ASX Weekly Wrap 19/06 - 23/06

To quote one of the all-time great AFL commentators in Dennis Cometti, the XJO seems to be ‘bobbing up and down like a cork in the ocean’ at the moment. We seem to have a week where we make decent gains only to lose them the next, rinse and repeat. The pattern continued this week as XJO ended down -58.10 points or -0.88%. Our high was 5,809.30 on Tuesday and our low was 5,665.30 on Wednesday.

As I spoke about last week there was literally no economic data to speak of to sway our market either way. In fact it will probably be much of the same this week as we draw into the close of the 2016/17 financial year. Hence expect a very short wrap this week.

I suppose the major news to move our markets this week was the announcement from the MSCI that it had added China to its emerging markets index. MSCI are an investment firm in the US and are used as the gold standard to define and weight global indexes.

So why is this significant for us and the ASX? Well these indexes are used as the benchmark for many fund managers across the globe. Hence when MSCI make a major change such as this, most funds have to follow suite. Consequentially funds have to re-weight their portfolios to allow for the addition of Chinese stocks. This mostly means selling off other stocks within the region, in this case Asia and the ASX. As a result the XJO fell -91.60 (-1.59%) points on Wednesday after the announcement by MSCI.

MSCI says it plans to add 222 China A large cap stocks to its emerging markets index starting next year. The first addition will be in May 2018 with further additions thereafter. The total weighting for the share within the index would start at 0.73% but would be increased if further regulations were relaxed in mainland China. China’s share market is very large in size and is capped at $US6.9trillion, hence you would expect an increased weighting as time goes on.

This further opens up China to overseas investment after what used to be a much insulated market. It follows the move in late 2015 where it allowed non-Chinese investors access to the China A index for the first time via the Hong Kong exchange connect system. It’s encouraging to see China further open up their financial markets and their economy to the rest of the world. It shows they are on the path to becoming responsible a world leader.

This isn’t the best news for the ASX though. Many investors used to use the Australian markets to gain leverage into the Chinese as China is our largest trade partner and so many of our listed companies do large business there. One would think this would lessen somewhat as investors now can get direct access through via various funds in the near future.

A few earnings updates to roll out this week and most relevant of them to us came from QBE Insurance (QBE). QBE announced a downgrade to 16/17 earnings after larger than expected claims came from its emerging markets division. This means that insurance margins are now expected to come in at the 8.5% - 9.5% range. QBE plummeted 10%+ on the day, not helped by the MSCI China announcement.

Whilst it’s not a positive announcement it’s not greatly significant in the grand scheme of things. It probably dents their reputation and upward stock momentum more than anything. The market did also seem to gloss over the bullish announcement that investment earnings would be in the higher end of estimates of +2.5-3.0% which was above expectations.

Overall the emerging markets division is a small part of the business and it seems positive that the rest tends to be travelling along as expected. For current holders it’s hard to swallow a price drop like that, but I can see the stock slowly recovering from here. In fact this may represent another opportunity to add to your holdings or create a new entry if you are not already in. Our original plan was long term for QBE to take advantage of its high correlation between a rising share price and rising rates in the US. This side of the story has not changed and most analysts are only decreasing their QBE EPS estimates by 3-6% in 2018 & 2019, because of this. As long as their full year report sticks to the same guidance come September I can see another rally in the stock later in the year.

Retail Food Group (RFG), owners of Gloria Jeans, Brumbys, Michel’s Patisserie and many others, was another company to downgrade earnings this week and get savagely punished by the market. It declared on Wednesday its profits would be +15% on last year’s earnings, this is down from the +20% that had previously said. They also announced there would be a $22mill non-cash write-down on its Michel’s Patisserie and Pizza Caper chains in the 16/17 result. It remained positive on growth for 17/18 noting that its international and coffee & beverages divisions were performing very well and there was lots of organic growth to be had. RFG is not a stock I have ever advised on, but I know some of you still hold it or have enquired about it in the past.

Keeping with the food theme Craveable Brands Ltd has cancelled a possible $400mill IPO onto the ASX. Craveable Brands owns companies such as Oporto, Red Rooster and Chicken Treat in WA. Its parent company, private equity firm Archer Capital, stated that conditions were not favourable for the IPO and they hadn’t drawn enough interest. Many worry that this is a bad sign for the market as the IPO did seem fairly solid. I would suspect that private equity’s reputation was more to blame as they have burnt many bridges in the past. The most recent is the failure of retail chain Dick Smith which caused much heartache for many retail clients and now is subject to a class action.

Caltex (CTX) updated the market with its unaudited first half guidance on Thursday which came in above most expectation. They noted that profit is expected to be roughly $290-$310mill for the first half of 2017, which is 19-22% above the same time last year. Profit margins seemed to be maintained even though the price of fuel was falling and that refining margins are increasing. Most analysts have upgraded their price targets on CTX to the $36-$39 range.

Health care and Industrials provided the only glimpse of green for the week as Property trusts, Resources, Energy and Financials weighed heavy on the market. Again this points to the risk off nature of the market seeking the defensive names in the health care sector. Moody’s credit downgrade of the banks within Australia didn’t help the financials or property trusts at all. Below you can see the best and worst performers for the week on an individual stock basis.

Technically I thought we would have a long term look at the XJO this week as not much has changed in the short term. Overall we are still travelling nicely in the longer term uptrend within those green tram lines that established themselves back in 2009. As long as there are no ‘Black Swan’ events we should continue to move upwards towards the top of that range. I still believe we will crack 6,000 later on this year before moving on towards 6,400 – 6,600 late next year. There is still a lot to be bullish about when it comes to the global economy.

Really nothing of note for the week ahead. Chinese manufacturing and services PMI are released on Friday, so the market will watch that with a keen eye. Metcash also has its results out today which I am will tell us more the same about the impact of Aldi. The end of the financial year is this Friday 30th June so if you need to adjust your portfolio according please do not hesitate to give me a call. I will try and get around to speaking with you all sometime this week just for a quick catch up and portfolio discussion.

Had a wonderful weekend just gone. My wife and I took our 13 month old son for his first trip to the Adelaide Zoo. It was a fantastic day. I thought he may be a bit too young to appreciate it but he loved it. He had a big smile on his face for most of the day pointing to the animals and making many baby noises as he got very excited. Certainly a day that I will cherish forever. Hope you all had as great of a weekend as I did and have a wonderful week ahead. Please try and stay safe. Will 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.