ASX Weekly Wrap 27/11 - 01/12

The XJO experienced modest gains this week which was filled with plenty of macro data and news. The XJO finished up 7.20 points or 0.12%. The high for the week was 6,031.40 on Wednesday and our low was 5,949.20 on Thursday.

The big news domestically was of course the royal commission set to take place to investigate our banks and financial services. Now the banks did approach the treasurer to push this royal commission, but only when it looked inevitable and was going to happen regardless. It was a PR stunt in order to gain some good faith from the public. The actually scope of the commission we don’t have the exact details of yet but it won’t be as in depth as if the Labor party had requested one should they win the next election. It will be a softer approach but still fairly negative for the banks. I’d expect this to drag on for most of 2018. It will take a few months to set up and then to conduct. Finally it will be another few months for the findings to be released. This means we probably can’t expect anything until fourth quarter of 2018 at the earliest I feel.

This will weigh heavily on bank stock prices in the short term. I’d say it would be similar to the period when APRA had announced it would be requiring the banks to add more capital but hadn’t announced how much yet. Most banks lost 20-30% in value during that time as the market hates uncertainty. Most banks are well off their highs already (20-30%), so I feel a lot of this was factored in. As soon as this citizenship issue sprung up and the Government lost majority power I feel the market knew this was going to be a real chance of happening.

I’d expect Australian banks to fall further, maybe another 10-20%, as the market contemplates the findings and implications on the industry. This coupled with rising rates overseas will see our banking sector grossly under perform international banks. How can we benefit from this? Well I can see two ways at this point in time. Investing in CYB ($5.73), which spun out of NAB, and is a UK based bank where rates have just been increased, is the first option. The other is an ETF going by the code BNKS ($7.34). This is an ETF, set up by Betashares, that invests in the largest global banks excluding Australian ones. I have included their top ten exposures below, but you can see there is a decent mix of banks from all over the world in the fund. As stated above I feel they will outperform on the basis they don’t have the sovereign risk hanging over their head and rates are actually starting to rise overseas, whereas they are remaining flat here for the foreseeable future. This means net interest margins will start to widen for these banks and increase profits. You also have a lot of US banks included in that fund which should benefit from Trump’s new tax cuts. It only yields 1.5%, but you would be in it for the capital out performance rather than the income. It’s also currency hedged helping protect your downside risk with currency movements. Management fees sit at a mere 0.57% per annum and like any share can be bought and sold on the ASX. These are two ways off the top of my head I feel you could diversify and benefit from the global financial sector.

The other large piece of news to come through last week actually came through in the early hours of our Saturday morning whereby the US Senate passed the Trump tax plan in a 51-49 vote. It still has a couple of small hurdles to jump, but the bill looks like it will get done which is a big win for Trump and a big win for corporate America. It would be the biggest overhaul of the US tax system in over 30 years if implemented. The main point to come from the plan is corporate tax rates would be cut from the current 35% to 20% by 2019. There are a heap of other individual tax payer cuts involved as well, but the whole thing will cost $1.5trillion over 10 years. At this stage Trump is saying economic growth will pay for it at this stage, which isn’t a lot to ask at $150bill a year on an almost $20trillion economy. Obviously this is very bullish for corporations in the US and overall for the US stock market. Mainly because this means companies will be paying less tax, which increases earnings for shareholders and then obviously higher EPS.

The only major corporate news that came during the week was the earnings result for Aristocrat Leisure (ALL). I believe it was a great result, with some solid earnings guidance, but the market seemed to want more in the end. ALL started the day up 2% only fall as far as 7% down. It recovered somewhat and ended up only down 5%, but still it baffled me a bit it was sold off so savagely. Many of you already hold ALL with me and some of you topped up last week on the price falls as well. I am taking this opportunity to top as many clients as possible.

The underlying numbers were great and slightly ahead of forecasts. ALL profit rose 41% to $495.1mill as revenue grew 15% to $2.45bill. It declared a 20cps dividend compared to 15cps this time last year taking the total yearly payout to 34cps v 25cps in 2016. For 2018 ALL simply stated it still expected strong earnings growth. It also must be pointed out that it is expected by 2021 67% of ALL revenue to become reoccurring which is great for stability and confidence in a stock. Most growth came from the US as earnings there lifted 23% and online earnings increased by 34%. Most analysts have 2018 earnings growing by 12-18% and almost of them have increased their price targets on ALL.

I suppose the big conjecture came from the announcement that ALL would pay, via debt, $US990mill for Big Fish Gaming, which is an online social casino game developer. This move further enhances ALL online gaming division and move away from traditional slot machines as it only just finalized the purchase of Plarium for $US500mill. Concerns are the industry is still fairly new and there is no idea how long before growth will cool. Also Big Fish’s revenues fell by 5% for 2017, but also have a +15% CAGR over the last five years. Given ALL quality of management and history with acquisitions I am prepared to back them in to get the most out of it. Big Fish is expected to be earnings accretive straight away adding about 5% to their bottom line.

A mixed week looking at it from a sector point of view. Utilities, Energy and Retail all provided solid gains whilst financials and resources dragged the market back down. Obviously the banks reacted negatively to the royal commission news and resources fell as most commodities saw falls and a strong AUD. Telecommunications were also weak as the bad news continued for TLS with an earnings downgrade due to delayed NBN payments. For the year only telecommunications and financials remain in the red.

Well that’s it for another week. Things are going very quiet news wise leading up to Christmas so next week will be my last Wrap for the year. We do have some significant data out this week in the form of retails sales (Oct), trade balance (Sep Qtr), GDP (Q3) and US Jobs on Friday night. Outside of that we have no corporate news scheduled.

I spent the majority of the weekend putting up the Christmas Tree and decorations. As I have said before I love this time of the year. We had the Christmas music cranking and had a great time getting it all done. It was a bit of a challenge doing it with an 18 month old running around as he loved the lights and decorations and wanted to grab them all. For those of you who follow me on twitter I will post a picture up of our tree when it’s done. My wife has excessive ornament placement disorder so things have to be perfect. She does do a great job though and our tree always looks stunning! I hope you all have a wonderful 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.