ASX Weekly Wrap 19/03 - 23/03

It was a terrible week for Australian markets last week as the threat of US/China trade wars weighed heavily on investor minds. We ended the week down 128.70 points or 2.16% which saw most sectors finish in the red. We still outperformed the US however, as the S&P 500 finished the week down 6%. This was the worst performance for a week since January 2016. We have plenty of ground to cover this week including the fore mentioned ‘trade wars’, so I’ll get stuck right into it.

A few economic data points to cover this week, but the most important were the Australian jobs figures for February released on Thursday. The headline figure saw +17.5k jobs added, below the +20k expected and the unemployment rate climb to 5.6% (5.5% expected). This was a result of more people joining the search for work with the participation rate up to 65.7%. We also saw large losses for part time jobs with 47.4k lost during the month. On the flip side we saw full time employment gain by 64.9k offsetting those part time losses. It seems it was more of the same for the Australian jobs sector with some solid growth overall. However it still shows there is a lot of slack to remove from the sector, hence it will be hard to see wage inflation having any meaningful increase until it does. Job ads continue to grow strongly suggesting that we can expect further strong gains in jobs in the coming months as business confidence also sits at all-time highs.

Turning to the US we saw the Fed Reserve meet for their monthly rate decision. As expected the Fed increased the official cash rate by 25bp to 1.75%. It also said it expected to increase rates three times in 2018 and three times in 2019. This was slightly less than the market had anticipated so we saw US 10yr Treasury yields peel off to 2.81% to end the week. Remember these peaked around 2.96% only a couple of weeks ago. This supports the notion the violent sell off a few weeks ago was over the top. With this rate increase we see the official cash rate in the US sit above the Australian cash rate for the first time in almost 18 years (1.75% v 1.50%). I would expect the margin between the two to continue to grow as the US continues to increase rates whilst we remain on hold.

Now onto the main issue of the week, and why we saw the XJO off 2%+ and the US off 6%, and that is the potential trade wars between the US & China. Last week Trump announced he planned on imposing $US50bill in tariffs on Chinese goods entering the US market. He cited decades of intellectual property abuse by China and unfair tariffs they already impose on US made goods coming into their country. For example an American made car sold in China is said to have a 25% tariff imposed upon it whilst a Chinese made car sold in the US only has a 2% tariff. China retaliated, quite meekly I might add, by proposing $US3bill of tariffs on US goods. I have to stress these are just proposals at this stage and nothing has been signed into legislation.

The markets have reacted badly to these proposals on the fear it may lead to a large trade war between China & US and may spread to include other nations as well. Remember markets hate uncertainty and this is the first oddball situation we have had in about 18 months. Tariffs in the grand scheme of things would put a break on world growth as prices become higher and the movement of goods and services slow from one country to the next.

My thoughts are these are merely threats and actually won’t be implemented. If they are they will be quickly reversed once Trump gets his way. I have feeling he is pushing China to crack down on IP breaches and also to come to the table and relax tariffs on US made goods as well. Trump has always been aggressive with his tactics and somewhat bullied to get his own way. Thus far it has worked quite successfully for him. Trump is also very pro US growth and that being reflected in the US share markets. It would irk him to see them performing the way they are now. He has often remarked he is the reason they have rallied so successfully. He will not want that to change. Finally Trump has already softened his stance on his steel and aluminum tariffs with Canada, Mexico and Australia among the exemptions to these but he has also added EU, Brazil, Korea and Argentina to those exemptions more recently.

Everything is pointing to these recent plans being a negotiation tactic and Trump trying to gain the upper hand in trade negotiations. For good measure though the last time tariffs were implemented, were during the Bush administration in 2002. This saw the S&P 500 fall 30% (however they were already in a deep bear market) until Bush scrapped them 12 months later in 2003 and the markets rallied 40% after.

Myer (MYR) were the lone company to release half yearly earnings last week as long term holders got no reprieve from their suffering. They announced a $476.2mill statutory loss for the half after writing down $500mill in goodwill and brand-name intangibles. Stripping out these one offs the company recorded a $40.1mill profit for the half, within the $36-$41mill guidance they had given, but down 36% on last year’s $62mill profit for the same time. They announced no dividends were to be paid and they were still on the hunt for a new CEO.

