ASX Weekly Wrap 18/04 - 21/04

The XJO endured a tough week as geopolitical tensions and weak commodity prices weighed on the market. The XJO finished down 35.80 points or 0.61% for the week. The high was 5,918.40 on Monday and low was 5,790.60 on Tuesday.

There is little to mention in the way of economic news, but a raft of trading and production updates to wade through this week. There was one important data drop on Monday whilst we were all enjoying our Easter break and that was Chinese GDP, Retail Sales and Industrial production numbers.

Once again this collection of data showed the Chinese economy is in a very strong position and should be able to meet 2017 targeted growth of +6.5%. GDP figures came in at +6.9% for the March quarter, ahead of the +6.8% consensus forecasts. Retail sales were +10.9% v 9.6% forecast and Industrial Production was +7.6% v +6.3%. The industrial production figure was the fastest rate it has grown at in 27 months. At this point it would have to be suggested the Chinese economy is again accelerating in growth and this bodes well for the Australian and world economy. It also should put more pressure on commodity prices moving forward.

Keeping with the GDP theme the IMF has suddenly become more bullish on the world economy than it was 3 months ago. This week it released its quarterly forecasts and revised GDP forecasts for countries, like Australia, up. The IMF now predicts that Australian GDP will hit 3.1% in 2017 and 3.0% in 2018. This is up from our 2.5% we hit in 2016. It also predicts unemployment will drop to 5.2% and inflation will hit our 2% target by the end of the year. These upgrades all come on the back of increased economic activity from the Asian and European regions. This lines up with what I have been saying for the last few months and that we should see a great improvement in the Australian economy in the second half of this year as the increased activity in China flows through.

They also now believe the UK economy will grow at 2.0% vs the 1.3% previously forecast and that India will grow at 7.2% in 2017 and 7.7% in 2018 as well. I feel India is a bit of ad dark horse when it comes to economic growth. If they can finally get their act together and start spending more money on infrastructure this will also be a huge boost for the Aussie economy. Hence despite the recent bearishness circulating in the media, if you can ignore the noise, everything is looking rather optimistic again.

Amazon have made it official that they will be entering the Australian market with a statement this week. They did not set a date but cited they are excited to bring a new vast range of products to Australian consumers with fast delivery. Above is a breakdown of Amazon’s products and what they represent as total sales to the company. As you can see electronics dominate the share with 44% plus physical & electronic media with 19%. This is bad news for the likes of JB Hi-Fi (JBH), Harvey Norman (HVN) and Myers (MYR). Even Foxtel is in the firing line here as Amazon has a quality streaming service similar to Netflix. Finally companies such as Super Retail (SUL) which own BCF and outdoor goods stores will come under pressure as outdoor/sporting goods make up 11% of Amazon sales. My stance remains the same with an AVOID on Australian retailers and property trusts. There is no doubt we will see similar trends emerge here as they have in the US & Uk with reduced margins, store closures and some companies even going bust.

The first of the major resource/energy companies to report production figures this week was Rio Tinto (RIO). Much like FMG, RIO’s production for their March quarter was disrupted by weather and caused production to be slightly down on the last quarter. RIO ended up shipping 76.7mt of iron ore which was down 13% on Q4 in 2016 but in line with the same quarter last year. Importantly they have maintained their full year guidance of 330-340mt for the year. Copper production was also disrupted by strikes at their Escondida mine as it fell 37% compared to the same time last year. As a result they have downgraded full year production guidance to 500-550kt for 2017. Most other minerals were up on the same quarter last year but down on the final quarter last year.

I still remain bullish on RIO longer term as I have spoken about on numerous occasions. Forecast EPS is around $5.28 hence place RIO on an 11.5x PE with a forecast yield of 4.9%. Most analysts have a target on RIO of $70-$75 hence giving it a potential upside of 20%+ at current levels. I am a believer in the China/commodity story so this is an easy decision for me, but if you are not one who shares the same view then RIO would not be for you.

Oz Minerals (OZL) was the other major miner to release production figures today and again it was in line with guidance despite a few large rainfalls impacting production. For the quarter they produced 25kt of Copper and 26k ounces of Gold. They are still on pace to produce 105-115kt of Copper and 115-125k ounces of Gold for 16/17. All in cash costs were higher during the quarter due to the weather disruptions and came in at $US1.35lb. Once again OZL stated that they are still on track to me guidance of $US1.20-$US1.30lb all in costs for the year.

Other points of interest saw cash at $594mill with no debt. Cash was down during the quarter due to dividends being paid out and a shipment of ore not lining up with the quarter which will add a further $40mill to that balance. Carrapateena is progressing well and within budget and a final decision on the mine will be made by December this year. At this point in time it looks very favorable and the mine looks like it will go ahead. Production would start mid-2019 if it does get the green light and it would produce a further 100kt of copper and gold per annum. OZL also announced two new exploration projects they have entered in to. Once is Alvito in Portugal chasing Copper and Gold and the other is Oaxaca chasing Zinc and Copper. They will spend roughly $10mill on them on exploration over the next few years.

