From Jonathan Bayes, consultant Chief Investment Officer, Bentleys Wealth Advisors

Markets seem comfortable with the progress being made towards a ‘phase one’ deal between China and the U.S, which both sides hope will be able to be signed and sealed by Trump and Xi on the sideline to the APEC summit in Chile in mid-November.

The deal largely addresses agricultural trade which benefits both sides, particularly the Chinese, who are being faced with skyrocketing pork prices as stocks across Asia have been decimated by the African swine fever.

China have agreed to buy US$40-50bn of US primary exports assuming the US continues to withhold the mid-October tariff rise, however, plans for the December US tariff hike remain unknown.

Economic data released

Australian September skilled vacancies fell again last month, taking the 12mth fall to -7% annually and marking the 9th straight month of declines.

US manufacturing in October has definitely flattened out, with the Richmond Fed manufacturing survey bouncing and the provisional US Manufacturing PMI similarly posting a small gain.

Observations from the past week

Costa Group (CGC)

Costa Group shares were suspended last week pending an update to FY2019 earnings guidance.

A likely earnings downgrade is sure to come, which will be its 4th in the space of 12 months, and its more likely than not, that CGC will seek to repair its balance sheet by way of equity raising.

CGC earnings forecasts have fallen well over -20% in the past year, impacted by a variety of issues across both its local and African operations, but the group do have excellent greenfield growth ahead of them in the coming years given heavy investment since their 2015 IPO.

Having risen 4x-fold since its 2015 IPO to reach a share price peak above $8 during 2018, its highly likely that the impending news from CGC will see the stock back under $3.00.

Depending on the content of the outlook and the size of any raising, we might finally take a serious look at investing in the company for significant long-term upside.

Woolworths (WOW)

Woolworths shares continue to defy gravity, trading at near enough to their all-time high as investors continue to place a ridiculously high premium on the stock for its perceived earnings certainty.

The shares are almost certain to see downside in 2020 as the group de-merge the Endeavour Drinks business from the wider WOW group – WOW shares currently trade on an eye-wateringly high 26x future earnings and a 65% premium to the local market.

The P/E of 26x makes the stock as highly valued as it was in the lead-up to the GFC and is far from justified given its barely single digit earnings growth nor <3% dividend yield.

As investors recognize that the $10bn demerger of Endeavour Drinks will surely see Endeavour trading on at best a mid-to-high-teens P/E multiple given the maturity of its business its and exposure to hotels and gaming, that will leave the remaining WOW supermarket operation on near 30x earnings for precious little underlying growth.

WOW shares look incredibly overvalued at current levels and shareholders would do well to take advantage and SELL them here.

What’s interesting?

Australian national auction clearance rates have rebounded back to be in the 75% range, not far off their peak recorded during the house price boom of 2015-2017.

Whilst current volume is significantly lower than in that period, the rising clearance rate augers well for rising house prices and with that, a turn in domestic construction markets.

The chart below shows the national auction clearance rate in RED and the national house price index in WHITE and suggests we should again expect to see house price growth push back up through +10% annualized in the 2H of 2019.

We remain optimistic that Australia’s economy will improve as we enter 2020 and that it will be led by, at first, a stabilization in building activity and then a bounce in residential construction volumes.

We do believe Boral (BLD) will significantly benefit from the improvement and hold it as a key equity position.

 

Auction Clearance Rates lead house prices

 

 

 

 

 

 

 

 

 

 

Looking ahead

• Tuesday – US Dallas Fed Manufacturing survey (Oct), US Consumer Confidence (Oct)
• Wednesday – AU CPI (Q3), US ADP Employment (Oct), US GDP (Q3), US FOMC Meeting
• Thursday – AU ANZ Bank (ANZ) FY19 results, AU Building Approvals (Sep), AU Private Sector Credit (Sep), US Employment Cost Index (Sep), US Chicago Fed PMI (Oct)
• Friday – AU Macquarie Bank (MQG) 1H FY20 results, AU AIG Manufacturing survey (Oct), AU CBA Manufacturing survey (Oct), US Employment (Oct)

 

Beyond ANZ and MQG’s results this week locally, markets will focus on results in the US from Alphabet (GOOG) tonight and then Apple (AAPL) and Facebook (FB) on Wednesday night.

Next week Westpac (WBC) will report on Monday, Pendal (PDL) on Wednesday, NAB (NAB) on Thursday and AMCOR (AMC) on Friday.

 

Friday 5pm values

	Index	Change	%
All Ordinaries	6841	+83	+1.2%
S&P / ASX 200	6739	+89	+1.3%
Property Trust Index	1646	+31	+1.9%
Utilities Index	8233	+176	+2.2%
Financials Index	6445	+67	+1.1%
Materials Index	13030	+310	+2.4%
Energy Index	11005	+239	+2.2%

Friday Closing Values

	Index	Change	%
U.S. S&P 500	3023	+37	+1.2%
London’s FTSE	7324	+173	+2.4%
Japan’s Nikkei	22799	+306	+1.4%
Hang Seng	26667	-53	-0.2%
China’s Shanghai	2955	+17	+0.6%

 

Key Dividends

Tue 29th October 2019	Div Ex-Date – Northern Star (NST) Div Pay Date – Nick Scali (NCK)
Wed 30th October 2019	Div Ex-Date – BOQPE, NABHA Div Pay Date – Japara Healthcare (JHC), Reece Limited (REH)
Thu 31st October 2019	Div Ex-Date – Metrics Income Opportunities Trust (MOT), Metrics Master Income Trust (MXT) Div Pay Date – Rural Funds Group (RFF)
Fri 1st November 2019	Div Ex-Date – Freedom Foods Group (FNP) Div Pay Date – Harvey Norman Holdings (HVN)

 

Tuesday 29 October 2019, 4pm

For more information on the above please contact Bentleys Wealth Advisors directly or on +61 2 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.