it come to fruition. We should now go on to test that last high at around the 5,827 mark before an eventual move to 6,000. In another bullish signal the market is now trading above the 10, 20 & 40 day moving average which suggests this could be a quick and aggressive move.

Well that’s enough from me this week. Have a jam packed week next week with the likes of ANN, BEN, JBH, NCM, CGF, COH, TWE, A2M, CBA, CPU, CSL, DMP, WES, TLS, TTS, ANZ, ASX, & MPL all reporting. Only important piece of economic data out here and abroad are our jobs numbers for January on Thursday. Apart from that it’s fairly quiet.

I hope you are all coping with the heat ok, staying cool under some AC and keeping the fluids up. Remember to check in on older friends and family members on days like these. It can sometimes hit them the hardest. Three days around 40 degrees is enough to make anyone feel uncomfortable. As a result of the heat I doubt I’ll be doing much this weekend. Have some study to do and an unfortunate cold to recover from. Honestly how do you get a cold in 40 degree heat? Hope you all have a fantastic weekend, stay safe (and cool) and I will speak with you all next week. Go Crows!

Heath Moss

heath@hlminvestments.com.au

0413 799 315

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.