From Jonathan Bayes, Investment Consultant, Bentleys Wealth Advisors.
We have a nice rally underway today, which should leave the ASX200 flat or even up a little on the week, but all the same the notable trend for the week again remained the underperformance of Australian shares against their foreign counterparts.
Since the start of June, the ASX200 has underperformed the U.S S&P500 by -3% in constant currency terms, and this is the continuation, and even escalation, of the same, pervasive trend we have seen for much of the last few years.
I am sure I sound like a broken record, but the trend remains a strong one and this move comes in large part due to the falling Australian Dollar, which this week is under 75c and just off a 12-month low.
Magellan Financial Group (MFG) upgraded to BUY
Interestingly, we added Magellan Financial Group (MFG) to our recommended Australian equity holdings this week, in large part due to improving performance within the group’s flagship Magellan Global Equities fund – also a stalwart of our international equity recommendations.
We have some good history with MFG and we think they are an extremely well-run business. Since mid-2014, the stock has grown funds under management three-fold from $20bn to be $67bn currently, and its share price has risen from $13 to as high as $29, settling recently at $23 or under.
We think MFG looks good value here at 15x 2019 earnings numbers, which is a little cheap against the ASX200 currently, but we think MFG is increasingly likely to see analyst earnings upgrades from improved performance within its global equity franchise.
In recent years, MFG’s core portfolios have held large cash weightings and this has held back their ability to outperform the international benchmarks. Indeed, they still hold almost 20% of the core global portfolio in cash, but in spite of this, the fund has recently begun outperforming its relative peer group again due to excellent stock-picking.
This return to outperformance leaves MFG prone to earnings UPGRADES of substance if continued.
In a market craving sensibly priced earnings momentum, MFG stands out as a rare BUY to us.
Other movers this week – Afterpay (APT), Telstra (TLS), APA Group (APA), APN Outdoor (APO)
APT is up another +13% this week, taking the gains to 60% in 2 months since we added it to the recommended portfolios. The driver this week has been its planned inclusion in the ASX200, and this has forced fund managers focused on this benchmark to add to positions.
We think APT is a stock that can still double from here, but suggest the recent surge is likely to peter out in the coming months as the market digests the exciting new rollout of its Afterpay service in the US.
TLS bounced +8% this week for a few reasons, but the headlines will tell you it was driven by the JP Morgan upgrade to BUY and new target price set at $3.30. We don’t dispute this fact and naturally we are happy with the short-term bounce in what we believe to be an oversold and cheap Australian blue-chip stock.
Next Wednesday TLS hold their annual investor day and the market is hopeful we see a more definitive strategy around cost-out, mobile strategy – particularly in relation to pricing and 5G network rollout – and also potentially news insofar as the potential for balance sheet/asset restructuring.
I think the JPM target price of $3.30 is a good one for now, and sets a realistic assessment of the potential in TLS when compared to the ongoing deterioration being inflicted on its core business from mobile competition and the NBN.
APO surged to $5.90 this week, allowing us the good fortune to suggest TAKING PROFITS before being asked to put our hands back in our pockets to help the group fund their acquisition of street furniture advertiser, Adshel, for $500m.
We recommended APO back in January at $4.80 on the belief that the company had good upside earnings leverage to the improving domestic economy. Though the stock then fell further, to as low as $4.20, we were vindicated in our view when APO announced a 6% upgrade to core 2018 earnings guidance last month.
At $5.90 APO now trades closer to a fair value multiple of 18x, but with questions swirling in our head over the price and reasoning behind the takeover of Adshel, and the need for a capital raising if completed, we think it prudent to take our +20% or more profits achieved in the last 5 months.
APA was the subject of a surprise takeover bid this week, with CK Infrastructure (part of Hong Kong billionaire Li Kai Shing’s sprawling group) tabling an indicative bid of $11, well above the traded price of $8.30.
The bid certainly surprised me, but it will take some work getting through the FIRB and ACCC given CK Infrastructure’s $13bn acquisition of gas pipelines business Duet Group only last year. The share price at $9.76 is well under the $11 indicative bid level tabled, and indicates a significant skepticism from investors as to its likely success.
Whilst it is uncertain whether APA goes through or not, the first thing I thought when I saw the bid was how the pool for local equity investors continues to shrink. With the banks on the nose at 7-year relative lows to the ASX200, investors continue to bid up those large, liquid franchise shares outside of the bank sector to record valuations as their way of playing the local share-market.
This strategy is fraught with danger. Clearly the woes of ANZ, Westpac (WBC), Commonwealth Bank (CBA) and National Australia Bank (NAB) shouldn’t make the likes of CSL (CSL), Woolworths (WOW) or Wesfarmers (WES) a more highly-valued company, should they?
Yet this is precisely what is happening.
Central Bank news – Fed raise rates & the European Central Bank confirm the end of QE
This week the US Federal Reserve raised rates for the second time this year, and the voting members seemed to confirm expectations that they would raise rates a further 2x in 2018. This isn’t revelatory, but it does confirm the Fed plan to stay the course with hikes and balance sheet tightening, and that means that the cost and availability of US and indeed global credit will rise and tighten.
At some point, sooner than later, this will bite on the strong economy or more likely, on financial assets.
In Europe, the ECB confirmed plans to taper their purchase of European bond markets from October when the monthly purchases will fall from e30bn a month back to e15bn, before ceasing altogether at calendar year end.
Just like the Fed tapering, this removal of liquidity and stimulus will push yields in the Eurozone higher and will restrict access to capital as we enter 2019. There is little value in denying this.
Have a great week.
Friday 10am values
|S&P / ASX 200||6017||-40||-0.7%|
|Property Trust Index||1399||–||–|
Thursday Closing Values
|U.S. S&P 500||2782||+12||+0.4%|
Key Dates: Australian Companies
|Mon 18th June||Div Pay Date – NABPB, SUNPE, SUNPF, SUNPG
|Tue 19th June||N/A
|Wed 20th June||Div Pay Date – ANZPG, ANZPH, NABPA, NABPE
|Thu 21st June||Div Ex Date – WBCPG
|Fri 22nd June||Div EX Date – WBCPF, WBCPH
15th June 2018, 1pm
For more information on the above please contact Bentleys Wealth Advisors directly or on 02 9220 0700.
This information is general in nature and is provided by Bentleys Wealth Advisors. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.