From Jonathan Bayes, Investment Consultant, Bentleys Wealth Advisors.
Well, I’ll admit to feeling slightly relieved with some of the moves we saw in markets this week.
Though the Australian share-market is down only a shade over 1% for the week, action amongst the stocks and sectors made a significant shift from previous trends.
The big miners continued their recent fall, but joining them were the mortgage banks, led by ANZ (ANZ), who also fell over 3%.
Conversely, small cap companies began to show some signs of life too, and even Telstra (TLS) saw its share price rebound this week.
Perhaps the winds of change are upon us?
In the case of the miners, the continued glut of iron ore at Chinese ports is pressuring prices, with spot iron back at $60/ton and virtually at a 6-month low.
BHP (BHP) has fallen 20% from its highs, and underperformed the market by a similar amount since its January peak.
The proposal for BHP to collapse the dual-listed structure (UK & Australia) seems to have fallen flat, with the Treasurer Scott Morrison noting on Thursday that BHP would face civil and perhaps even criminal penalties were they to implement any change to BHP’s Australian headquarters, as suggested by the activist hedge fund Elliot.
On the mortgage banks, share price weakness is a new thing.
ANZ was certainly the culprit behind the investor reassessment, posting profit figures that showed just how competitive conditions remained in Australian domestic banking.
ANZ shares have rallied 50% since early 2016 as investors have been encouraged by plans to simplify its structure, including a reversal of its Asian growth strategy and its intent to sell off its Australian wealth operations.
These moves have worked well in cleaning up the ANZ balance sheet, bringing in much needed equity capital at a time when investors had been fretting over the increasingly burdensome capital requirements being imposed by bank regulators globally post the GFC.
This story is now well worn and ANZ are indeed now so flush with capital that pending the sale of their wealth operations in the months ahead, the bank could even consider a $3-4bn share buyback.
Seemingly less well understood however was just how significant the earnings lost from selling businesses had been, and subsequently analysts this week have been busy downgrading forward earnings forecasts by 3-4%.
When you have rallied as far as ANZ has, the share price needs earnings upgrades, not downgrades, to keep its ballast.
National Australia Bank (NAB) was a little more polished with its numbers than ANZ this week and didn’t bear quite as heavy a sell off as ANZ.
Like ANZ, NAB struggled with revenue growth, but it surprised the market with better than expected cost performance and capital generation.
Interestingly in both ANZ and NAB’s results, ‘past-due’ arrears (late repayments) crept up during the six-month period, indicating an early sign of rising credit stress.
Both Commonwealth Bank (CBA) and Westpac (WBC) will report on their trading performance next week, and we shouldn’t expect any major points of difference in those results.
We continue to feel pretty strongly that Australian mortgage banks look richly valued and prone to bouts of renewed negativity as Australia’s housing market begins to cool.
The mortgage banks are fully-valued and don’t price in any potential threat from rising bad debts associated with a housing market pull-back.
They also haven’t priced in any risk of a loss in Australia’s AAA sovereign credit rating next week, which if it were to occur, would ratchet up borrowing costs for the country, the sector and ultimately us.
I raise these manifold issues every week.
Macquarie Bank (MQG)
Last year we encouraged investors to switch part of their Australian mortgage exposures away from the ‘big-4’ and into MQG, initially on the basis that MQG was undervalued, then continuing with this position based on the belief that MQG is better positioned for not only a slowing in local housing, but also for likely U.S legislative changes in the wake of Trump’s election victory.
We have been rewarded in recent weeks with MQG outperforming the sector by +9%.
Driving MQG’s outperformance this week were today’s 2017 profit figures, which beat analyst expectations by around 5% and included a surprisingly strong dividend.
MQG share are now within spitting distance of their all-time highs ($97) made almost 10-years ago to the day, and we have to say, do look quite fully-valued.
However, unlike the mortgage banks, MQG does not have the sword of Damocles hanging over their head in the form of household debt the way Australia’s ‘big-4’ does, and for this reason it remains very much our preferred bank.
