ASX Weekly Wrap 08/4 - 12/4

Welcome all to the first ‘ASX Weekly Wrap’ of 2019…..even if it 3.5 months late. Firstly I would like to apologise for not having something out sooner. Normally I would have a review of 2018 and preview of 2019 in your inboxes by end of February, but it just wasn’t possible with my current work load. Last year’s email to start the year was 7,000 words long and took me almost a week to write. It was looking like it would be similar again this year with the amount of information I had to cover, thus I made the decision to skip it for this year and get started on my weekly wraps. These wraps are still 2,000 to 3,000 words long but the fact checking etc. is a lot simpler as information is current and at the tip of my fingers. I do horde articles and information throughout the year for my yearly email but even then I have to dig through them to find the information I need to write about. The servicing of clients and keeping on top of financial markets have to be my first priority.

The XJO ended last week with a strong positive move which saw us finish 70 points higher or +1.13%. In fact the first few months of 2019 have seen some of our best gains to start a year ever with the XJO +10.82% for 2019. Australian, and global markets, have been buoyed by the possibility of a trade deal being struck between the US and China, plus some encouraging economic data which may show that the global slowdown has bottomed and is starting to consolidate and trend in the right direction. This is in stark contrast to how we finished 2018 which saw the XJO drop -9.04% in the last quarter alone on the back of trade war fears and poor economic data from China & Europe mainly. The US did see some softer data as well but also some very strong data to offset that. There were very real fears about a major global slowdown headed our way. In 2019 it has been all ‘beer and skittles’ thus far, with both US & China leader’s talking positively about their negotiations and how a deal could be struck within a few weeks. Commodity prices have also rallied hard with Oil, Copper and especially Iron Ore performing very strongly for the year.

Iron Ore is the first topic I wanted to touch on today as it has been a very bullish story for our local miners. Whilst equity markets didn’t see a bottom until mid-December last year, Iron Ore bottomed out early November and rallied hard into the year. Then early this year a terrible accident occurred when a dam burst at one of Vale’s iron ore mines in Brazil killing hundreds and shutting down several mines for an indefinite period. This took 5%+ of all seaborne iron ore out of the iron ore market. Then we had a couple of cyclones flow through the top end of Australia shutting down major ports and causing more supply disruption. This has seen iron ore prices surge to multi year highs and has also closed the discount gap between lower grade 58% Fe with the standard 62% Fe. The gap is also at its lowest in some time, helping Fortescue (FMG) greatly.

As you can see above RIO Tinto’s (RIO) stock performance he matched that of the iron ore price during this time. Early January RIO was around $80 per share and recently surged to $102, a +27.5% increase in around three months. We used this opportunity in Iron Ore markets to benefit our clients. We went overweight RIO during this time with our highest entry being $83. Thus since early January we have picked up to 22% in capital gains, plus the almost $6 in fully franked dividends RIO paid out, for a total return of up to +33.7%.

This strategy is exactly the same we implemented with BHP Billiton (BHP), before rolling it over into RIO, whereby we went overweight BHP towards the end of last year with highest entry around $30 per share. The stock touched $40 during the time we held but most exited their position around $39, thus providing up to a +30% capital gain. BHP also paid a fully franked $1.41 special dividend during this time as well taking total returns to +34.7% for this trade.

RIO this week announced that due to the supply disruptions production FY19 will be lower. They have lowered total production to be 333-343mt, down from the original 338-350mt. Despite this some analysts suggest that the strength in iron ore could see a 30% benefit to earnings for both RIO & BHP in FY19. RIO has since come off in price, -4% alone, due to the rumor that Vale is about to restart one of its major iron ore mines again, thus I’d expect some weakness in the sector and in the iron ore price. However due to recent strong economic data out of China iron ore should still see prices under pinned as fiscal and monetary stimulus benefit the Chinese economy. They are also entering their summer months when environmental conditions are relaxed and steel production increases. In summary we may see some short term (3 months maybe) weakness in BHP, RIO & FMG, which could provide another entry opportunity, but overall longer term strength in the next 12-24 months.