It is tough to find any rays of light in the MYR result for shareholders as total sales were down 3.6% and comparable sales were down 3%. They did note that online sales had increased by 50% from the same time last year. It’s hard to even mount a half compelling case to invest in MYR. You only need to walk into one of their stores to understand this. They are empty of both staff to help and customers buying product. Theirs lines seem bland and not appealing to its target market and their prices are on nowhere near the cheapest. The only reason you would look to buy MYR shares at this point is in the hope of a miracle turnaround or a bailout, via takeover, from Mr. Solomon Lew and PMV. I feel this will only happen when they have already gone into administration and are at deaths door though. It has also been revealed they have a lot of debt that will be due in 2019, that on current metrics, they may be at risk of defaulting over. This suggests they need a big turnaround in sales or, more likely, a large capital raising.

MYR are not 100% to blame for the situation they find themselves in however. You only need to look across the pond to see how department stores are suffering in the US & UK to understand how new global competition + online sales + a dying store structure is killing them all slowly. Their main difference is most of them had much shorter term leases so companies could cut their losses and run on loss making stores. MYR are unable to do this as their leases are much longer and costlier to break.

As I mentioned over 18 months ago MYR, and most of the retail space, are still an avoid for me. They have yet to go through the major store closure and employee lay off period many went through in the US a few years ago and Amazon is yet to really make their mark.

Adding to AJM’s news just over a week ago another major lithium name in Kidman Resources (KDR) also came out with some significant news. It announced it was able to increase its mineral resource estimate for its Earl Grey lithium project by 54%. This means the project now stands at 189mt @ 1.50% Li or over 7mt of LCE. This has made it one of the largest known lithium deposits on the planet (see chart below) and a world class asset. KDR own 50% of this project along with world leading lithium producer SQM and they expect to go into production in 2019/20. At a conservative $13kt LCE ($15kt current global price/$25kt Chinese price) this means KDR/SQM have over $9bill worth of lithium in ground and KDR still only has a market cap of $770mill. They were also able to reduce their strip ratio down from 2.3 to 1.9. This is very important as it helps get operating costs down. A strip ratio says, and in this case, they have to mine 1.9t of over burden to obtain 1.0t of their lithium product. Obviously the less waste you are having to move to get to your desired product the less it will cost you. This is all very positive news for KDR as the story continues to improve and add value. This is why it is one of my favourite stocks in the lithium space.

Not much to say about how each individual sector performed last week except for it was a sea of red. Only two sectors were able to stay in the green in Energy and Gold as both saw their underlying commodity outperform and make gains. Oil on the back of increased demand and political tension and gold due to its ‘safe haven’ asset quality.

Technically the XJO broke down last week on the back of those trade war fears and looks headed to test the bottom band (blue) of the current uptrend. In fact we are testing it today around the 5,800 mark and seem to be holding it ok (keep in mind I am writing this Monday night 26/3). If we are unable to hold this then we will probably see a level around 5,500-5,550. It will all depend on whether or not markets see a trade war between the US & China as a real threat. I have the feeling that it will dilute itself over the week and we may see a rebound in global equities heading into Easter. Already I am hearing of new trade agreement being struck between South Korea and the US and that the US is very open to trade talks with China.

That wraps up another Weekly Wrap. A lot to mull over on the world/political stage rather than an individual stock level at this point in time. Had a fantastic weekend just gone despite the Crows loss. I told you I wasn’t confident. Short week this week as we head into the Easter long weekend. Will depend on the amount of news around this time next week as to whether or not a Weekly Wrap goes out. It may just be a very short one. Having a very quiet Easter long weekend with nothing of real note planned. Just spending time with the wife and kids and relaxing. I will be attending the Crows game on Thursday night, which I am much more confident in us winning than I was last week. Hopefully you have a very enjoyable long weekend yourselves. If you are driving anywhere please take care and stay safe. So much more traffic out there on the roads at this time of the year. I will speak to you all again shortly. Go Crows!

heath@hlminvestments.com.au

0413 799 315

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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.