From Jonathan Bayes, Investment Consultant, Bentleys Wealth Advisors.
Another week of consolidation across markets.
Probably the main change to note this week, was the slightly more optimistic tone to come from out of China.
In response to tighter liquidity conditions brought on by greater regulatory scrutiny of non-bank lending, the China State Council held a meeting this week, the outcome of which saw a definitive shift in policy tone. Banks are being encouraged to loosen lending to government projects, and fiscal policy has been eased to accelerate tax cuts and state spending.
Asian share-markets jumped on the news, and related sectors locally, such as mining and oil, also benefited.
Elsewhere, the Trump tariff headlines continued apace, the latest of which implied a ‘truce’ between the United States and Europe. Clearly the trade rhetoric continues to twist and turn, but encouragingly none of the recent headlines have made any dent on the one thing that continues to matter most, that being US economic confidence.
Only this week, US weekly consumer confidence further gained to reach a level not seen since 2001, and it’s precisely this economic momentum which continues to underpin US and global share-markets.
Alongside the strong economy, bond yields have begun a slow creep higher and in the US are now back at a level just under 3.00%.
More interesting to me is that US ‘real’ or ‘inflation-adjusted’ yields have moved to their highest level since early 2010. The higher this number goes, the higher the standard to which riskier asset classes, such as equity, are likely to be judged.
Reporting Season has commenced in the US
In the US this week we have seen the number of companies reporting escalate, with notable headlines out on Alphabet (GOOG), Visa (V) and Facebook (FB) – interestingly three companies that comprise just under 20% of the Magellan Global Fund by weight.
GOOG shares rose +5% after results, again to a new record high, buoyed by strong growth in core search activity, particularly on mobile. Similarly, artificial intelligence is driving paid click activity to ever stronger growth, with customers appreciating the beneficial search results offered up by AI enhanced search.
Excellent momentum is also building in its next line of businesses such as Youtube, Cloud and self-driving/ride sharing subsidiary Waymo.
Facebook (FB) – peak. Has it lost its ‘cool’?
On Wednesday night, V and FB posted quarterly results. Where V were there or thereabouts, FB shares were slammed and closed down over -20% in after-hours trading due in large part to signs of a peak in platform use.
It was the first time FB had missed analyst expectations for revenue since 2015, but worse, the company guided for a faster deceleration in forward revenue growth in the coming quarters than analysts had anticipated.
In the last quarter, daily active user (DAU) numbers were flat in the US/Canada and even went backwards in Europe, the latter region being impacted by the introduction of stricter data privacy laws which lowered platform usage.
The June quarter addition of 11m new daily users is the weakest net addition rate since the company started measuring the figure back in 2011.
Around 50% of all Americans and Canadians use the platform daily (including infants and the aged) and this peaking in the US/Canadian daily user base will be hugely concerning to investors since the company makes roughly 3x per user there than they do from users in other regions.
It would seem that FB is rapidly reaching saturation point. In fact, several analysts even branded it ‘uncool’.
It will be fascinating to see how the stock trades tonight in the US, but with the decelerating rate of growth now evident, it seems unlikely we will see the sort of rapid bounce-back the stock enjoyed back in March at the height of Zuckerberg’s testimony to congress over company data policy.
Australian Reporting Season ahead
August marks the start of Australian reporting season, and next week we will see Rio Tinto (RIO) as the first notable large-cap to report profits for the 6 months to June 2018. In the following week however we will see IOOF (IFL), Transurban (TCL), Commonwealth Bank (CBA), Crown Resorts (CWN), Magellan Financial Group (MFG) and REA Group (REA) report, and then it really ramps up as we push deeper into August.
Within our core portfolio, we hold out hope for some positive earnings momentum in each of SEEK (SEK), Downer (DOW), Afterpay (APT) and QUBE Holdings (QUB).
Both SEK and DOW have already upgraded 2018 forecasts this year, and it is our hope that we similarly see optimistic forecasts set for 2019, on account of the stronger local economy. DOW has begun to show some share price momentum, and it seems investors are growing even more comfortable that the peak in Australian infrastructure spend is still around 2021-22, leaving several years of operational upside ahead.
On QUB, we feel more optimistic about pricing on Australia’s wharves and we hope this leads to earnings upgrades. Equally too, we feel like we are due some news-flow on the groups Moorebank Intermodal project, particularly given that momentum here has been slow over the past 12 months, despite the pressures it hopes to alleviate growing ever larger (south-western Sydney truck traffic).
We have made much of APT in recent weeks, and with the company having already pre-guided to a 2018 earnings figure, one shouldn’t expect surprise here. However, with the market keen to ascertain momentum within its US roll-out, the result in late August is likely to be closely watched for further data on the past months take-up by retailers and users in the US.
IOOF (IFL) – a nice surprise.
IFL jumped +5% on Thursday in response to the release of their quarterly funds under administration statement which showed an excellent end to 2018 for the group, both in terms platform flows and new funds under advice – the quarter saw IFL add $666m in new funds on platforms, and just under $2.5bn in new funds under advice.
Having been rocked this year by industry concerns related to the Royal Commission and rising compliance costs, IFL has been further pressured in recent days by BT’s decision to slash platform fees by 30-40%, and the suggestion this move sets the industry on course for a bitter period of price reduction.
Dedicated platform providers such as Netwealth (NWL) and Hub24 (HUB) have similarly been weak on this news.
However, today’s release shows IFL continues to power ahead in winning share amongst a rapidly fragmenting industry. We are comforted by today’s news and remain optimistic that the coming cost-out plans from the purchase of ANZ’s wealth and platform operation can drive strong earnings per share growth between now and 2020.
I am off for a long weekend skiing with the kids, so data and commentary this week are current as of Thursday evening.
Thursday 5pm values
|S&P / ASX 200||6244||-18||-0.3%|
|Property Trust Index||1412||-9||-0.6%|
Thursday Closing Values
|U.S. S&P 500||2846||+42||+1.5%|
Key Dates: Australian Companies
|Mon 30th July||N/A
|Tue 31st July||Div Ex-Date – MCP Master Income (MXT)
Div Pay Date – Magellan Global Trust (MGG)
|Wed 1st Aug||Earnings – Rio Tinto (RIO)
|Thu 2nd Aug||N/A
|Fri 3rd Aug||Earnings – RESMED (RMD)Div Pay Date – James Hardie (JHX)