ASX Weekly Wrap 16/07 - 20/07

The XJO continued to tread water this week as it finished a mere 17.50 points up. Again trade wars fears kept our market in check with a heavy focus on China and concerns over what these tariffs could do to their economy. Our high for the week was Friday where we high 6,297.90 and our low for the week was which saw us go as low as 6,199.90. That’s 6,300 level providing some resistance for the XJO, but we are building up a healthy consolidation around here it looks possible we could break to the upside during reporting season.

A big week for macro and corporate news so I will get stuck into it straight away. China released their Q2 GDP figures, plus retail sales and industrial production for June last Monday. GDP came in at +6.7% as expected, which was lower than the +6.8% recorded in Q1. Retail sales also came in as expected at +9%, which were above the +8.5% we saw last month. Finally industrial production came in weaker than expected at +6% after the market had forecast +6.5% and it was also lower than +6.8% recorded in May. Overall it was another solid set of figures for China, with some small signs of weakness in the industrial sector. This could be tariffs already taking effect as manufacturers etc. wind back production on the fear of lower sales moving forward. What China have already started doing to make their exports more attractive and to help prop up the economy is devaluing their currency vs the USD. This could help offset some of the price rises their products will receive in the US and still make them attractive to US importers. As I also explained a few weeks ago this will hurt BRIC countries such as Brazil, Mexico etc. as it makes their exports less attractive as their currencies tend to be heavily correlated to the USD. The third quarter will start to see any possible effect the tariffs are having on China if any. With a devalued Yuan and an economy maturing and moving towards more services based it could end up having little effect.

Back home, Australia had its job figures released for June on Thursday which were a surprisingly very strong set of numbers. Overall the economy added 50,900 jobs for June, which included 41,200 full time positions and 9,700 part time positions. The unemployment rate stayed steady at 5.4% as the participation rate rose +0.2% to 65.7%. These figures were well above the +17,000 expected and a real surprise considering softer than expected labor market data points over the last month. Whilst these jobs figures can be highly volatile, and somewhat unreliable, the trend suggest a very healthy Australian economy. In a boost for us South Australian’s we now have the second lowest seasonally adjusted unemployment rate in the nation at 5.4%. We are only behind NSW which reads 4.7% at this stage.

With reporting season soon upon us we currently have quarterly production results being released by almost every resources company listed. On Tuesday RIO Tinto (RIO) were the first of the big miners to release their results. The results were very strong, particularly for iron ore, as they shipped +14% iron ore than they did in the corresponding quarter in 2017. Their shipments were also +10% on Q1 of 2018 and +9% year on year with 168.8mt of iron ore shipped. RIO stated they expected iron ore shipments to now come in at the upper end of guidance in the range of 330 – 340mt. Copper (+26%), Bauxite (+3%) and Hard Coking coal (+40%) also saw increases on Q2 2017. Aluminium was the only product to see a decrease and that was of a mere 3%. Much of the story remains the same with RIO as free cash flows remain high, margins wide, low net debt and costs low. I would expect record dividends to be announced come reporting time with possible capital management via buy-backs or capital returns. On top of all this RIO have sold one of their Copper projects for $US3.5bill which will give them excess cash with most expected to return to shareholders. Obviously RIO and other resource companies are at the mercy of commodity prices, but with world growth still expanding above trend I would expect them to remain elevated levels. I like RIO at these levels with a forward PE of just 14x and forecast yield of 5% and am adding to positions here.

