From Jonathan Bayes, Investment Consultant, Bentleys Wealth Advisors.
Reporting season has now largely come to an end. Looking forward, investors will again re-focus themselves on the macroeconomic outlook in the coming months.
Globally the big focus will be on the March Federal Reserve meeting (March 16th) in the U.S. with an increasingly real prospect for interest rate tightening then.
Locally, the economic data is mixed as I have said numerous times before. This week’s decision to reduce penalty rates for casual workers is another knock to consumer confidence, and could precipitate additional weakness in consumer demand near term.
Equities have rallied significantly since the US election and are +9% higher since November 11th.
Australian equities have outperformed bond indices by +15% in that time, and it would seem fair to expect some consolidation.
Miners and banks have led the market, but in recent days, the mining sector has begun to consolidate.
Chinese iron ore and steel inventories are significantly higher than they have been in recent years (iron ore is at a record, Chinese finished steel inventory is at a 3-year high), and now is seasonally the time when end-users in China begin to drawdown on inventory, alleviating end-demand for steel and its inputs.
Banks too are back at their highs. Results from the sector were fine, and credit quality was a notable standout, but revenue growth remains elusive.
Commonwealth Bank (CBA) is now back offering only a <5% dividend yield and on 15x P/E despite the absence of earnings growth in the coming 2-years.
I guess the question again becomes, ‘where’s my upside as an equity investor?’
It is a question I regularly pose on Australian shares, and with the market at its highs, it is again pertinent.
The weight around our legs – lack of earnings growth
I am constantly asked why our market has not recouped the highs of 6800 it reached back in 2007, and yet the US market is some 60% or more higher and there’s a really simple answer – we aren’t innovating and we aren’t growing.
Australia’s market is and remains dominated by banks, miners, and a couple of cozy duopolies.
On Macquarie Bank’s estimates, Australian shares excluding the banks and property trusts will demonstrate virtually no earnings growth between 2017 and 2019.
What makes it a potentially dangerous market in the longer term is that it is still incredibly ‘over-owned’ by domestic investors.
Again, this is a well-worn case I have made and will continue to make.
We are the fourth biggest pension market in the world, but our share-market is only the 13th biggest.
Australia’s share-market value comprises only 1.5% of global share-market values.
And yet Australia’s low-growth blue chips dominate domestic superannuation portfolios.
Being ‘over-owned’ tends to make our shares expensive.
In trying to cram all of our pension savings into the domestic share-market and to accumulate cherished franking credits, Australian shares trade expensively in spite of their absent growth.
Many large Australian companies, including some we own, trade well over 20x earnings in spite of tawdry earnings growth.
Yet offshore, you can buy big-pharma companies for 14-15x earnings, consumer brands, banks and technology names all at a discount to Australian multiples.
Facebook (FB) trades on 20x 2018 earnings as an example.
This is precisely why Australia’s Future Fund holds only 7% of its portfolio in Australian shares.
Look, the simple point to note after this reporting season is that earnings growth (excluding the miners bounce) still remains hard to come by locally, and until that changes, Australian shares are going to continue to lag their offshore peers.
This is going to be a long-term and highly relevant theme, and we will continue to bang the drum on this for as long as it remains pertinent.
Corporate Profit results this week
Crown Resorts (CWN) were a pleasant surprise this week.
Operationally CWN continue to suffer from a drought of VIP patronage in the wake of staff arrests in China, and the main floor at Crown in Melbourne is absent growth from regular ‘grind’ gamblers.
However, more interesting was the volte-face in corporate strategy, with CWN declaring a focus on its domestic Australian assets and a desire to reap the cash flows they continue to provide.
Having sold much of their Macau stake late last year, CWN declared an 83c special dividend (60% franking, making the grossed up value $1.04) and an intention to pay 60c annually (60% franked).
It also announced a $500m share buyback, which at last price of $12.40 is worth over 5% of the company.
The shares go ex-dividend on Wednesday next week.
We think shareholders will reward the company with this new change in strategy. CWN will become a domestic casino property play with low gearing and a 5%+ dividend yield going forward.
SEEK (SEK) reported sound profits this week too. We feel really strongly that this is a stock for portfolios in the coming 12+ months.
Regis Healthcare (REG) was another positive result this week, and though the shares are today flat, they are indeed +4% higher on the week.
REG delivered strong and sound profit figures and though 2018 profits will be impacted by tightening government reimbursement thresholds on aged-care services.
Woolworths (WOW) were also solid and the shares are beginning to really work as an investment.
WOW Food operations are hitting their straps in terms of customer and staff engagement and cost-of-goods efficiencies. Second quarter like-for-like sales growth of +3.1% was well ahead of analyst forecasts.
