ASX Weekly Wrap 03/09 - 07/09

The XJO experienced significant losses this week on continued emerging market (EM) fears which coincide with trade war fears between China and the USA. The XJO was down 175.7 points for the week or 2.78%. We had our worst week since the second week of February earlier this year where we experienced falls of 4%+. In fact the market is on an 8 day losing streak as I write this, but looks like it will be breaking it today. We had a high of 6,333.7 on Monday and a low of 6,102.00 on Friday.

Due to the fact that earnings season is over there really isn’t much corporate news to cover, thus this week’s note could be a little shorter. There is a bit of economic data to touch upon however. Over the weekend China released its trade balance figures which returned another solid set of figures. The overall surplus came in at $US27.91bill which was lower than expected but still a very solid figure. Exports were +9.8%, slightly lower than the +10.1% expected but imports were +20.0%, higher than the +18.7% expected. This is what caused the surplus to come in narrower than expected. These figures will do nothing to quell trade war fears as China’s surplus it has with the US increased to record levels. This will only add fuel to Trump’s fire in proceeding with greater tariffs.

There has been a lot of concern lately with China’s economy and the fact it appears to be slowing via various sets of data, however the commodity trade data that was just released for August show’s anything but a slowing economy. As you can see above most, if not all, major commodities are experiencing solid import gains into China since last month and the start of 2018. Oil +6.5%, Gas +34.9%, Coal +14.2%, Copper +15% are all well up on the year. These are not signs of a slowing economy. I think what we can take away from this all is whilst there may be some softness in pockets of the Chinese economy, overall it’s pretty solid and things are never as bad as they seem.

Turning to the US and we saw some very strong manufacturing PMI figures released there last week. The ISM manufacturing PMI came in with a very strong read of 61.3 for August after a read of 57.7 was expected and they saw a read of 58.1 in July. The theory behind this is the tariffs may be working and increasing production domestically and increasing demand for US made products. On top of these bullish figures we saw the US employment figures drop on Friday night, which saw another very strong figure. Over 201k jobs were added to the US economy in August as the unemployment rate stayed steady at 3.9%. What was most encouraging were wages, which saw a +0.4% rise on month and a +2.9% rise on year. That yearly figure is the highest we have seen in some time and sent US 10 year yields towards 3% again. This obviously stoked the rate rise fire with expectations now that the Fed will increase rates in both September and December this year.

Finally in Australia we saw our trade balance released last Thursday for July in what were also impressive numbers. Our surplus came in at $1.5bill, ahead of the $1.4bill expected but lower that the $1.94bill last month, which was also revised up. Imports were flat for July whilst we saw exports fall -1%. There are fears that the drought stricken areas in Australia will hurt our soft commodity exports, which could lead to smaller surpluses in the second half of the year. It’s something to keep an eye on.

Our only corporate news for this week comes the way of Telstra (TLS). I have been deliberately focusing on TLS over the last few weeks as a couple of months ago, after extensive research, I decided to accumulate TLS for appropriate clients around $2.75. It has been a very successful trade for us thus far with it trading around $3.20 as I speak giving us +16% in capital growth and also an 11cps fully franked dividend in that time. During the last week TLS gave us an update on its earnings guidance for FY19 after the NBN released its corporate update on 31/8. TLS revised down potential income by $300mill and potential EBITDA by $100mill and no change to free cash flow. This means TLS guidance for FY19 now sits at $26.2-$28.1bill in revenue and $8.7-$9.4bill EBITDA with capex and free cash flow remaining at $3.9-$4.4bill and $3.1-$3.6bill respectively. TLS rallied on the news as a.) The NBN rollout plans are actually more beneficially to TLS FY19-21 and b.) The free cash flow remaining unchanged means there is a higher chance a 22cps dividend could remain for FY19.

This latest news has de-risked TLS somewhat with another major hurdle out of the way. Current risks to be focused on now revolve around the actual business performance and hence potential dividend cut. I don’t think we will get an announcement on the dividend until late in 2018 or early 2019 before their half year results. I have said since entry that I expect dividends to be cut to 18cps for FY19, a 6.5% yield on entry, hence anything more than that will be a bonus.

Technically the TLS chart is still looking very bullish with a short term target of $3.40 in our sights. I am holding TLS here and waiting to see how it reacts to the $3.40 target. If we clear that then $3.75 will be in our sights.

Earnings Season Summary

As earnings season has come to a close I always like to update you all on how we performed throughout. Hence below is a summary of some key statistics from the latest reporting period:

· Of those companies with a June 30 reporting date 139 companies reported full year earnings whilst 31 companies released half yearly report

· 93% of companies reported a profit, which is well above the long term average of 87%

· 62% of companies lifted their profit, which is slightly above the 61% average and higher than the half year results which were at 57%

· 90% of full year reporting companies elected to pay a dividend

· Cash levels for ASX 200 companies lifted 6.2% to $124.7bill

· The average aggregate statutory earnings rose 8.4% on a year ago

· Revenues rose by 7.4%, expenses rose 7.6% and dividends lifted by 13.6% on average

· Of those reporting a dividend 70% of those increased it, 10% dropped it and 20% left it the same

Overall our earnings season was very solid and it makes sense we continue to do well as business conditions are still improving. Moving forward we may see high cost pressures from fuel, a lower AUD and debt for companies reporting in AUD but these could be offset by those reporting in USD. The XJO is currently trading at 17x earnings which is higher than the 15.5x average but also has not factored in the latest round of earnings and recent falls in the market just yet. I’d expect that to be closer to 16x when all is said and done which puts at fair value.

The XJO is in a bit of limbo at the moment failing to sustain breaks (blue) out of our current uptrend and breaking below recent support (green line & purple circle) in last week’s sell off. We are, however, holding around older highs made in May this year. If we can’t hold here then our downside target is 5,920 at this point, thus roughly 250 points (4%) away. Given we have a lot of money to come out of the market, via dividends in the next few weeks, which won’t return until October (when dividends are generally paid), then I see our risk being to the downside in the short term, with some sideways movement being our best outcome. Overall the longer term outlook remains very bullish for the XJO with a 6,400-6,600 target still intact by the end of the year.

This week will be a quiet one overall with Australian unemployment data and the usual Chinese monthly summary the only points of interest economically. There is no scheduled company news with a host of top 200 companies going ex-dividend. Personally I had a quiet weekend, but did venture to the Royal Adelaide Show last week with my family. My eldest loved seeing all the animals and just the general sights and sounds of the show. I may have snuck a show bag or two home. I hope you all have a wonderful and safe week. 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.