ASX Weekly Wrap 31/07 - 04/08

Earnings season started in Australia last week with not much to write home about in terms of headline numbers. The XJO was able to edge higher with a 17.80 point gain or 0.31%. Our high was 5,779.60 on Wednesday and our low was 5,701.80 on Monday.

A few pieces of economic data passed over our screens during the week, but there wasn’t anything major to write home about. The Chinese Caixin manufacturing PMI index was released and it was a beat on forecast. The read came in at 51.1, much stronger than the 50.4 expected and the 50.4 read last month. Remember any read above 50 suggests the sector is growing at above trend pace, hence this month’s read was another bullish signal for the Chinese manufacturing sector.

The US reported their non-farm payrolls on Friday night and it was another strong read. The US economy added 209k jobs for July as the unemployment rate fell to 4.3%. Average hourly earnings also rose by 2.5% on month. The market had forecast a additional 183k jobs to the economy and 2.4% in wages growth, hence it was a beat all round. After a sluggish start to 2017 it seems as if the US economy is slowly gathering pace again with improved data from a few different sources.

Locally we had three important talking points in retail sales, trade balance and the RBA meeting. Retail sales again came in above forecast. For June sales were up +0.3%, better than the +0.2% expected but lower than last month’s +0.6%. It was also revealed that for Q2 retails sales grew +1.5%. Both sets of numbers show consumers are opening their wallets again and spending. We just need some growth in wages to really help push it along later in the year.

Trade balance figures were a bit of a disappointment. We recorded a surplus of $856mill, below the $1.8bill expected and below last month’s $2.024bill read. Imports rose 2% whilst exports fell 1.1%. Lower commodity prices and a higher AUD were to blame, along with a rise in imports. The positive thing is we are still showing a surplus and have done so for the last few months. This should improve in the coming month’s as commodity prices rise again and we start to export larger amounts of LNG in the second half of this year.

Finally the RBA met on Tuesday to decide the fate of our cash rate and it was no surprise to see they keep it steady at 1.50%. Within the commentary it was much the same, but they did note the higher than expected AUD could hurt economic growth moving forward it if remained so high. In the end it does look like rates will be on hold for the foreseeable future. This is positive for equity markets as it keeps attracting investors into the market as the return vs cash is so much higher.

Turning to earnings of sorts and it was a volatile week for Treasury Wines Estates (TWE). On Monday Goldman Sachs put a Sell recommendation on the stock citing it didn’t believe it could hit earnings forecasts and growth was unsustainable. This forced the TWE share price down a good 7-8% on the day. On Tuesday TWE released a statement reaffirming its guidance outlook and bullish state of its Chinese and US side of its business. TWE then bounced back up and regained most of those losses the day before. I remain bullish TWE and many of you still hold the stock from much lower prices. I see their Chinese business still continuing to grow strongly as middle class China becomes wealthier and is attracted to their popular brands.

Rio Tinto (RIO) was the largest of all companies to report last week and it was a mixed bag for Australia’s second largest miner and their first half results for 2017. RIO missed on its headline number reporting $US3.94bill in earnings when the market expected $US4.26bill, but outside of this is was a very strong report. They plan on returning $US3bill to shareholders, $2bill via a $1.10ps dividend, their highest interim dividend ever, and $1bill via on on market buy-back. This is on top of the current buy-back they are currently undertaking and it will be wrapped up by the end of 2017. They reduced debt by a further $2bill and have a net gearing ratio of just 13%. This is a lot lower than the 20-30% they deem acceptable. RIO are also generating huge amounts of cash with a $US6.3bill operating profit.

The above table is one I love and one RIO consistently release with earnings. It shows the effect of commodity price and currency movements on RIO’s earnings. For example in the first half of 2017 they received an average price of $68.20/dmt for their Iron ore. If the iron ore price were to rise 10% it would add an extra $1bill+ to earnings. You should note that iron ore is almost 10% higher now at $74/dmt than their average earnings in that first half. Conversely if the AUD were to rise 10% it would remove $641mill of earnings off RIO’s balance sheet. The table also shows what commodities drive RIO’s earnings. Obviously everyone knows iron ore is their big earner but also Aluminium and Copper have a big say on their bottom line. Both metals have seen improvements in price in the last month or so, hence if this were to stay the same or improve I can see RIO’s second half being very bullish.

At its current price RIO is yielding 4.5%, 100% franked, and will continue to pay out a lot to shareholders as it generates huge amounts of operating cash flows. RIO trades on a 16x forward PE at current prices, so isn’t cheap. However if you foresee future upside for commodity prices over a longer period, like me, this may seem cheap, especially with that yield. The buy-back should help support the price, but RIO does approach significant technical resistance at $70, a level they haven’t been able to hold above for over 5 years now. I would probably wait for a break above that or a pull back in price before making an entry into the stock.

Queensland’s largest bank in Suncorp (SUN) released a disappointing set of full year numbers last Thursday. Cash earnings came in at $1.145bill which was 4% below forecast. Hidden away within the report were some nasty surprises too. Their wealth divisions earnings were 71% below forecast ($4mill v $14mill) whilst their NZ insurance margin was 14% below forecast (4.80% v 5.60%). Australian life insurance earnings were 6% below forecasts but their dividend came right on as expected at 40cps 100% franked.

The stock was severely punished falling almost 10% at one stage. Its pretty obvious that a lot had better results baked into the price, hence the sell off. SUN has always been a fickle stock and one that consistently misses forecasts. Apart from an attractive yield of 5.4% there is not much else to like about SUN. There is also an inherent risk of further capital requirements as their capital reserves came in much lower than expected. I would rather steer towards one of the larger banks than place my money into SUN at this stage.

Most sectors saw green last week especially in the resource and industrial space. Financials struggled as Commonwealth bank was charged with 53,000+ accounts of anti-money laundering breaches. The market sold off the banks in anticipation of a large fine and possible board departures. The maximum fine per breach is $18mill. For 53,000 breaches that is almost $1trill in fines. Obviously ASIC will not send CBA to the wall but I’d expect a hefty fine in the range of $500mill - $1bill for such serious offences. As usual the telecommunications sector continued to struggle as Telstra continued its drift down.

Commodities and the technicals of the XJO really have changed over the last week or so, so I wont bother going into any depth here. I will say trading in the XJO is tightening and a break to the upside does look imminent.

A host of companies reporting this week as earnings season starts to heat up. In the big end of town AGL, AMP, TCL, CBA and JHX all brief the market. Next week and the week after is when the majority of the top 200 report so expect some lengthy wraps to follow. Economic news remains fairly dry this week with Chinese CPI & PPI the only data release of note. Expect next week’s wrap to be company heavy.

Tried to stay warm and dry as much as I could on the weekend venturing outside only when I had to. Thoroughly enjoyed my Crows giving the cross town rivals a good old fashion flogging yesterday. I was very surprised by the margin but even more surprised by Ports insipid effort. Hope you all had an enjoyable weekend and have a wonderful week to come. Stay safe and I’ll 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.