WOW were a little frustrating again in share price terms, falling -1% on the week in spite of some fantastic supermarket sales momentum.
The stock initially rallied on the news from WOW that its much-watched measure of same-store sales rose a strong +4.5% in the third quarter, eclipsing market expectations for a +3% rise.
WOW are still investing heavily in the supermarket turnaround and did warn that margins would continue to be impacted in its second-half profit figures, so perhaps this is the point of disappointment, as well known as it should be.
Either way, we remain very happy with the turnaround being effected by WOW management and feel very confident that earnings momentum is positive in the months to come.
Australian shares in global context
This week shed more light on Australia’s narrow share-market.
With bank results disappointing and falling commodity prices crippling investor appetite for miners, it makes for a tricky market.
In the last few days, Australian shares have underperformed their U.S peers by almost 4% when you take into account the fall in the Australian Dollar too, and are now back at their lowest level year-to-date when compared against the U.S sharemarket.
Another little win in TLS this week, albeit the stock is still early in its journey on the road to redemption.
Today the ACCC ruled that it would not order ‘wholesale domestic mobile roaming’, which in laymen terms simply means that TLS and the other mobile telecoms operators will not be forced to make available their mobile networks to third parties at regulated (ie low) rates.
This is a win for TLS and will alleviate some initial concerns investors have had over the pace in which TPG (TPM) plan to enter the mobile market.
We advocated for a trading BUY on TLS a fortnight ago when the stock was pole-axed down to $4.00 as it emerged that TPM had paid a substantial price for some key mobile spectrum, effectively confirming its intention to become Australia’s 4th mobile operator.
The stock fortunately has rebounded +10% in that period, and we think in the very near-term the stock can go further.
Next Week – the Federal Budget
Obviously next Tuesday is a huge day in Australian financial markets, and as usual we will endeavor to have our thoughts and remarks through to you post-haste on the Wednesday following Budget night.
Whilst a lot will be made of potential policy, the really important issue will be what the credit ratings agencies think of the country’s fiscal position.
Already this week the Australian Dollar has fallen to a 6-month low, perhaps in anticipation of the possibility Australia was to lose its coveted AAA sovereign credit rating.
If we lose the rating, share prices will pull back a little further, mainly because of the knock-on effect to borrowing costs for the government and the banking system, but it shouldn’t be anything worse than what I have already warned on insofar as domestic bank exposures investor portfolio’s over-reliance on local shares.
I guess we’ll have to see, but as I say, it will be an important few days for the country and its investment markets.
It was a busy week internationally with eyes fixed on a marginal slowing in both Chinese and U.S economic growth.
Manufacturing surveys released in both countries this week pointed to a moderate deceleration month-on-month, but in China the concerns are slightly more elevated since the slowing in China seems to be stemming from tighter policy and the resultant impact on financial system liquidity.
In corporate profit terms Apple (AAPL) were a little disappointing, at the margin, but they tempered any disappointment with an increase in their capital return program.
Facebook (FB) interestingly posted some good figures, but did their best to warn investors that the social media platform was now near saturated in terms of its ability to offer additional advertising content to users without then impacting the user experience.
It’s interesting that FB themselves are flagging investors to be realistic on the recent rapid pace of revenue growth, and we could well look back in the months ahead that this was a clear catalyst for the stock and its peers to consolidate lower after their spectacular gains.
Thursday 11am Values
|S&P / ASX 200||5864||-43||-0.7%|
|Property Trust Index||1417||+1||+0.1%|
Wednesday Closing Values
|U.S. S&P 500||2390||+1||–|
Key Dates: Australian Companies
|Mon 8th May||Div Ex-Date – ANZ (ANZ)|
|Tue 9th May||AUSTRALIAN FEDERAL BUDGET RELEASE
|Wed 10th May||Div Ex-Date – RESMED (RMD)|
|Thu 11th May||Div Ex-Date – WBCHB, SUNPD|
|Fri 12th May
|Div Ex-Date – WBCHA|
For more information on the above please contact Bentleys Wealth Advisors directly or on 02 9220 0700.