From Jonathan Bayes, consultant Chief Investment Officer, Bentleys Wealth Advisors
Another yo-yo week with little to catalyze fresh market direction.
From an administrative perspective, this is our last ‘Weekly Market Update’ and we will resume again in 4 weeks.
Australian ‘technical’ recession a possibility
Not to fear-monger, but I would remark that I think there is an increasing chance we see a ‘technical recession’ in the year ahead having seen a deterioration emerging in Australian business confidence on account of the credit contraction.
The November NAB Business Confidence survey this week saw confidence fall to a near 3-year low with forward order books deteriorating and credit availability unsurprisingly deemed to be at its worst in 6-years.
Consumer confidence (also released this week) is yet to drop away, but it seems highly likely that it will if businesses continue to ease up spending/job openings until the uncertainty of May’s Federal Election is resolved.
The Royal Commission inspired ‘credit crunch’ is now branching out into the wider economy, so much so that I’d note the Council of Financial Regulators (APRA, ASIC, RBA and Treasury) discussed this week that an ‘overly cautious approach by some lenders incorporating relevant laws and standards into the loan process may be affecting lending decisions’.
The liquidity tap, which we have discussed virtually every week for a year or more now, is running dry.
With the Royal Commission into financial services likely to hand down its findings in February, it’s unlikely we will see any easing in lending conditions before then. With that in mind, it seems increasingly possible that Australia sees its first consecutive quarters of negative economic growth since 1991 in early 2019.
Whilst I’m yet to be convinced that the RBA will cut rates further in response, I do feel confident we will see the AUD commence its final down-leg into the 65-68c range during the first half of 2019.
Let’s see shall we.
Market Context (1) – ASX200 down -2.8% year to date
Although we might just make it back to flat, as we stand today, the ASX200 Accumulation index (which includes dividends) is down -2.8% for 2018.
Were we to close the year today this would mark the first down year for Australian equities since 2011.
Australian bank’s and financials have lost -9.4% year-to-date even after including their healthy dividends, and with earnings downgrades in 2019 increasingly likely, and certainly a dividend cut at National Australia Bank (NAB), I have to say, I think the banks are still a good 10% or so above their ultimate low.
Next week we have the ANZ and NAB AGM’s and in the first and second week of February we will get half-year earnings results at which point I fully expect to see earnings downgrades occur again in light of falling lending volumes and credit quality deterioration.
Market Context (2) – China, U.S, and Italy
We have made a lot of the political crosswinds emerging globally as being of a risk to the market, and we still feel this to be the case, however this week saw a small positive in Europe with the Italian Government seemingly ceding ground on its budget deficit target for 2019.
Another factor this week that I think we should focus on is in China, where we are now heading into a very important period for economic planning that occurs there annually between now and March.
This week and next there is a central economic working conference and politburo meeting underway which will set the tone for economic direction in 2019 in particular and comes at a crucial time in light of the ongoing trade war between China and the United States.
It’s likely we will see some additional economic stimulus and certainly policy reform, and that’s a good thing.
The Wall Street Journal this week reported that China plans to replace its controversial ‘Made in China 2025’ policy with a pivot towards fastening market reforms that would allow greater access to its economy for foreign firms, and a heavier reliance internally on domestic demand.
The policy pivot is likely to signal a willingness from Beijing to acquiesce on certain terms demanded by the U.S, and also to insulate the economy against the vagaries of global trade.
We think this is good news.
Whilst uncertain, Chinese and Asian equity markets do seem to offer more potential at current levels and so we have added exposures here accordingly in recent months within our models.
Healthscope (HSO) – a formal bid for Christmas?
Brookfield’s exclusive due diligence on HSO ends next Friday the 21st December, around which time we hope to see the group confirm its intention to formalize its proposed $2.42 cash bid ($2.55 via scheme of arrangement) for the hospital operator.
If the level of insider buying this month is any guide, a formal bid looks likely. Canadian healthcare property fund manager North West Health and sovereign wealth manager Norges Bank have both increased their stakes.
Fingers crossed we get the final resolution here.
Diversified Financials – Challenger (CGF), IOOF (IFL), Magellan Financial (MFG) and Pendal (PDL)
CGF bounced a little this week as the market digested news its second biggest shareholder and Japanese distribution agent, MS&AD Insurance, raised its stake to 10.4%.
MS&AD have said in the past they would like to own up to 15% of CGF, so this is encouraging news that they are stepping in around similar levels to ourselves in the low $9 region.
We have high hopes for CGF over the coming 3-4 years as annuities feature more widely in the Australian retirement system under the new Retirement Income Framework (RIF) legislative umbrella set to come in from July 1st next year.
IFL has obviously been a huge disappointment to us in recent weeks, but we feel is incredibly oversold, and a still highly important set of strategic assets in a rapidly consolidating financial advisory industry.
We think the board and management will be forced to change, and, with some arguably overdue contrition and understandably a likely uptick in ongoing compliance costs, the business should be able to continue on its way.
With the ANZ Onepath deal unlikely to be decided formally until as late as March 2019, IFL have several months to seek to address APRA’s requests and to ideally proceed a deal, however even if that fails IFL would be in a position to return 20-30% of its capital via buyback, and still be on 9x and a 10% dividend yield
It is hard to believe there will be significant one-off compensation payments based upon what we know of IFL’s supposed indiscretions, but I guess this uncertainty is precisely why the stock remains under $5.
As clarity on this front emerges it would seem highly possible we see IFL back in the $6-7 range very quickly.
Touch wood, because this has been a pain.
On MFG, the stock has retreated 10-15% from its highs, but the company couldn’t be doing any better operationally.
Fund flows remain consistent and performance fees look set to surprise favorably in my opinion given the excellent outperformance of its flagship Magellan Global Fund.
I feel pretty confident that we will see MFG in the $28-30 range during the 1st quarter, potentially putting us in the position of being able to consider booking a strong 25%+ capital gain.
On Pendal (PDL), whilst the news-flow isn’t particularly exciting either way, I would note that the stock trades on around 12x earnings looking out a year, with a 6%+ dividend and with some $200m in cash on its balance sheet.
I feel like the valuation is pretty sound here, and there is undeniably potential corporate appeal in the business, so it’s a stock in which I am very comfortable being an owner of.
Good luck with the Christmas shopping!
Thursday 5pm values
|S&P / ASX 200||5662||+4||+0.1%|
|Property Trust Index||1419||-2||-0.1%|
Thursday Closing Values
|U.S. S&P 500||2651||-45||-1.7%|
Key Dates: Australian Companies
|Mon 17th December||Div Pay Date – CBAPC, CBAPD, CBAPE, CBAPF, CBAPG, NABPB, SUNPE, SUNPF, SUNPG|
|Tue 18th December||Div Pay Date – ANZ (ANZ), Macquarie Bank (MQG), WBCPD|
|Wed 19th December||AGM – ANZ (ANZ), National Australia (NAB)|
|Thu 20th December||Div Ex-Date – WBCPG
Div Pay Date – ANZPG, ANZPH, NABPA, NABPE, Pendal (PDL), Westpac (WBC)
|Fri 21st December||N/A|