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ASX Weekly Wrap 24/04 - 28/04


It was a quiet week, but the XJO followed most international indexes and finished up strongly, although it may have underperformed most. The XJO put on 69.50 points for the week or 1.19%. Our high was 5,924.20 yesterday and our low was 5,853.80 on Monday.

In a shortened trading week, due to the ANZAC day public holiday, there was little for markets to react to from an economic and company stand point. Obviously the biggest release of data for us was our CPI, which was revealed on Wednesday. The headline number came in at +0.5% on the quarter which was slightly weaker than expected +0.6%. Year on year CPI came in at +2.1%, also slightly weaker than the +2.2% expected. Whilst the numbers were slightly off we do now sit in that 2-3% CPI range the RBA seeks and also shows that CPI is growing, although slowly, as you can see from the table below. Core inflation, which many look to for a better reading of CPI, was right on forecast at +0.5% for the quarter and +1.8% on year. That’s ahead of the +1.55% on year figure we printed for the December quarter. Whilst growing at a slower rate than expected CPI is improving and to me shows that no more cuts for the RBA are needed and that the next will most definitely be up. Our next lot of CPI data will be out in July hence I dare say the RBA sits on its hands until then.

The first round of the French elections took place Monday morning our time and as expected Macron and Le Pen made it through to the second round of the campaign. The markets reacted positively to this and the French stock market, the CAC, was up 4% when it opened for trade on Monday. The reasons the markets reacted so positively is because it is almost impossible for Macron to lose this race due to the preferential votes he holds. This means Le Pen’s far right wing policies, such as leaving the EU, are highly unlikely to come to fruition. This gives the markets some certainty, which they like, hence the move to a ‘risk on’ theme again and investment back into global equity markets. The final election doesn’t take place until May 7.

Trump’s tax plan was in focus during the week in what was a bit of an anticlimax. The main take away from his proposed plan was lowering the corporate tax rate from 35% to 15%. He also would look to simplify the system with only three tax brackets of 10%, 25% & 35% on an individual basis, this would be down from the current seven brackets. Really the plan wasn’t anything out of ordinary and does meet most of his pre-election policy promises. At this point there really hasn’t been any real opposition to the plan and it looks like he will get it through. The big kicker is obviously the corporate tax rate cut which would put more money in the pockets of large US business, which would obviously be bullish for the share market as earnings would increase. In fact the estimated average EPS increase would be 12% for US stocks, if these tax cuts were implemented. There is no date set as to when this bill will be introduced to congress at this stage.

BHP Billiton (BHP) released its third quarter production figures this week and it was generally well received by the market. It stated it recorded record production from its WA Iron Ore mines and five QLD coal mines. It did mention, as did RIO, that because of strikes at its Escondida copper mine that Copper production guidance would be revised down to 1.33-1.36mt. Petroleum and Coal production were on track to meet guidance. Overall it was what the market expected with no nasty surprises. Unlike RIO & FMG there was no mention of weather adversely impacting their WA production.

My sentiment remains the same with BHP as it did with RIO & FMG. I am bullish Iron Ore and Copper long term and see great value in all the fore mentioned companies. The Iron Ore price seems to have settled in that $60-$70 range which is still highly profitable for the big three here in Australia. I believe we will see a turnaround in the resources sector in the second half of the year.

Wesfarmers (WES) updated the market this week with its retail sales for the Coles Group, Bunnings and Officeworks. Coles, much like Woolworths, is now struggling to increase sales. Total sales of food and liquor increased just 1.2% and only 0.3% on a like for like basis. Bunnings were a different story with sales increasing 7.7% on quarter and up 6% on a like for like basis. I struggle to see how Bunnings can continue at this pace given what is coming with Amazon. Officeworks, who WES are looking at possibly spinning off, had another strong quarter as well. Their sales increased 9% on the previous corresponding period. This bodes well for their possible IPO, as it seems if WES may be selling near the top. Their department stores in Kmart and Target were mixed. Kmart sales were up 2.5% whilst Target sales were down 18.1% as they re-position themselves as a lower cost store. I have said it before and I’ll say it again if Target are going to be re-positioned basically the same as Kmart then what is their place in the market? Might as well turn all the Target stores into Kmart.

