ASX Weekly Wrap 30/10 - 03/11

After pausing last week the XJO put in another solid performance with a 0.96% rise or +56.70 points. The high for the week was 5968.20 and the low was 5,903.60 on Monday. Overall it continued with its strong upward momentum and push towards that elusive 6,000 level. The closing price of the XJO on Friday was our highest close since April 2015 and there looks to be more legs in it yet. With some money coming out of the market in the next two weeks due to ANZ, NAB, WBC & MQG going ex-div it may pause again with the customary ‘Santa Rally’ to end the year.

A few snippets of economic data out this week. The most anticipated were the jobs figures for October in the USA. The headline figure came in slightly below forecasts at +261k jobs added, whereas most had it around the +310k mark. However the figures for last month were revised up from +18k to +90k in what is a difficult period to gauge due to the hurricane impacts in the south. Wage grew more slowly than expected as well at +2.4% vs +2.7% expected, but the unemployment rate fell to 4.1% vs the 4.2% print last month. All in all these are once again very solid numbers for the US and almost makes it a certainty the Fed will increase rates again in December.

Locally we once again had conflicting reports about the state of the Australian economy. To start with retail sales came in very weak again for September with a flat read of 0.0%. It was expected to see a +0.4% lift. Growth for the third quarter also was released coming in at a mere +0.1% growth vs the +1.5% we saw in Q2. Low wages growth and continued discounting/deflation saw retail sales right up against it. It’s also a case of that these figures don’t pick up all our spending. Our online spending is one of those areas it doesn’t capture so it’s not a true reflection. This weakness will obviously be a drag on our Q3 GDP reading.

In stark contrast to the retail figures our trade balance for September came in very strong and well ahead of expectations. We ended the month with a surplus of $1.745bill with the market expecting a surplus of $1.2bill. Exports rose 3% whilst imports were flat, which helped give us a larger than expected surplus. This also will feed in very positively to our Q3 GDP figures and probably bears more weighting than retail figures. These contrasting data points make it even more confusing and hard to get a read on the Australian economy. Personally I feel our economy is very solid without being spectacular. At a corporate level things are moving along very strongly, but it is yet to flow through to the average consumer. It eventually will which will lead to more spending, increased confidence etc.

The big corporate news for the week came from the National Australia Bank (NAB) and their full year results. The market wasn’t too happy with it as it sold the stock down 3% on the day. It is thought that higher than expected costs it what the market was most unhappy with. The headline numbers were solid with cash earnings +2.5% to $6.64bill. The final dividend was also set at $0.99ps (100% Franked), which was unchanged from a year earlier. Revenue grew 2.7% to $17.9bill and bad debts also grew 1.3% to $810mill. This is the opposite of what we saw with both ANZ & MQG where bad debts fell considerably. NAB’s net interest margin fell 3bp to 1.85% but its tier 1 capital ratio climbed to 10.1%.

In other news for the bank it declared it would cut 6,000 jobs within the bank with the aim to save $1bill by 2020. This was to be partially offset by the creation of 2,000 new positions, mainly in the IT department. They also declared they would invest a further $1.5bill in themselves to help improve services and their tech.

Overall it was more of the same for the NAB and the themes we have seen in the last few years for the banks in regards to low growth, squeezing margins and flat dividends. NAB is trading on a 13.1x PE here with a yield of 6.2%. It is the cheapest of all the banks in terms of valuation and probably why I favor it on that basis. I feel longer term value is to be had in NAB but don’t expect fireworks. A healthy yield and timid growth with be the theme for the next 12 months at least.

Woolworths (WOW) produced some positive figures for its Q1 sales update for the 17/18 financial year. They saw like for like sales in their food division up 4.7%, this was despite food prices falling 2.4% for the quarter. They also saw a recovery from Big W with sales up 2.5% for the quarter and of course they officially exited the home improvement sector in October. Whilst this is the second or third quarter in a row with encouraging figures for WOW, one can’t help but think how it will continue. With food prices continuing to fall, mainly due to Aldi, it’s hard to see where growth will come from. This is all before Amazon Fresh hits our shores next year. I am definitely not a buyer of WOW here and feel these rallies just give an opportunity for shareholders to exit before real pain sets in.

Most sectors contributed strongly last week to the rise in the XJO but resources and energy were a clear standout. Energy was up 4.53% and resources were up 3.89%. Energy’s rise came from a recovering oil price whilst resources benefited from a lower AUD whilst underlying prices remained relatively flat. RIO finished the week on 6 year highs for the sector. Industrials and health care also performed strongly, whilst the financials dragged on the market on the back of the NAB results.

Despite it being a quiet week for most commodity prices we did see Oil outperform. Oil saw highs we hadn’t seen since August 2015 on the back of talk OPEC will extend current production cuts until the end of 2018 and the continued absence of production from the Texas/Florida area as they try to recover from their devastating hurricanes. This has meant a lot of excess production has been taken out of the market and that some of the global reserves have been eaten in to. We are also seeing some instability in Saudi Arabia where a lot of royalty and high standing officials are being arrested and thrown in jail by the new leaders. This has thrown some uncertainty around one of the world’s largest oil producing nations. Given the reasons for the rally and the fact demand for oil remains subdued I see it as only short term. This doesn’t mean we can’t go higher and around $62 per barrel is my next target. However longer term the world is moving away from oil and fossil fuels and our demand for it will continue to fall. You all know my stance on lithium and the electric vehicle revolution we have just begun.

With the Melbourne Cup being run tomorrow I’d expect it to be a quiet start to the week locally. We have a few earnings results out namely from WBC, ORI, BTT and XRO. The RBA meet tomorrow in what is expected to be a nonevent and China release their trade balance plus CPI/PPI figures over the next few days,

On a personal note it was a quiet weekend as our little man was a bit sick. Nothing too serious but had a bug of some sort. Ventured out to a major shopping centre on Saturday and found it to be very busy. I suppose people are starting to head out to prepare for Christmas. The Christmas pageant is only a couple of weeks away, which I no doubt will be getting up at the crack of dawn for. I love the Christmas period. The general happiness and up beat feel in the community is catchy along with the decorations, music, food (Fruit Mince Pies…. Yum!) and time spent with family. As I told you all last week it will be a little bit more special for us this year with our expected arrival. It’s also a time where many feel very alone and down, so if you know anyone like that maybe reach out to them. You may just make their day and put a smile on their face.

Hope you all have a wonderful week and stay safe. 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.