ASX Weekly Wrap 09/10 - 13/10

It was a fantastic, yet unexpected, performance by the XJO last week. The index ended up 103.50 points or 2.62%. At a level of 5,814.20 we are now at four month highs and our gains for last week were our best in seven months. There wasn’t much news to drive our market but it seems due to our lacklustre performance compared to global peers we did attract some international investment as they sought value. Naturally our banks did a lot of the lifting as ANZ, WBC & NAB all are leading into earnings in early November.

We had little economic news to touch upon this week, but there was one piece of data to take note of in the Chinese trade balance figures. It was a mixed bag in terms of it meeting forecasts as the surplus came in at $US28.47bill vs $US39.50 expected. This was mainly due to the strength of imports that it came in lower. Imports rose 18.7% for the month of September versus an expected 13.5%. Exports came in slightly lower than expected at +8.1% vs +8.8% forecast. These figure further reinforce the strength of the Chinese and global economy as high demand remains on both sides of the equation.

Whilst economic data was thin we do have a decent amount of corporate news to cover, this includes the full year earnings for Bank of Queensland (BOQ). It was a mixed bag for BOQ as revenue fell 1% to $1.1bill and their net interest margin was also down 7bp to 1.87%. Obviously this shows the struggle some of the smaller banks are still having trying to grab market share off of the big four. However cash profit was up 5% to $378mill due to loan impairments being down 28% to $48mill. In a surprise move BOQ maintained their final dividend from last year at 38cps, but also decided to pay a special dividend of 8cps on top of that. This news helped see BOQ shares spike 3%+ on the day but they have since eased back again.

BOQ is not for me given the low multiple valuations elsewhere in the big four banks. BOQ is currently trading on 14x earnings whereas you can pick up ANZ or NAB at 12 – 13x earnings. The bigger banks just have so much more pricing power and market share and I will only tend to turn to the smaller banks when the larger ones look overvalued. This is currently not the case. Also despite all the talk of mortgage stress and potential defaults in the media we are yet to see any sign of it in any of the figures the banks are releasing. Bad loans and impairments are again on their way down suggesting that families are being able to service their loans confidently. Even if rates are to rise in the coming years it will be some time I feel before households feel the pinch as not only are bad loans close to record lows but people ahead of their mortgages are at record highs. Hopefully by the time it does become a concern wage growth is higher than where it is now.

It’s been a rocky year for infant formula producer Bellamy’s Australia Ltd (BAL), but there are signs things could be on the improve in 2017/18. BAL updated the market on its earnings on Thursday with a revision upwards. They stated that due to an improvement in conditions they were upgrading theirs sales revenue from an expected 5-10% lift to a 15-20% increase. They also said they would increase their EBITDA margin from 15-20% to 17-20%, positive numbers all round. It seems the cat was out of the bag before the official announcement as the stock climbed 26% in the week leading up to it. I dare say ASX/ASIC should be having a good hard look at the trading of the stock in that period, who was buying and what they knew. I will say that the whole infant formula sector has been on fire again of late as A2M (+12%), BKL (+16%) & BUB (+31%) are also up aggressively in the last week as well. Given their recent troubles BAL rise does ring a few alarm bells in my opinion. Personally I can’t touch BAL given their troubles and the recent run in the share price. Time to let the whole sector pull back and consolidate before looking at an entry.

The final piece of corporate news surrounds the hotel owner Mantra (MTR). MTR, and French hotel group Accor, came to an agreement which will see Accor takeover MTR with a full cash offer of $3.96 per share. This values MTR at over $1.18bill and was a 23% premium to MTR last traded price before the announcement. Obviously there are some regulatory hurdles to clear before the takeover goes ahead it’s not a certainty to get the tick of approval. Accor and MTR are the top two hotel providers in Australia by rooms available. Accor has 27,000 rooms and MTR has 20,000, so Australian regulators may not see it’s the best interest of competition for the takeover to go ahead. MTR shares jumped on the news and now trade close to the offer price at $3.88. I looked at MTR over 12 months ago but was put off by its private equity history and large amount of debt on the balance sheet. The stock was over $4.00 at the time so it does seem like a good move in the end. Will be interesting to see how it all plays out for MTR.

