ASX Weekly Wrap 23/10 - 27/10

The XJO took a breather this week after putting on almost 4% over the last two. In the end the XJO finished down 3.80 points or 0.06%. Our high for the week was 5,938.10 on Friday and our low was 5,859.20 also on Friday. It was a particularly volatile day on Friday as we got news from the high court that 5 out of 7 politicians would have sit for elections again for the respective seats due to the dual citizen ship fiasco. This means we have a hung parliament for a while, whilst these get sorted. It just throws a bit of uncertainty about the place, which markets hate. I also want to quickly apologise for not having a weekly newsletter out to you last week. I had an extremely busy week and couldn’t find a spare moment to get on top of things. Regardless we are back this week with a bit of ground to cover.

We had two important pieces of economic news released during the week, one domestically and one for the US market. At home we had our quarterly CPI figures released for Q3, which again were on the softer side of the ledger. The headline figure came in at +0.6% (QoQ) vs +0.8% expected and then also +1.8% (YoY) vs +2.0% expected. The trimmed mean, or core inflation, figure came in at +0.4% and +1.8% vs +0.5% and +2.0% expected respectively. Obviously this means rates are going nowhere any time soon here in Australia. As I mentioned previously we will probably need to see some pick up in wage inflation before the CPI figure starts to move. This is a concern for the RBA as they would like to see rates normalise sooner rather than later, but nothing to lose sleep over.

The second piece of economic data came by the way of the US and their Q3 GDP figures. These were very encouraging indeed with a +2.1% increase in growth (QoQ) vs +1.8% expected and a +3.0% (YoY) figure with +2.5% expected. This is despite a couple of very large hurricanes disrupting a large part of the economy during the quarter. It shows the great strength in the US economy and one that should help fuel global economic growth for the foreseeable future.

Its bank reporting season now with three of the big four reporting along with Macquarie Group. First out of the blocks was ANZ Banking Group (ANZ) who reported their full year results last Thursday. It was mostly positive for ANZ with almost all headline figures coming in within expectations. Cash profits saw a +18% rise to $6.94bill this was despite the fall in revenue of 1%. It mainly came from the fall in bad loans -38% to $1.2bill and expenses were cut by 9%. Whilst these are encouraging figures it does show ANZ are still struggling to increase profits from their underlying business. Net interest margin fell 8bp to 1.99% from 2.07% a year before. Again this highlights the struggle in a low rate environment and how margins are being squeezed. Their tier 1 capital ratio remained solid at 10.6%, above the 10.5% required by APRA. The market sold ANZ shares off by 2.3% on Thursday mainly due to the issues I have mentioned above.

In positive news for ANZ it did mention what it plans to do with the money it will receive from the sale of its wealth management business ($975mill) and from the stake in the credit card company it is selling ($US288mill) in the Philippines. ANZ said that share buy-backs were a strong possibility as well as using it to strengthen their tier 1 capital ratio. This is welcome news as ANZ, along with the other banks, have had to dilute shareholders in recent years due to increased APRA requirements on tier 1 capital. This is helped stunt EPS growth and a buy-back will go some way to improving that.

Lastly ANZ announced its final dividend for the year would $0.80 (fully franked), bringing the total divs for the year to $1.60. This gives ANZ a yield of 5.4% at these levels. My views on ANZ and Australian banks are simple. For a long term portfolio they are a must due to the weighting they hold on the XJO. They are also fairly priced at these levels trading 15x underlying earnings. I wouldn’t expect to see massive gain in earnings over the next 12-24 months, but when rates do eventually rise they will benefit. Their low risk nature and strong income should see them hold current multiple levels.

The other major bank to release earnings this week came the way of Macquarie Group (MQG) and it was another case of under promising and over delivering, which the market loves. Net profit rose 19% to $1.25bill up from $1.05bill in the corresponding period. This was on the back of revenue increasing 3.4% to $5.4bill and expenses coming off 1%. Better than expected gains in the form of fees and commissions boosted profits whilst losses from commodities and their global market business saw a drag.

In further positive news this better than expected half yearly performance is set to see full year results come in ahead of original expectations. MQG also plans to buy back $1bill worth of its shares whilst increasing its interim dividend to $2.05 (45% franking) per share, up from the $1.90 it paid this time last year.

MQG remains one of my favorite blue chip stocks in recent times. The company consistently outperforms expectations, mainly due to it being conservative with forecasts. MQG trades on a 14x forecast PE at current prices with a 5% yield. With such an excellent track record and a consistency in earnings (70% coming from annuity style products), you could be justified in giving MQG a much higher PE. It is also a USD play with 60% of earnings coming from overseas now and with the AUD expected to fall against the USD in the long run this will only benefit MQG. I am not buying at current levels due to the large gap up in price but I will be a keen buyer on any pull backs.

It was a mixed week from a sector point of view with Energy, Gold, IT and resources all boosting the market. Banks, on the back of the ANZ result, retail and industrials all were a drag. A higher USD continues to weigh on commodity prices yet a lower AUD is helping the sector locally as it helps to increase earnings. Similarly is the same with the health care sector which has rallied 5%+ in the last few weeks, as predicted. Energy is benefiting from a short term lift in the oil price and also a lower AUD. Property trusts and telecommunications remain the only sectors in the red for the year.

After breaking out from a 5 month sideways pattern a few weeks ago the XJO looks as if it will grind higher to test that 5,950 area again in the coming week. We may then pull back and test recent highs in the 5,830 area first before busting through 6,000 later this year. Given the renewed bullishness surrounding the XJO, USA and global economy overall the XJO is looking very healthy moving in Xmas and 2018. A lower AUD will not only help our economy but eventually encourage international funds into our market. If the cooling in the Melbourne and Sydney property markets also continues it may also see funds move into the share market. I still feel it’s possible we see record highs on the XJO as early as late 2018, if not in Q1 2019. Unless there is a ‘black swan’ event within that time I feel economic and corporate data is too strong on a global scale for us not to see strong times ahead. A rising tide lifts all boats and the Australian economy’s, and hence XJO’s, boat is yet to rise on the back of that tide. I feel that time is coming soon.

A busy week ahead with Chinese manufacturing and services PMI released tomorrow. We also have local service and manufacturing PMI released this week along with our trade balance and retail sales. Finally US unemployment and trade balance is out on Friday night. On the corporate side of things we have the NAB reporting earnings on Thursday with WOW & GMA also giving us quarterly updates throughout the week. There is also a host of quarterly production reports from SYR, BPT, ORG & AWE.

On a personal level it’s been a very busy, but exciting time for myself and my family. Some of you already know, but others don’t, however my wife and I are expecting our second child at the end of December. Hence the last few weeks have been spent doing a bit of preparing for the pending arrival in buying another car seat, dual pram and odd bits and pieces. We haven’t even started getting the nursery set up yet. We are over the moon to be having another little bundle of joy so soon after our first who is now 17 months old. I am sure they will be very close and the best of mates growing up. The actual due date is 29/12 so I will of course be taking some time off in the new year to spend with the baby, wife and family. Luckily it’s such a quiet time of the year I dare say most of you won’t even think about the markets. It will be a challenge to have two little ones around the house, but I am very happy and can’t wait for him/her to get here. Everything is going well thus far and Mum and baby are both healthy.

I hope you all have a fantastic week 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.