It was a similar story with BHP as they reported their fourth quarter and full year production results. BHP produced record amounts of iron ore exceeding guidance by increasing production by 8% on 2017. Their iron ore division was +6% on the June quarter last year and +10% on the March quarter this year. After producing 238mt of iron ore in 17/18 they expect to produce 241-250mt in 18/19. Other divisions such as Copper (+32%) and Met Coal (+7%) were also strong but Petroleum (-8%) and Energy Coal (0%) were weaker. BHP has cited they expect to produce 1.675 – 1.77mt of copper in 18/19 which would be up to 1% higher. However with labor contract negotiations still on going there is a chance of strikes at their Escondida mine. BHP are also selling off their onshore US petroleum assets. The sale is expected to wrap up by the end of the year, which also leave the door open, like RIO, to capital management initiatives. I also like BHP at these levels as it continues to respect the long term up trend and bounce off support. I love their exposure to copper and even oil at this stage and China continues to produce record amounts of steel, which helps the iron ore story. Like RIO, BHP is only trading 14x forward multiples here with a forecast yield of 4.6%. I expect both BHP & RIO to exceed earnings guidance with a beat on profits, free cash flow and returns to shareholders. It would not surprise me to see BHP/RIO with a 6% yield at these levels based on the fact both companies have so much free cash flow and nothing to do with it apart from paying down debt and returning it to shareholders.

Along with the major miners the larger oil producers also reported their quarterly results last week. Woodside Petroleum (WPL) was the largest of the oilers to report their quarterlies and had another favourable outcome. They announced 22.1mmboe for Q2 which was slightly down on the 22.2mmboe in Q1 but higher than the corresponding Q2 in 2017 which say 20.7mmboe. Sale also came in at $1.082bill which again was down from Q1’s $1.169, but larger than Q2’s $868mill in Q2 2017. Overall production and revenues came in around forecast, so there were no surprises for the market. WPL did mention a few days before its Q2 release it had commissioned a second train for its Wheatstone LNG project, with production ramping up there ahead of schedule. WPL is more an LNG play rather than oil as that is what it primarily produces these days. I am bullish LNG longer term as China turns off its coal plants and replaces them with LNG. LNG prices have reacted positively to this more than doubling in the past 12 months in Asia. Like BHP/RIO WPL now has high free cash flows as it has passed its high capex stage of its main project cycles and now is reaping the production benefits. This should see excess cash returned to shareholders over time as well as possible buy-backs.

Oilserach (OSH) is the final energy company to release its Q2 report last week that we will cover. Production recovered in Q2 to 5.40mmboe after it produced 4.84mmboe in Q1 due to the earthquake in PNG. However due to inventory rebuilding sales were down 9% on Q1. Like WPL, OSH mainly produces LNG now with 4.9mmboe of its quarterly production in LNG. Sales and production for the first half of 2018 will remain lower than 2017 due to the earthquake and subsequent rebuilding of inventories and lower prices received selling into the spot market after the earthquake. Insurance will look to cover most of what OSH lost during this time so in the end OSH will not be any worse off. OSH remains my favourite pick in the energy/LNG space at current prices as I feel it has more capital upside. Its continued ramp up of the PNG LNG project, increase in the size of reserves and strength in LNG prices makes it an attractive prospect. Their Alaskan oil project could potentially provide some much larger upside as well as they continue to improve the metrics of the field. Recently they came to agreement with other companies to share drilling information in Alaska, as a result they have less holes to physically drill themselves.

Resources, energy and gold sectors got hit the hardest this week as commodity prices continued to sell off on the back of a stronger USD and trade war fears. Financials, Industrial and telecommunications performed well as investor piled back into underperforming stocks that may have some value at current prices. Not much else to see sector wise as the XJO traded for such a small gain for the week.

The quarterly reports continue this week with the likes of ILU, BPT, FMG, NCM, SFR and CYB all providing us with how they fared for Q2. Economically the Australian CPI figures for Q2 are out on Wednesday with US Q2 GDP out Friday night.

On the weekend we went bed shopping for our eldest who just turned two recently. I can’t believe how fast he is growing up and will be out of his cot and into a full size bed within the next couple of weeks. It’s sad to see him grow up so fast but also exciting to see him develop into a little boy. I guess we have a few of these similar milestones left to look forward to with him and also with our youngest who is now seven months old himself. 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.