The market saw most sectors with strong lifts in their respective indexes, with probably the resources sector the only under performer. A sharp bounce in retailers saw sector the best performer with a +4.38% lift with health care, IT, utilities and industrials all climbing around 3% as well. It was broad based buying which shows great conviction for the XJO as a whole and indicates it could have been overseas and institutional buying.

Just wanted to quickly touch on the XSO, the S&P/ASX Small Ords index. This index is the top 100 companies included in the S&P/ASX 300 but not in the top S&P/ASX 100, hence companies from 101 – 300. These are smaller capitalized companies anywhere from $123mill to $4.2bill hence it varies greatly. It’s seen as the riskier end of the market, but has outperformed the XJO over the last 12 months. The chart above shows a clear breakout in the index which I feel is very bullish for the market and us as investors overall. The XSO has provided many trading opportunities in the last 12 months and that looks set to continue as investors find it hard to find value in the top 100 on the ASX. This sector index is obviously where the next top 50/100 companies will come from, hence there are potentially large gains to be made here. The XSO sits currently at approx. 2,500 points but during the pre-GFC boom saw a level of around 4,200, hence it could have plenty of run left in it yet. I am closely monitoring the index and looking for opportunities within it.

Quiet week for most commodities except for iron ore. Over the last week we saw iron ore get sold off down to as low as $58t. However as a result of Chinese trade data last week we saw it rebound to finish above $62.50t. Within the data we saw that China imported a 100mill+ ton of iron ore for September. This was a record for a single month and 10%+ higher than August. It also saw 1.079billt ton of iron ore imported by China for the year to date. Also another record and already surpassing the 1.024bill ton they imported in 2016, and we are only just through September. I did state, at the start of this year, if we saw them continue the same level of growth they saw from 2015 to 2016 they would be on track to import 1.1bill ton of iron ore in 2017. This looks highly likely now and it looks as if they will blow those estimates away. It’s also great signs that their insatiable appetite for our iron ore still exists as a result of their infrastructure needs.

There has been a lot of commentary of late regarding iron ore demand levels dropping as a result of China’s crackdown on pollution forcing steel mills to cut production or close their doors. What I believe will happen is demand will still remain strong for 62% Fe, the higher quality, as it is less of a pollutant due to it being more efficiently turned into steel. We could see a slide in the price and demand for lower quality iron ore, 58% Fe. In fact this could force more upward pressure on the higher quality iron ore as previous lower quality users move to the higher grade material to keep the doors open.

There were also concerns at the start of the year with a believed 90-120mt of new supply to enter the market. Well it seems China will soak up that extra supply by itself, let alone whatever the rest of the globe does. Once again we could see a rally in the spot price similarly to what we saw at the end of last year again this year.

As a result of the big gains for the week the XJO broke out to the upside (purple circle) on strong volume. It also happened to break above the 200 day moving average and continues to trade above it. It’s probably as bullish a move as you can get and we now look set to test old highs around 5,950. I know a few weeks ago I signaled a move to the downside and also moved most to 20-30% cash. All the signals were there and I would do the same thing again, as it was as much about protecting capital as it was being ready for an opportunity. It also just happens that most of the sectors we sold to generate the cash have not moved back up as of yet. This move upwards has also yet to be confirmed. We need to see a retest of the breakout first, and see if it can hold that before it can be confirmed. However, as it stands now, it does look as if the XJO will venture higher and we are sitting on plenty of cash to take advantage of opportunities that present themselves.

Big week of data ahead with Australian jobs figures for September out this Thursday. It’s expected to be strong again. China releases its Q3 GDP also on Thursday, along with fixed asset investment, industrial production and retail sales. It’s going to be a big week and if China do release solid figures we could see the XJO rally on the back of it. Company wise its quarterly production season with OZL, EVN, RIO, OSH, BHP, S32, STO & WPL all updating us on how their September quarters faired. There are also a heap of company AGMs, hence we may get a few trading updates this week. After a couple of shorter weekly wraps this week seems to back to normal. Should have a bit to cover next week as well by the looks of it. Hope you all have a wonderful week. Stay safe and I 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.