ASX Weekly Wrap 13/06 - 16/06

A very strong week for the XJO as it was our best since late March. The XJO was up 96.20 points or 1.91%. Our high was 5,833.90 on Wednesday and our low was 5,681.20 on Tuesday. Many attributed a good portion of the gains to extra money flowing through to super. This is due to new laws coming into effect on July 1st which further restrict the amount of capital that can be put into super outside normal contributions. Also because most people have a balanced investment portfolio within super an automatic 30-40% is usually invested in Australian equities. However it is also thought due to our underperformance compared to international markets, as we are the only major market under our 50 day moving average, there was a flow of international money finding a home in the XJO. This would also line up with almost record inflows into the US equity markets last week. We have now seen the XJO trade on the positive side of the ledger for 5 of the last 6 trading days.

Obviously the big news of last week came from the US Fed. As expected the Fed raised their official cash rate by 25bp to 1.25%. This was largely factored into the equity markets so there was little reaction there. Bond yields did take a dive, the 10 year hit 2.12% before bouncing to 2.16%, on the back of more dovish comments from Fed chair Janet Yellen. The market took the comments as there was no guarantee of another rate hike this year. However the Fed maintained it stance for further rate hikes moving forward with 3.5 expected in 2018 and 2.5 expected in 2019. It also stated that it is confident inflation would pick up due to a strong jobs market. Overall it was more of the same and the Fed seems to be sticking to its script.

Staying overseas China had some important figures released this week as well namely retail sales, industrial production and fixed asset investment. All numbers came in pretty much in line with expectations with retail sales at +10.7% vs +10.6% expected, industrial production was +6.5% vs +6.3% and fixed asset investment came in at +8.6% vs +8.9% expected. As you can see from the chart above all three have moderated and stablised after a slow down through 2014 and 2015. These figures again show the Chinese economy is moving along solidly.

Turning to data back home we had our jobs data for May released on Thursday, which really blew forecasts away. Our unemployment rate dropped down to 5.5% on the back of 42,000 jobs being added for the month. That’s on the back of the participation rate improving to 64.9% from 64.8% as well. The breakdown was even more encouraging with 52,100 full time jobs added whilst we lost 10,100 part time jobs. Obviously this is great news for the Australian economy because eventually this will put upwards pressure on wages which will then push inflation higher. In the last 3 months alone we have added 141,000 jobs. This is the fastest rate of growth since November 2004. The unemployment rate of 5.5% is our lowest since February of 2013. It all points to a very healthy economy one which, I have been declaring for some time, will show great improvement in the second half of 2017. Whilst jobs figures show data from the past it is still a decent lead indicator as business’ will only hire, especially full time, if they are only confident in growth moving forward.

Turning to company news now, the much maligned infant formula company, Bellamys (BAL), has had a positive last few days after announcing the successful completion of the institutional arm of a $60.4mill capital raising. In total $14.3mill has been raised via institutions with the rest being open to retail via a 5 for 38 entitlements issue at $5.64. The funds will be used to purchase Camperdown Powder Pty Ltd in Victoria. This will help them settle and gain CNCA license to be able to sell their infant formulas in China. This has been a huge hurdle for BAL in the last 12 months and the reason they shares nosedived from $14+ to sub $4 at one stage. Some of the funds will also be used to help settle a contract with Fonterra. The shares have jumped substantially the last few days on the back of this news. It will help clear some of the uncertainty surrounding the company and help lead them on the way back to profitability. If you do own BAL shares the rights issue does look good value at the moment as it’s priced at $5.64 and they last traded at $7.20+.

Sticking with the infant formula theme A2 Milk (A2M) has yet again released another profit upgrade last week. A2M stated that revenue would be approx. $NZ20mill higher than last forecast for the 16/17 year at $NZ545mill on the back on continued strong growth in its infant formula market, particularly in China. They also announced that they would be increasing their marketing spend by $10mill compared to the first half of 16/17. This is a smart move as BAL showed when you don’t invest in putting yourself out there in China you will be looked over. A2M have gone from strength to strength as this is the 3rd earnings upgrade within the last 12 months. A2M was a great earner for us as we picked it up below $1 but sold way too early in the $2.30-$2.50 range. Should have kept at least a small position in the company as it has now risen to $3.80+. It will give us another opportunity to enter it so we will just have to be patient.

In sad news Ten Network Holdings Pty Ltd (TEN), the owners and operators of channel 10 here in Australia, has gone into Voluntary Administration late last week. This was after the failure to secure funding for its $221mill debt, when two major backers pulled out of the deal. It has been a quick demise for TEN as shares peaked at $1.40 late last year only to go into suspension at $0.16 last week. It’s more than likely that the government will keep TEN running until a suitable buyer can be found. TEN has lagged behind channel nine and seven in the race to bring its company into the modern age. Free to air channels struggle to compete with the ‘on demand’ viewing nature of the modern consumer where people have turned to YouTube, Netflix, Apple TV, Twitch, Amazon Video etc. for their entertainment purposes rather than the traditional TV model.

In the US YouTube attracts a bigger audience in the 18-49 year old demographic, during primetime, than the top 10 TV channels combined. Also of the 49mill homes in the US with a Wi-Fi internet connection 75% of them have a Netflix subscription. I don’t have the figures here for Australia but I dare say we are headed in the same direction and it will only get worse for free to air company’s as Amazon will roll out its on demand service here later this year. Just another sector here in Australia to add to the disruption list.

Just quickly more news on Amazon who announced during the week that they will be making a $US13.7bill takeover offer to Whole Foods Markets. Whole Foods is a US based healthy eating grocery chain, who whilst having bricks and mortar stores has a strong presence online. Obviously Amazon is seeking to expand it grocery arm and Whole Foods is an easy bolt on acquisition as it offers an online presence whilst having stores that Amazon could roll out into with their checkout-less model. That’s right…. A grocery store with no checkouts. For now Amazon says it is keeping the Whole Foods brand as is, but it’s only a matter of time before things change I feel. Obviously this has ramifications for Australia as it further shows Amazon’s intent on expanding its grocery arm. It already has signed up 20% of the lines available at WOW and Coles here in Australia for its Amazon Fresh rollout in late 2017/2018. Who could they acquire here in Australia though to offer them similar exposure to Whole Foods in the US? One thought is IGA, owned by Metcash (MTS), who have stores and distribution centers, but poor online exposure. WOW and Coles are too large and their structures do not appeal to Amazon. It’s one to think about.

From a sector point of view Property Trusts, Health Care and Banks all lead the XJO higher during the week whilst Metals & Mining, Resources and Materials went in the opposite direction. The Health Care sector continues to be the best performing sector in 2017 as companies such as CSL, Cochlear, Sonic Healthcare etc. all climb to new highs. You have done very well if your portfolio has been weighted heavily towards them. Industrials have been also a solid performer but have pulled back in recent weeks on the back of poor construction numbers.

With those large upswings last week we did break out of that downtrend temporarily only to be pulled back in. We will need to hold our head above 5,800 if we wish to see a decent break. The last thing we want to see is a lower low and another test of the 200 day moving average. We seemed to have bounced off of it for now. July is traditionally the second best month for the year as dividend payments from the banks flow back into investor pockets. It may be more subdued than recent times due to June’s relatively solid results thus far. I am still bullish long term as long as we trade in that uptrend signaled by the green tram lines. There is a possibility of short term downside still to 5,350/5,400 if we do break the 200dma.

A very quiet week ahead with nothing of note being released here or abroad. Might be a very short Wrap next week depending on company news. Hope you all have a wonderful week and stay safe. Speak to you all soon. 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.