ASX Weekly Wrap 28/08 - 01/09

In what was a quiet week for economic and earnings news it was significant in terms of the XJO and some technical alerts that were set off. Particularly because the economic data we did get was generally bullish both here and abroad. For the week the XJO finished 19.30 points down or 0.34%. Our high was 5,746.30 on Monday and our low was 5,645.80 on Tuesday.

This week’s wrap will be short and sweet as there really isn’t that much to cover in terms of news, but I will follow up on the email I sent out earlier last week on the technical aspects of the XJO.

As we have all been made aware Kim Jong Un and North Korea are rustling a few feathers on the world stage. It started with a test missile launch that went over the top of Japan early last week and ended with a supposed hydrogen bomb test on the weekend. Now let me say I do not think this will lead to anything. I feel North Korea are trying to frighten the world into loosening economic sanctions against them. They are very well aware if they ever did push that button their country would be rubble within a matter of a few hours. However this is enough to be a catalyst for a sell off on our markets in the short term. I will cover that more later on.

Turning to economic news we saw some positive data locally that gives us great belief that our Q2 GDP figures could be relatively bullish. Capex numbers for Q2 came in at +9.3%, after a +1.0% read was expected and following on from just a +0.9% figure in Q1. This is really positive news as it shows business’ are investing more in themselves and expanding. This all feeds into GDP along with our strong retail figures, credit growth and business sentiment. It was also positive to see it up nicely across all areas and not just dominated by one specific sector.

The second lot of data came from overseas in China. Their Caixin manufacturing PMI data came in at a read of 51.6, again beating the street forecast of 50.9 and last month’s 51.1. This was huge growth in what is normally a more conservative figure when compared to the NBS figure. Again it shows the manufacturing sector in China is growing above trend and is helping fuel that economy. It is now thought that Chinese GDP for the year will easily beat their +6.5% forecast. The last read came in at +6.9% and all data thus far is pointing to a another strong GDP figure for the next set of numbers. All of the above feeds into my narrative, I have been harping on about for some time now, that the second half of 2017 in Australia will be a very bullish one. It also leads me to believe it will continue on into 2018 and 2019, but that’s something we can cover towards the end of the year.

The final set of economic figures that came through were the jobs numbers in the US Friday night. These were a little soft as only +156k jobs were added, +180k forecast, wages growth only grew +2.5%, +2.6% expected and the underlying unemployment rate climbed to 4.4% from 4.3%. The data did miss forecasts, but is still solid. The main focus is wages growth now which is still on the lower side, but well above our own figures. These numbers just mean it is likely the Fed will continue to keep rates on hold now for the rest of the year as its unlikely we will see inflation move much based on these wage figures. This could mean the USD remains soft, commodity prices continue to climb and puts more pressure on the AUD.

Earnings season came to a close last week with the likes of Caltex (CTX), Ramsey Health Care (RHC) & Lend Lease (LLC) reporting their numbers. None of the majors that reported are of any concern to us, so we wont touch them on an individual basis, but we will cover the earnings season overall.

- 91% of companies reported a profit this season which is above the 87% average but down from the 94% in February

- Cash levels grew by 24% to $113billion

- Of companies who reported full year results 65% increased their profits (avg. is 61.4%)

- Of those companies who recorded a profit 69% lifted their dividend

- Ex-BHP profits were up 20% and if you ex-CBA/TLS profits are up 38%.

- In aggregate terms revenues rose 6.5%, expenses rose 1.3%, profits up by 62.9%, dividends increased 7.1% and cash rose 26.9%

Overall earnings season this time around was good without be spectacular. It certainly wasn’t as good as the season we had in February. The strong Feb season probably set the bar a little too high in terms of forecasts and could be why so many stocks missed the mark and were priced for perfection. Those who missed forecasts and who had ordinary outlooks were punished hard whilst those who missed forecasts, but had a positive outlook were rewarded. When all is said and done you have to be happy with how earnings sit here in Australia because if the second half of 2017 is shaping up like we expect then we could see a very strong 17/18 earnings season.

Looking at how individual sectors performed last week we saw some of the majors drag us down in the banks and telecommunications. You can mainly put that down to CBA & TLS. We also saw the retail sector come off as a few retailers continue to struggle against lower prices and margins. Resources continued to perform well with commodity prices continuing their move upwards. This is the highest the Materials index has been since August 2014. Gold has become the best performing sector for the year thus far as the underlying gold price continues to move up due to geopolitical instability and the lower USD.

The XJO continues to move in a mini downward trend (orange lines) within the overall longer term larger uptrend (green). As I wrote to you all about last week we broke down through the 200 day moving average (red) which alerted me to a highly probable chance of some downside in the XJO. Nothing that has happened since then has changed my mind. We have even re-tested that 200dma and tried to break above it again with no success thus far. Hence I see that 5% downside playing out with a target of 5,400 – 5,450. This is only short term and I believe will be one last shake out before a move above 6,000 later this year. Even with positive data and a really solid earnings season we have not been able to move higher which gives me this negative sentiment in the short term. There is some small support at 5,650, which we bounced off last week, but as soon as we break that my downside target will come into play quickly. I have been trying to adjust most of your portfolio’s accordingly since I received this alert, but if you wish to discuss this at greater length please get in contact with me.

I also wish to highlight that whenever I send an email out to you in the format I did last week it is General Advice only and that you should be talking with me personally before you make any decisions regarding your personal portfolio both held with me or elsewhere.

Taking some time off

Just a quick note to inform you all I will be taking some time off later this week to recharge the batteries. It will only be a short absence as I plan to be away from the screens from Wednesday 6/9 until Friday 8/9 and returning Monday 11/9. During this time if you need to place a trade you can call my colleague Roger Pridham. I will send out a separate email tomorrow with his details and a friendly reminder of my plans. Working in this industry, especially for yourself, can be draining at times and it’s 24/7. The Australian market closes and then Europe opens and then US and so on. Even on weekend events like we had with North Korea can severely impact markets when they re-open and they do play on your mind as an advisor. Its healthy to step away from time to time, as it is with any profession, to relax and reset. I still love the financial markets and am very passionate about them. I will find it very hard to log off, but will spend some valuable time with my son and wife.

An important week of data ahead with Australian Q2 GDP figures out on Wednesday. The year on year figure is expected to come in at +1.8% and month on month at +0.8%. I have a feeling we will beat both forecasts comfortably. We also have the RBA meeting on Tuesday, which no one is expecting much from. Retail sales are out on Thursday along with our trade balance. China also have their trade balance out on Friday. As reporting season is done there will be a few stragglers left who report at different times, but nothing to really concern ourselves with. A lot of stocks will start going ex-dividend over the next few weeks so that will also place a drag on our market. September is the 6th worst performing month for the XJO which is not surprising considering the capital that leaves the market.

Hope all the Dads out there had a wonderful Father’s Day. I thoroughly enjoyed mine and I got very spoiled. I spent the day with family at a winery in the Barossa for the most part and then just relaxed at home. I am also attending the Royal Adelaide Show this Wednesday and taking my son there for the first time. He is not even 16 months old but does love seeing animals so we will take him along to see those. I don’t think he meets the height restrictions for the rides just yet J. It also wouldn’t be a show day without grabbing the Bertie Beetle show bag!

Hope you all have a wonderful week ahead. Enjoy yourself 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.