OZL is a stock we have traded well in the past 6 months. A lot of you entered around $6.50 and exited close to $10 in that time. I can see a similar opportunity arising again with OZL as it bounces off support around the $7.25 level. I am very bullish Copper and OZL continue to be smart with their Gold as well. They have hedged 219k ounces at $1,733 per ounce which starts next year, hence if prices do fall they still receive elevated amounts. They also have the prospect of a major new mine in Carrapateena, which I feel isn’t being accounted for in the share price plus very promising exploration projects both here and abroad.

Woodside Petroleum (WPL) released its quarterly production report this week and again as it was with RIO & OZL it too was affected by adverse weather conditions. It lost roughly 21 days of production to cyclones in the area. WPL still managed to produce 21.4mb of oil equivalent for the quarter, roughly down 10% on the last quarter. Revenue was also off 8.9% to $892mill due to the lower production. As a result WPL has lowered its full year production to 84-90mb of oil. This is compared to the 94mb+ it produced last year.

I’m not too keen on energy companies at current prices. I feel the latest increase in the oil price has been factored in and the world still has an oversupply of oil. It will take the globe a while to work through the glut so until this shows signs of easing I will sit on the sidelines when it comes to oil.

Coca-Cola Amatil (CCL) gave a trading update today and it wasn’t pleasant reading. The company cited volume and price pressures due to continued competition and category trends (i.e. more energy drinks being consumed). As a result sales have been weaker for 2017 than expected and they now expect the 16/17 year’s profit to be in line with 15/16 with no growth. This is another disappointment in a long list of them for CCL over the last few years. It has not been able to combat pricing pressures and new trends at all. In fact if you look at their EPS from 06/07 which was 56.2cps to last year where it was 32.2cps they have gone backwards over the last decade. I mentioned CCL a while ago after their last lot of results and said I had them on watch but didn’t want to enter at that stage. It has proven to be a sound move as the stock was slammed 10% today on the back of this earnings downgrade. I will be avoiding CCL until they can prove they can achieve consistent earnings growth.

Commodities remained under pressure this week as geopolitical tensions remained on investor minds. Iron ore fell as low as $61t before bouncing and hitting $64/$65t again. Oil has drifted back to the $50 mark with concerns that extra output from US producers have filled the gap from what OPEC nations cut. I have stated it for a while that OPEC will have to cut again if they wish for oil to remain above $50. Also in a sign we may be at peak oil Saudi Arabia and Oman are aggressively pursuing the IPO of their oil assets to US based exchanges. If they were confident in Oil still being a viable long term investment I doubt they would be offloading their assets. To me they can see the writing on the wall and that battery technology and renewables will eventually take over as the world’s major energy source. Gold eased back to $1280 an ounce after failing to break that long term downtrend again. It also coincides with bond yields recovering after they hit 2.17% only to bounce back to 2.25% again. If Gold can’t hold these levels then its next test will be down to $1,170 and whether or not it can hold long term support.

The XJO continues to trade in a small short term uptrend (blue lines) within its longer term up trend. With current tensions around the globe I can see it falling and testing that 5,750 level on the bottom blue line before its next leg up to 6,000. If we cannot hold the trend at 5,750 then my next longer term target would be 5,300.

Some big data drops next week both here and abroad. Locally we have CPI out on Wednesday. I have seen forecasts ranging from +0.5% to +0.9%. If we get close to the later then we are well on our way to our 2% target. The UK & US both drop their Q1 GDP figures on Friday night. It’s expected the US may be a little soft but the UK could surprise to the upside. Finally BHP releases its quarterly production report on Wednesday. I would expect they would have had weather interruptions similarly to RIO and FMG. US reporting season also continues next week and more than likely provide much of the market’s direction.

The first round of the French elections takes place Monday morning our time. This is a vote to decide who the top two candidates are to compete for leadership in the second round. It is expected that Macron & Le Pen will make it through. There could be cause for concern if one of the outsiders were to get through as there are some worries about their policies. I dare say the US markets will be risk off tonight and come down in anticipation of the vote.

On Tuesday we, of course, have a public holiday to recognize ANZAC Day here in Australia. I will always be eternally grateful to those who laid down their lives to defend our freedoms and those of the world around us. They paid the ultimate price so we could live the lives we do today. I hope that I, nor my children, ever have to witness the horrors these brave men and women had to endure. Markets will be closed for ANZAC Day here in Australia.

Well it’s time to sign off for now. Has been a bit wet here in Adelaide over the last 24 hours but the sun has broken through and I think we are in for a wonderful weekend weather wise. Once again I will be watching a bit of footy this weekend whilst also catching up on some chores around the house. Hope you all enjoy your weekend and public holiday. Please stay safe and I will speak to you all next week. Go Crows!

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.