ASX Weekly Wrap 09/04 - 13/04

In what was our first full week in a couple the XJO performed solidly. We finished the week up 41.10 points or 0.71%. Our high was 5,864.00 on Wednesday and our low was 5,808.70 on Monday. We saw ‘Trade War’ fears dissipate during the week even after Trump signaled there could be a further $100bill in tariffs imposed on China and we also saw a very strong start to earnings season in the US with the US banks mostly beating forecasts and providing strong guidance.

Economic data, along with corporate, was light on this week with the only noteworthy data coming from China. First up were the CPI & PPI figures which came in much weaker than expected. Headline CPI came in at 2.1% vs the 2.6% expected and the 2.9% last read. PPI came in at 3.1% also below the 3.2% expected and 3.7% read last month. These figures for March show that whilst there are pockets of inflation popping up from time to time it still is relatively under control. I will note that CPI for this time last year came in at just 0.9%, so it has improved, but not to the extent to worry about. Commodity prices did cool in the first quarter so this may have contributed to the lower CPI figure as well as the Chinese New Year.

The second lot of economic news to come from China this week surrounded their trade balance. China released a surprise trade deficit of $US5bill for March after exports slowed (-2.7%) coming out of the Chinese New Year. Imports climbed 14.4%, which was above the 10% forecast and 6.3% last month. If you look at the first quarter overall, which is better due to the New Year distortion, you will see Exports avg +17.5% and imports avg +17.1%, hence both still really strong. Once again all pointing to solid economic growth remaining the norm in China for 2018.

On Tuesday Chinese President Xi Jinping gave his annual speech to the Boao forum on the Chinese economy and plans moving forward. Overall it was very well received as Xi spoke about opening up the Chinese economy more to foreign investment and being in favour of free trade and globalization. He also mentioned that they would look to lower tariffs on a lot of imported goods and would not look to attack anyone else on trade. The XJO rallied hard on the speech as it quelled fears of an impending trade war with the US and basically dismissed it extending passed them. China doesn’t seem to want to add tariffs to US goods and has opened the door to negotiation. This is what I have mentioned all along. Neither side wants to enter a trade war and it will be resolved, via negotiation, in the coming months. I think its Trumps brash nature that scares the market, although we may just start getting used to that now. This bodes well for the Australian economy and commodity prices as it seems there now won’t be any restrictions placed on trade in the near term between the US & China.

The first bit of corporate news isn’t direct news from the company, but plays a big part in their performance over the last week or two. The news surrounds Alumina (AWC) and the performance of the Aluminum price last week. Aluminum hit a 6 year high closing in on $US2,400/t after adding +12%. This was all on the back of the US government placing sanctions on Rusal, a major producer of Aluminum from Russia, during the week and banning entities from doing trade with them. This may also flow on to other western countries as well. This has meant that Rusal could be forced to cut production. This bodes very well for AWC as former Rusal customers may have to turn to them for supply, plus it obviously takes some supply out of the market forcing prices up.

I was a big buyer of AWC around $1.90 - $2.00 for myself and clients about 12 months ago. Back then I was purchasing on the back of a recovering Aluminum price, plus the fact AWC had entered a phase of massive positive cash flows and reduced capital expenditure as production facilities were ramped up. It was also yielding 6%+ at the time on forward earnings.

Since then shares have surged to almost $2.80 and 15%+ in the last couple weeks alone. AWC still yields 6%+ here (100% franked) but there is a lot of froth in the share price now. I would be looking to add on any weakness, but don’t feel comfortable buying at current prices. Current holders have done well over the last 12 months adding 35% in capital appreciation and picking up a 6% yield.

Oil saw a stellar run last week adding 8%+ on political risks in the Middle East and the fear of an impending war with Russia over Syria. Over the weekend we saw a combined effort by the UK, France & USA as they bombed specific targets in Syria after the chemical weapon attack on civilians a week or so ago. All nations stressed that this was in retaliation to this and these were once off, targeted, attacks. These attacks were larger than the ones carried out almost a year ago to the day, the last time chemical weapons were used on the people of Syria.

Oil has softened since these attacks as some risks subside, but with increasing world demand for oil and Saudi Arabia benefiting from a higher oil price in order to try and IPO some of its oil assets, I wouldn’t expect it too come off too much. I can see it pulling into $63.00 before its next move higher. There is some talk SA want oil around $80/b to get the sale done, but these are only rumours and innuendo.

I spoke of my bullishness of the energy sector last week, in particular LNG, and how my preferred exposure to the sector was through WPL & OSH. These stocks have benefitted since then with WPL +3.42% and OSH +6.2% since I wrote about them. They both still remain my preferred exposure to the sector and I believe have 10%+ upside before the end of the year (including dividends).

Was a much better performance by most sectors last week with banks, retail, utilities and property trusts the only ones in the red. Resources outperformed last week as commodity prices recovered somewhat. Gold also continued to perform well as trade wars and Syria fears pushed the precious metal up. Most of our mid-tier gold producers are at all-time highs and yet the sector isn’t getting much coverage. Health care and IT remain the only sectors in the green for the year.

The XJO almost tagged the 200dma yesterday and it is trying to again today around the 5,870 level. We need to break this and hold above it for this recent rally to be sustainable. With commodity prices recovering and banks heading into earnings we may have the stimulus we need to get above it the next few weeks.

Well that rounds out another quiet week for the wrap. Next week should be a lot more comprehensive as a host of quarterly production reports are released and the likes of BOQ release their earnings to kick of the bank reporting season. Personally it was another quiet weekend but we did manage to start to do some birthday shopping for our eldest who turns two next month. Feels like only yesterday I was sending you all an email to welcome him to the world and now he’s turning two. What a wonderful two years it has been! Also had a birthday lunch for the sister-in-law’s partner on Sunday, which was fun. I won’t bother mentioning the football except for the fact we sat through that garbage in rain that was coming in sideways, and we sit undercover. I hope you all have an enjoyable 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.