ASX Weekly Wrap 07/08 - 11/08

The XJO was having a rather positive week until geopolitical tensions between the USA and North Korea caused a major sell off in global markets on Friday. To end the week we finished down 27.50 points or 0.48%. Our high was 5,792.0 on Tuesday and our low was 5,674.0 on Friday.

As I mentioned last week this week was fairly sparse when it came to economic news, hence I will quickly move through it. There was some data released from China in regards to its trade balance and inflation. Both sets of data came in under expectations. The overall surplus came in higher than expectations at 321bill Yuan v 292bill expected but overall export growth came in at +7.2% v 10.9% expected and imports were +14.7% v +17%. Still very solid numbers and the fifth straight month of gains, but below what the markets expected. This means rates in China should remain stable for the next month or so. Finally China also had inflation numbers released. Month on month figures came in at just +0.1% vs +0.2% expected but better than last month’s -0.2% read. The year on year figures also came in weaker at +1.4% v 1.5% expected. It seems as if prices are yet to move up regardless of higher commodity prices etc. You would have to think that this cannot remain the status quo for too much longer and inflation will eventually creep back up above that 2% mark.

In the US we also had inflation figures released on Friday night and just like the Chinese numbers they remained soft. Month on month figures came in at just +0.1% after +0.2% was expected. Once again it must be noted this is higher than the 0.0% read we got for June. The year on year figures were not much better as they came in at +1.7% v 1.8% expected. Again higher than the +1.6% in June but lower than expectations. Despite the lower than expected figures analysts are becoming more bullish in regards to inflation figures in the US, mainly because of the continued low USD and growth in employment.

Australia’s largest bank, Commonwealth Bank (CBA), released their full year results on Wednesday and it mostly pleased the market. Its headline figure in cash earnings were up a solid 4.6% to $9.88billion, a record earnings release for them. Revenues were up 1% to $44.949bill and the final dividend increased by 10c per share to $2.30ps compared to last year. This would take the full year dividend payout to $4.29 per share or a yield of 5.3% at current prices.

Other metrics focus on by the market included its net interest margin falling 3bp to 2.11% and loan impairment expenses dropping 13% to $1.1bill or just 0.15% of total loans. Its tier 1 capital ratio fell to 10.1% from 10.6% a year earlier. Remember banks have to have a ratio of 10.5% by 2020 to satisfy new regulations set out by APRA. This doesn’t concern the market at all as CBA may look to sell its life insurance business to help reach that goal in the near term. Going to the market for more capital is not thought of as a need.

Once again the story remains the same for CBA. Modest earnings growth will a fairly bullish outlook on the Australian economy. There were no alarm bells or real concerns that arose from that result. At a PE of 14.5x and yield of 5.3% CBA looks the most expensive of the big four and I’m not rushing in. They have the money laundering scandal hanging over their heads now and their CEO, Narav, announced just this morning he will be stepping away as of next June as a result. CBA does not deserve the premium it once did over the other banks. With the recent scandal plus the financial planner debacle just over a year ago it has muddied their waters somewhat. If it were to drop to the low 70s range then it would be an immediate entry, but for now ANZ & NAB look the better value of the big banks.

Another one of Australia’s largest financial services firms in AMP released their half year results last week as well. As it flagged a few months ago, in their earnings downgrade, AMP’s half year profit fell 15% to $445mill from $523mill a year earlier. Struggles once again stemmed from their messy life insurance book which they have been unable to get control of. As a result they have reinsured 65% of it to keep it more stable. Their wealth management division also struggled with earnings there falling 1%, whilst earnings from the capital and bank divisions grew strongly at 11% and 10% respectively. AMP has opted to pay a 14.5cps dividend for the first half of this year, which is up on the 14c it paid at the same time last year.

At 14.4x PE AMP is not cheap, but nor are any of the other wealth management business’ listed on the market. AMP has a history of underperforming and have seen EPS fall from 46.5cps in 2007 to a projected 35cps in 2017. Even with its attractive 5.6% yield it is not enough to entice me until they can consistently show they can start increasing earnings again for shareholders. This was the whole reason I sold most of you out of AMP some time ago. It might be better look at companies such as BTT and IFL if you want to add a wealth management company to your portfolio.

The final company we will cover today is Australia’s largest power provider and utilities owner in AGL Energy (AGL). Releasing its full year results on Thursday AGL revealed a healthy 14% growth in underlying profit to $802mill from a year earlier and an EPS of 119.8cps. This was mainly on the back of higher power & gas prices and their cost cutting initiatives. Their final dividend was 50cps up from the 36cps it paid out last year and 91cps in total. This provides AGL with a yield of 3.7% at current prices.

AGL also released guidance FY2018 expecting underlying profit to sit somewhere between $920mill - $1.04bill by the end of the year. Once again this is to come from higher power & gas prices plus further costs cutting measures. This would mean AGL is trading on forward PE of 16x current earnings with a projected yield of almost 5%. On the face of it impressive numbers and well worth a deeper look. My concern surrounds their electricity business. Power prices are higher now than they ever have been before and look to remain so for the immediate future, however there is a concerted effort to bring those prices down. This would not be positive for AGL. Also with the advancement of technology and the major switch by households to solar there will be less reliance on the grid. On the flip side AGL’s gas business should continue to boom with a shortage of LNG here in Australia and great demand for it on a global scale.

Our last foray into AGL was when we entered at roughly $19 and exited above $28 within a 6 month period. Not often you pick the top but we were almost spot on this time as AGL has come down to the $24.50 mark since. A nice 47% capital return there with a dividend thrown in. AGL does seem to hold some value here but concerns still surround it in my mind in the longer term. The chart also certainly doesn’t suggest it is a buy here as AGL remains in a downward trend. Earnings forecasts for the next couple of financial years remain bullish and are worthy of just a 16x PE or possibly higher. I am keeping a close eye on it and feel as soon as it breaks this downtrend I would be happy to enter.

A sea of mostly red this week for a majority of sectors. A few green sparks were seen from a very strong Gold sector, mainly due to the rally in underlying commodity, plus some strength in the metals and telecommunications. Not much to write home about here as the table tells the story. We could see a relief rally this week as markets slowly realise the threat of major war between North Korea and the US is a very minute chance.

We haven’t had a technical update on the XJO in the last few weeks, hence please refer to the chart above. The XJO remains trading within that wedge formation indicated by the green lines. It did break momentarily below it on Friday but has reclaimed it in today’s trading. The XJO also continues to respect the 200 day moving average and hold above it. As we continue to trade in a tighter range at the end of the wedge a break either way will be more explosive. My opinion is we break to the upside with a target 6,000 by the end of the year.

A very busy week ahead with a raft of data expected from China today and our unemployment figures due on Thursday. On top of all this we have a big portion of the top 200 stocks reporting results this week. The list includes ANN, BEN, CGF, CSL, CPU, WPL, SHL, IVC, ORG, ASX, TLS, COH, TWE, QBE and WES among others.

Hope you all have a wonderful week and stay safe. Look forward to speaking with 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.