Cash-flow generation was another constructive feature of the results, and but for the continued disappointment of Big W profits, WOW profits would have been even more impressive.
WOW has outperformed the market by +12% since December and we think there is further upside to $28 before we would look to trim holdings.
Rounding out a week of constructive results, QUBE Holdings (QUB) and Woodside (WPL) delivered in-line figures.
Having had a more fortunate week on results in the most part, I left the one blight on portfolios until the end.
Blackmores (BKL) continue to be confined to the naughty step, and were down -12% on the week.
I concede we have been too early on BKL and regret that positions are under water; however, I remain firmly confident that BKL is closer to turning a corner operationally than it has been in 12 months.
In this week’s BKL results profit and sales figures were actually in-line with analyst forecasts; however an extension of its inventory issues from mid-2016 saw cash-flows deteriorate as BKL were forced to pay suppliers for over-ordered stock.
This will ease in due course.
As a result, I feel the sell-off this week was overdone, and we may choose to add to BKL holdings at $100. In fact, the CEO Christine Holgate chose to do much the same, buying over $100,000 worth at $104.
Stay the course.
I think that rounds out my comments on the reporting season.
There are quite a few companies we are looking at with a view to perhaps adding them to portfolio’s, much like what we did with SEEK. Again, price is vital.
One name that stands head and shoulder above the rest, but regrettably we recommended well above here, is Mantra Group (MTR). If you have not bought that yet, you got lucky, but you should take a closer look here.
MTR trades 14x 2018, has a terrific balance sheet and concerns around its CBD hotel portfolio should now start to lift as corporate spending stabilizes.
The resorts business is going gangbusters and ought to continue to do so.
International News
The main news from offshore this week came in the release of the minutes from last month’s Federal Reserve meeting.
The minutes revealed an ongoing belief in the constructive recovery in US economic confidence, and signaled the March meeting as being a highly contentious one.
We have had some real strength in US economic data in recent months, so I would think it is an increasing likelihood that the Fed raise rates a third time at the meeting on March 16th.
Late in the week in the US, there was some negativity around the pace of implementation for Trump’s ambitious infrastructure plans, and this caused some profit-taking in US heavy industry names such as steel and construction. An article suggested that with such a heavy legislative workload, the Trump administration might defer the infrastructure plans until 2018.
In Europe this week government bond markets continued to worsen as fears heighten into the lead up to elections in Holland (March) and France (April). Spreads on bonds in France and Italy particularly have worsened significantly on concerns an anti-European candidate might assume power.
This is clearly something to watch for in the coming months.
Friday 11am Values
|
Index |
Change |
% |
|
|
All Ordinaries |
5799 |
-56 |
-1.0% |
|
S&P / ASX 200 |
5750 |
-59 |
-1.0% |
|
Property Trust Index |
1368 |
-5 |
-0.4% |
|
Utilities Index |
8143 |
-152 |
-1.8% |
|
Financials Index |
6663 |
-49 |
-0.7% |
|
Materials Index |
10021 |
-397 |
-3.8% |
|
Energy Index |
9029 |
-97 |
-1.1% |
Thursday Closing Values
|
|
Index |
Change |
% |
|
U.S. S&P 500 |
2364 |
+17 |
+0.7% |
|
London’s FTSE |
7271 |
-7 |
-0.1% |
|
Japan’s Nikkei |
19371 |
+23 |
+0.1% |
|
Hang Seng |
24115 |
+7 |
– |
|
China’s Shanghai |
3251 |
+22 |
+0.7% |
Key Dates: Australian Companies
|
Mon 27th February |
Div Ex-Date: AGLHA, WBCPD, Coca Cola Amatil (CCL) |
|
Tue 28th February |
Earnings: Harvey Norman (HVN) Div Ex-Date: Bega Cheese (BGA), Insurance Australia Group (IAG), NABPB, Navitas (NVT) Div Pay-Date: Ardent Leisure (AAD), Charter Hall (CHC), Dexus (DXS), Scentre Group (SCG), Westfield Group (WFD) |
|
Wed 1st March |
Div Ex-Date: Crown Resorts (CWN), Telstra (TLS), NABPA Div Pay-Date: ANZPC, ANZPD |
|
Thu 2nd March |
Div Ex-Date: Bendigo Bank (BEN), Bluescope (BSL), Fortescue (FMG), Woodside (WPL), Woolworths (WOW) Div Pay Date: Magellan (MFG) |
|
Fri 3rd March |
Div Ex-Date: REA Group (REA), Treasury Wine (TWE), CWNHA, CWNHB |
For more information on the above please contact your Bentleys Wealth Advisor directly or on 02 9220 0700.