Crown Resorts (CWN) saw shares surge 30%+ last week as it announced it had been in discussions with US based Wynn resorts to take over CWN for $14.75 per share or $10bill in total. However the very next day Wynn Resorts terminated discussions with CWN citing that it was disappointed these discussions were made public as soon as the companies were in very early talks. As a result CWN shares fell 9% that day. It is thought that there is another conglomerate looking at making a bid for CWN, hence keeping shares elevated even though Wynn has pulled their bid. We have little to no exposure to CWN in our client base, but it may put some bullish sentiment behind the sector in the short term. Stocks such as Reef Casino Trust (RCT), Star Entertainment Group (SGR) and Skycity Entertainment Group (SKC) have all seen handy ticks up in share price over the last week. There may be an opportunity there, which we are currently looking in to.

So what is our next move after our successful BHP & RIO trades in 2019? Most of you would already know and been contacted regarding this, but we have since moved most suitable clients into Macquarie Group (MQG), highest entry being a touch under $126. This has worked well for us thus far with MQG trading above $134 a share as of yesterday. The investment hypothesis behind this is MQG is reporting its full year results on 4th May. Historically MQG has a very bullish run up leading into results, as we have started to see. MQG have announced they expect to see 15% lift in profits FY19. This should lead to a final dividend of approx. $3.60 per share (40% franked), however we would not be surprised to see forecasts beaten on the final dividend given the excess capital on MQG sheets. Plus the trend of companies offloading franking credits, due to the possibility of Labors policy change, leads us to believe that it will be a beat on the dividend. I wouldn’t expect this trade to return as well as our previous BHP/RIO plays but a 10-15% return looks possible.

I actually believe we will see a lot of these types of opportunities this year, especially if Labor do get into Government as expected. I feel the resources space will be where most of it will happen as we have a lot of companies with lots of cash, low debt and high levels of operational cash flow. We have already seen it with BHP, RIO & FMG and I expect we could see it happen again with them come August’s reporting season. Also keep an eye on the following companies who fit that bill and could produce those extra dividends: South32 (S32), Woodside Petroleum (WPL), Santos (STO), Mineral Resources (MIN), any of the mid-cap Gold producers, Iluka (ILU) and Alumina (AWC).

The XJO is looking very bullish from a technical point of view at this point in time. It’s forming an ascending triangle and looks set to break out and test our highs last year around 6,350, maybe as soon as next week. Higher highs and higher lows are being recorded which are always favorable for another possible move up. Generally we have some sideways to down movement in May/June before a rally mid-July before earnings season. The talk from financial analysts is they expect a trade deal to be announced in early May between the US & China, this could be a catalyst for equity markets to rally during this time. It is also possible that this has all been factored into markets already given our rally to start the year, so it will be a wait and see approach before getting too excited. I would still expect our markets to be a lot higher come the end of the year, given the health of the US economy and green shoots showing up elsewhere.

Well that does it for the first Weekly Wrap of 2019. We have a lot of quarterly production reports out this week so there will be plenty to talk about in our next edition. The Easter holidays are upon us so please note the Australian markets are close Friday 19th April & Monday 22nd April. We also have ANZAC day next Thursday which will see the markets closed again on 25th April.

I am also going on a mini holiday as well next week as I am going away with the family to Port Elliot on Monday 22/4 and returning Friday 26/4. I am taking my laptop with me, keeping an eye on markets, and will be available to clients during this time if you need to place trades. Any catch ups or major administration issues will need to be left until the week after. As there are only 3 trading days next week I expect it will be a quiet one as many people are taking advantage of using only 3 days annual leave to get 10 days off situation.

I aim to get another Weekly Wrap out to you early next week despite being away. I will try and get the majority of it done over the weekend. I hope you all have a wonderful Easter Long Weekend and please remember to stay safe out there on those roads. We see way too many unnecessary accidents on our roads at this time of the year. I look forward to speaking with 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.