Overall it was a line ball report with Bunnings and Officeworks the better performers. For me WES gets thrown into that retail basket as well and I can’t see how they will compete with Amazon once they arrive on our shores. This is probably why WES are seeking to get top dollar for Officeworks now. WES trades on an earnings ratio of 17x which seems relatively high for me considering their lack of earnings growth. Their only attractive asset will soon be Bunnings which will carry too much baggage around it (Coles, Kmart, Target) for it to be an attractive enough proposition for me.

Finally Resmed (RMD), the makers of medical devices for sleep apnea sufferers, has posted its third quarter results overnight in the US. In what is becoming a familiar habit with RMD they missed with their earnings forecasts again. Sales improved 18% over the same period but if you exclude recent acquisitions this falls to 5%. Margins did improve to 58.3%, up from 57.3% and EPS was $0.62 only increasing 3% on the same time last year. RMD will pay an $USD0.033 unfranked dividend for the quarter.

RMD is one I have been trying to exit for many of you around the $9.50 level. I am finding that on a too regular basis RMD are missing forecasts in one way or another and tend to get beaten down upon that. The market punished them 5%+ today and they got to $9.07 at their lowest. I am not a buyer of RMD here and prefer to pick them up around that $8 mark. They do have a quality product that is arguably the best in the world, but have too much risk associated with them at current prices.

Unless you are Oil or Gold it has been a fairly stable week for most commodities. As I spoke about previously iron ore is trading around the $66t level and seems to have stabalised. Copper also is trading around the $2.58lb, slightly higher than the $2.54lb it was trading at last week. Oil continues to be sold off from its highs as Libya recommences production again after a short halt. It seems as if OPEC will again have to cut as US producers continue to increase production and flood the market with supply. Trump is also only going to make the energy market more friendly and conducive to increased production by cutting red tape. There are major headwinds ahead for Oil, but it does have some major growing demand from the likes of China. I am avoiding energy stocks at this point in time.

Gold hit some major technical barriers in the last week or so, and has once again been sold off. It was unable to breach that long term downward trend line (red) over the last two weeks. It now looks as if it is pulling back to a short term uptrend it has established (dark blue) around 1250. If it can’t respect that then it will fall to a longer term uptrend (light blue) at around 1,180. Reasons for the recent sell off surround the ‘risk on’ mantra again. Investors are selling safety assets such as bonds and gold and jumping into riskier assets such as equities again. This is evident by rising bond yields. The 10 year US Treasury bond yield has now moved from 2.17% up to 2.31%. As I have said many times rising yields/rates are negative for gold. Until gold can breach that long term downtrend I am avoiding it. I have my doubts it will ever be able to.

A lot of economic data to digest next week as UK & US Q1 GDP figures kick it off tonight. Its expected the US will be a tad soft whilst the UK may surprise to the upside. Japanese, Chinese, Eurozone and UK manufacturing PMI are out Tuesday night our time. An import set of data for a possible recovery in commodity prices. We have the RBA meeting on Tuesday to discuss our cash rates. No movement is expected. We also have Fed sitting to discuss their cash rates on Wednesday night our time. Once again no change is expected. Finally to round out the week we have Japanese, Chinese, Eurozone, and UK services PMI on Thursday night and US jobs figures on Friday night. To top it all off ANZ starts the banking reporting season on Tuesday with their half year results and Macquarie rounds out the week with their results on Friday. Phew….. What a week!

A much shorter wrap this week as it has been relatively quiet. I am sure I will make up for it next week with all the above information to hit our screens. Weather has been terrible of late. Getting really cold and damp. Can’t stand it. As you probably have already guessed I’ll be attending the Crows game this weekend. Two teams who sit 5-0. I still expect Crows to win. Will be spending time with the wife and son. He turns one in May. Those 12 months just flew by. This time last year I was prepping myself and the house for his arrival. Being a Father has been one of the greatest experiences of my life and with so much more to look forward to. Who would have thought that such a little person could bring so much happiness and love into the world. Hope you all thoroughly enjoy your weekend. Whatever you’re doing make sure you stay safe. I’ll 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.

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