ASX Weekly Wrap 15/10 - 19/10

The XJO was able to bounce back modestly after last week’s savage losses. We saw a 43.80 rise in the index or +0.74%. We managed to outperform the US markets, in particular the S&P 500, which has seen nine negative sessions in its last eleven. Some confidence was seen in financials, with MQG, NAB, ANZ & WBC to report earnings in the next few weeks, and also resources, with many quarterly production reports dropping this week for the September period.

Thankfully we have a lot of economic data and corporate news to cover this week, so as per the norm we will cover the macro data first. China was the flavor of the week dropping its regular retails sales, industrial production and fixed asset investment numbers, but also releasing CPI and the all-important GDP figures for Q3. It was a mixed bag overall with retail sales +9.2% (+9.0% exp), industrial production +5.8% (+6.0 exp) and fixed asset investment +5.4% (+5.3% exp). As Meatloaf once said, two out of three beats aint bad (Note: he may or may not have said that), but overall figures are trending down from where they were in proceeding months. Expectations are just also being revised down. This was also reflected in the Q3 GDP figures that also were released on Thursday last week. Expectations were for +6.6% growth (yoy), but the figure came in at +6.5%, thus a little lower than expected. The weakness in the Chinese economy was also reflected in quarter on quarter growth where it grew +1.6% in Q3 vs last quarter which grew at +1.8%. Many put the softness in the economy down to the trade wars with the US. I feel its more China trying to moderate and deleverage its economy into a more serviced based style, like ours, and moving away from a reliance on manufacturing. You can’t have an economy the size of China running at 6%+ long term as it just requires too much debt to obtain it and it’s just not necessary. However China are not standing idly by and letting this growth disappear as they are current trying to inject more liquidity into the system whilst also stimulating it with more fiscal spending. This may see figures improve over the next 12 months.

Finally China also released their CPI figures on Tuesday which saw a +0.7%, month on month, and +2.5% year on year. The monthly figure came in exactly as expected but the yearly figure was higher than the +2.3% expected. Whilst overall figures are still subdued and inflation is very tame there are signs that it could be returning to the Chinese economy. Nothing to concern yourself with at the moment but something to keep an eye on.

Back in Australia we had our September jobs figure released. The headline unemployment figure dropped to its lowest level in 6 years at 5.0%, however participation also dropped from 65.7% to 65.4% which would have accounted for most of the fall. The economy only added 5,000 jobs for the month which was below the +15,000 expected. The economy added 20,300 full time positions whilst losing 14,700 part time. A mixed set of numbers which really didn’t have an effect on equity markets or AUD. It still shows solid strength in the jobs sector and overall economy.

Its quarterly production reporting season and we had most of the majors brief us on how they performed in Q1 of 18/19 (or Q3 depending on how they report). BHP Billiton (BHP) was one of these and released a report which was mostly in with expectations with no surprises. All guidance was maintained for iron ore, oil, met coal and energy coal with copper production the only commodity to have its forecasts revised down. Production is now expected to be 3% lower due to, two major outages at two of its biggest mines during the quarter. BHP now expected copper production to come in at between 1.62-1.705mt. Despite this copper production was +1% for the quarter compared to last year. Iron Ore also saw a lift in production of 10%. Production of 61mt was a record for a single quarter and was put down to improved efficiency across its rail network. Petroleum (-1%), Met Coal (-2%) and Energy Coal (-1%) were all down due to scheduled maintenance. Like I said early not much can be taken away from this except that things are running smoothly at the world’s largest miner. At this stage lower Copper production, and prices, will be offset with higher iron production and prices plus higher coal and oil prices. Add in a lower AUD we could be in for a monster half yearly report for BHP come February.

RIO Tinto’s (RIO) quarterly report wasn’t as flash as BHP, but none the less still a solid report. Iron Ore took a 5% shipment and 3% production hit due to planned maintenance and unfortunately a fatality at one of its mines. Bauxite production was down 1% due to lower grades and Aluminium production was down 1% due to industrial action. Copper production was 32% higher than this time last year mainly due to Escondida being at full production, whereas it had industrial action last year, and higher grades at other mines. Looking ahead to the FY18 guidance, iron ore production is expected to be in the upper end of forecasts (330-340mt), Aluminium revised down to 3.4-3.5mt (previously 3.5-3.7mt), Bauxite revised up to upper end of forecasts of 50-51mt and finally copper revised up to upper end of the 510-610kt forecasts. RIO also noted that raw material cost headwinds (caustic soda, petroleum coke etc) from their Aluminium production will have a $400mill negative impact on EBITDA in FY18 compared to FY17.

RIO also noted that it had now fully exited the coal business and was on track to return $US3.5bill back to shareholders via buy-backs later this year and into 2019. Like BHP, RIO should see a very good full year report come February despite some cost and legacy contract headwinds in Aluminium. It too will benefit from higher iron ore prices and a lower AUD.

The final company I will touch upon today is Woodside Petroleum (WPL) who delivered its third quarter report as well. Overall for the third quarter WPL produced 23.1mmboe and sales revenue of $US1.157bill. This was 13.8% higher than the corresponding quarter last year due to production at Wheatstone being ahead of forecast. Sales were also 25.4% higher than the same time last year due to the higher volumes and increased LNG prices. Quarter on quarter growth was also greater with production 4.5% higher in Q3 compared to Q2 and sales revenue 6.9% higher.

WPL also updated the market in regards to expansion and new projects to come in the next few years. The greater western flank phase 2 project is under budget and ahead of schedule, due for commissioning in Q4 2018. It also notes its Greater Enfield project remains on budget and 72% complete, but didn’t give an update on expected commissioning. Finally the Browse JV project final decision has been moved up to 2020 from 2021.

I have been a big believer in WPL for a little while now and started buying clients in between $30-$32 per share. I believe it still gives you the single best exposure to the rapidly expanding LNG market, with prices continuing to track higher. The stock has pulled back from recent highs of $38 in the last couple of weeks which I believes provides another entry point for investors. Like BHP & RIO, WPL has growing free cash flow from strong earnings and lower capital expenditure. This should see greater returns to shareholders over the next few years.

The XJO looks like it’s being draw to the bottom of that long term trend (green line) at around 5,650/5,700. Including today’s falls we are around 5,850 so those targets are around 200 points or 3.5% lower. As long as we hold those levels there should be a lot of value at that point. I would be a very keen buyer.

The week ahead is dominated by quarterly reports with ILU, NCM, WSA, AMP, IFL, QAN, FMG & RMD all updating us on their performance for the September quarter. We also have Q3 GDP figures out on Friday night for the US with a +3.3% annualized print expected. This would be lower than the +4.2% seen in Q2.

I spent my weekend taking advantage of the glorious weather here in Adelaide and was out and about with the family. We had a picnic at the park on Sunday, which was the highlight of the weekend for me. The kids loved it, with our eldest running around kicking the ball and taking advantage of the playground. Was just a very relaxing enjoyable day. I hope you all have a wonderful week and stay safe. 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.