Australian Market Summary – 9th June 2017

From Jonathan Bayes, Investment Consultant, Bentleys Wealth Advisors.
Geez, what a curious and rather depressing week.
From the horrors of the London tragedy, through the Comey testimony, and now the prospect of a divided British Parliament, it has been a volatile 7 days geopolitically.
In spite of it all, the U.S market is flat on the week.
But in Australia, things have been decidedly more tawdry.
The ASX200 is down more around -2% on the week, and only one stock (CSL) is up amongst the ASX 20 Leaders.
The recent malaise in Australian share-markets seems set to continue. Valuations are mixed, but perhaps more pointedly, the earnings outlook is beginning to darken.
Iron ore remains weak ($54/ton currently, was $89/ton in mid-February) and oil fell -4% under the weight of record U.S oil inventory and fears that the spat between Saudi Arabia and Qatar would fracture the OPEC coalition.
This leaves resources without momentum.
In the banks, the housing market is demonstrating greater evidence of a peak. Banks remain over-owned and hence remain lacking in positive impetus.
In the food retail space, it feels like there is growing concern over an uptick in price competition.
Whilst we have been big fans of Woolworths (WOW) and its restructuring, I can’t help feeling like the share has been dragged up against its will.
Wesfarmers (WES) this week at their annual strategy day alluded to a step-up in second-half customer investment within its Coles supermarket business, leading many analysts to question the margin outlook for both WES and WOW supermarket operations.
Telstra (TLS) too remains stuck in the mud with ongoing fears of TPG’s emergence as a viable 4th competitor in mobile. Though we feel this threat is overplayed, we can’t deny feeling in the minority here.
Anyways, its not be downbeat, its merely to make the point, once again, that the pond we are fishing in for idea’s gets smaller by the day.
In those previous paragraphs I just covered off 45% of the ASX200.
Offshore Fund Managers – Platinum (PTM) and Magellan Financial Group (MFG)
Speaking of the foreign funds, both Magellan Financial Group (MFG) and Platinum Asset Management (PTM) posted monthly fund flows this week, neither of which was particularly inspiring, but all the same both stocks hold interest for us given the theme.
MFG has continued to motor higher this year, but is increasingly fully valued at $27 or more with its valuation pushing 20x 2018.
The theme is a good one and MFG will continue to benefit, though it does look ever more so that the market is pricing in ongoing success.
In PTM’s case, there does seem to be increasingly latent value albeit PTM continue to see funds outflow after several years of indifferent performance across their two main funds.
We flagged PTM as a stock we were interested in last week, and were not surprised that it managed to bounce around +8% during the week after it posted strong May monthly figures in each of its two flagship funds, Platinum Asia and Platinum International.
We aren’t in a rush here and will wait for an opportune time to consider being more positive on PTM.
Headwinds for Wesfarmers (WES), but beginning to show some value.
Wesfarmers (WES) continues to be beset by concerns regarding its core Coles supermarket business and potentially the impact of a slowing housing market on its Bunnings DIY chain.
But that said, WES is now trading at a 4-year low to the ASX200 and now sits on a reasonable 15-16x forward P/E, with a forward dividend yield of 5.3%.
More interestingly, if WES are successful in their plans to sell down the group’s non-core coal division, the company will be in the enviable position of having a largely ungeared balance sheet and able to potentially buyback shares.
The stock isn’t cheap enough for us to turn more positive just yet, but do think it’s one to watch in the weeks and months ahead.
Economic data this week
We got the Q1 GDP figure and it showed annual growth of only +1.7% for the March to March year – the lowest run-rate since mid-2009.
A few breathed a sigh of relief that we still showed positive quarterly growth, but it’s a small relative win.
It feels inevitable to me that we are going to see a ‘technical recession’ in the quarters to come.
Construction is slowing, which I have mentioned enough.
Our trade balance took a dive in April, and looks set to fall into negative territory in the months ahead, leaving our export account as a negative contributor to growth.
Iron ore exports to China alone make up a whopping 20% of all of our national exports, which means we are hugely tied to the relative strength or not of iron ore prices.
When you add in related iron ore, energy and coal exports to each of China, South Korea and Japan, our reliance on commodity prices and sales to the Asian region totters up to just shy of 50%.
The RBA left rates on hold this week as expected, and surprisingly left much of the rhetoric on the economy unchanged

Personally I think the coming months we will see the RBA actively jawboning the AUD lower as a means to provide the local economy some productivity ballast.
It feels like a no-brainer, particularly given so much of the underlying support for the AUD is now going weak at the knees.
Let’s see on this.
Anyways, that’s it from me for now.
Winter down under tends to be a quiet time for markets, so don’t be surprised if it all gets a little dull in the weeks to come.
International News
Where to begin?
The result of the British election overnight seems to have thrown markets yet another curveball.
As we type it seems the Brits will be faced with a hung parliament, and a likely change in government.
The trouble with this isn’t so much the change in government, but whether a grand coalition made up of the former opposition parties (Labour and Liberal Democrats predominantly) can even form a functioning government with just 10 days to go before Britain is supposed to commence formal exit negotiations with the European Union over BREXIT.
To say it’s a mess, is an understatement.
Further complication comes from the fact that both Labour and the Liberal Democrats were forcefully in favour of Britain remaining in the European Union, which could in actual fact prove to be a positive and lead to an attempt at a ‘soft exit’ from the EU which many would welcome.
Whether the Europeans are prepared to allow the Brits a soft exit remains to be seen after the ignominy of their announced departure only a year ago.
I guess we watch this space.
The US Federal Reserve meet next week and will likely raise interest rates again on Wednesday night Australian time.

For more information on the above please contact Bentleys Wealth Advisors directly or on 02 9220 0700.