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Weak economic reports pressured US stocks after the market's recent run of gains, and a drop in healthcare shares added to the bearish momentumMORE >
Australian shares have finished higher despite a drag from the energy sector weakened by coal exports to China.
Friday, 22nd February, 2019
The ASX200 index finished up 28.1 points, or 0.46 percent, at 6,167.3 points, while the broader All Ordinaries was up 27.3 points, or 0.44 per cent, at 6,241.9.
The Aussie dollar is buying 70.92 US cents from 71.62 US cents on Thursday. The dollar climbed its way back from a sudden overnight drop following media reports that customs had halted Australian coal imports at five harbours in northern China, after Federal Treasurer Josh Frydenberg told ABC radio there was no ban in place. Nonetheless, shares in mining giant BHP closed down half a percent at $37.69 at the close of market, while fellow coal miner New Hope fell 3.5 percent to $4.08.
The ASX closed up 1.67 percent for the week and has now climbed higher in five of the last six sessions, thanks in part to companies reporting their earnings.
One of the biggest movers was NetComm, which surged by 50 percent to $1.065 after the internet company confirmed a $161 million takeover bid by US tech company Casa Systems. NetComm shareholders will receive $1.10 a share. Also reporting on Friday was Invocare, which saw shares rise 12 percent to $14.09 despite reporting a near 60 percent fall in first-half profit.
Of Australia's four big banks, Commonwealth Bank was up 1 percent and ANZ rose 0.65 percent while NAB and Westpac ended flat.
|Equities / Fixed Interest||Close||Change||% Change|
|Currency||Close||Pts Change||% Change|
|$A vs $US||0.7099||-0.0008||-0.12|
|$A vs GBP||0.5448||
|$A vs EUR||0.6261||-0.0006||-0.09|
|$A vs YEN||78.62||-0.06||-0.07|
|$A vs $NZ||
ASX 200 Follows the Script
The Christmas 2018 blog was issued on Christmas Eve, because your diarist felt that that was close to the bottom of the ASX 200 correction of 11.2% which had occurred to 5642, having previously reached 6351 on 30th August. In the Christmas / New Year postscript issued in early January, the ASX 200 had recovered to 5800 and yesterday following a relief rally after the Hayne Royal Commission report, the market reached 6000. That’s a 9.7% uptick from the Christmas Eve low, delivering a useful restoration of value to client portfolios.
The March 2009 low was also strongly recommended by the firm and proved to be the low after the 2007 global financial crisis. The recovery was relatively quick with the ASX 200 recovering from a low of 3304 in March 09 to 4763 by September 09. The reason we and our clients find it easier to predict bottoms rather than tops is that when one spends several hours each day reading independent research reports, having morning meetings, having company visitations and webcasts etc, all of that activity is directed to understand the value of the companies we invest in. When those companies then trade at a discount to value, that makes them interesting investment propositions. And when enough of those companies are trading at attractive valuations, and there are a number of market related issues leading to a fall in the whole market, it makes sense that we are better able to predict bottoms than tops.
In the Christmas 2018 blog, Bank of Queensland (BOQ) was noted as a stock trading under $9.50 on a fully franked dividend of 8%. BOQ is currently trading at the $10.50 mark, that’s an 18% return (including dividend) in a short period of time.
The January blog submitted that the Hayne Royal Commission was a ‘sell the rumour, buy the fact’ event. I.e. bank shares had moved down prior to the Feb 1 report. We recommended astute investors to ‘Buy prior to the report date. There are a number of good buys across the market in Australia, some of which are noted in this Bourse. Likewise, the corrections overseas are providing selective buying opportunities.’ Consider Westpac. Even in 2015 when the banks fell from the high $30’s to around $30, Westpac held this level despite ANZ and NAB falling to around $25. Westpac has a market capitalisation of $90B. At $30 that’s $3B for each $1 market price fall. During the Hayne Royal Commission period, Westpac fell from $30 to $28, $6B reduction in market capitalisation. It then fell from $28 to $26, $12B down. Finally a couple of days before the release of the Royal Commission report, Westpac was trading at around $25, $15B reduction. Nothing that Hayne would write in his
report would cause a loss of $15B in market value for Westpac. While there has been some recovery after the report, today’s value in the range $26- $26.50 looks short of fair value (FVE).
So what are the banks worth? The sector that has particularly copped a change in its value is mortgage broking, with the commission failing to understand that over 50% of Australians go to a mortgage broker, because they get a better price and better service. While I was initially shocked by that 50% proportion, talking to several of our staff left no doubt about that view. Thus the Hayne Commission Report recommendations adversely against mortgage brokers are not in the best interests of the consumer. However mortgage brokers being treated as the fall guys is positive for the banks, if they pay less in trail commission to mortgage brokers. On the other hand the more significant issue is that there are a wide range of breaches of duty by the banks, insurers and superannuation funds which some legal firms will be considering in great detail. Evidence in the UK from these types of remedial issues is that they cost much greater amounts than initially anticipated and go on for much longer.
In your diarists view, it is prudent to reduce current bank FVEs by at least $1 for their remedial costs. This contrasts with an independent research report on ANZ this morning which has held the FVE at $29.
A final word on the last two months is that the market has reminded us that we need to look for value and not sentiment. That is not to say sentiment is irrelevant, because sentiment can hold overvalued markets at high levels for much longer than would be justified on the value basis. ‘The trend is your friend’ is the old adage. The US market is a case in point having the best January in 32 years. US monthly new jobs were up 304,000 (a very positive number for non-farm payrolls). Some wage inflation is starting to appear with 3.4% AHE (average increase in hourly earnings) year on year. The US 10 year bond ticked back up to around 2.7% and a number of commentators are saying the US on a valuation multiple of 16 times is not overly expensive, although one should rotate to value stocks now that imminent interest rate rises are off the table.
The US market highlights that it is more difficult to pick highs than lows because stocks buoyed on by sentiment will trade above fair value for a long period of time, as happened in 2000. And not all stocks are trading in that way, which makes it harder to sense the total market, particularly where it is as large as the USA.
Your diarist sees the elephant in the room in the US as the reduction in the tax rate from over 30% to 21%. Ultimately this is unsustainable and adds to the trillion dollar deficits in the USA. But the reversing of these tax cuts isn’t on the agenda in New York and being myopic, US markets may be the last to realise that some reversal of these tax cuts is inevitable and if the US market hasn’t corrected by then, it is difficult to see how it could sustain such a reduction in free cash flows to New York listed companies.
Returning to Australia, Paul Bloxham, Chief Economist HSBC addressed a FINSIA Economic Indicators lunch on Friday 1st February at the Brisbane Convention Centre. Paul has a positive view on Australian economic growth for the current year, including agreeing with the view that construction will move from commercial and residential property to infrastructure. In respect of resources, he noted that while a slowing in China is in the first instance consistent with less demand for coal and iron ore, that what a number of commentators have missed is that China has shut in a deal of their high cost / low grade production because of their objectives with respect to the environment. The shutting in of that high cost production means that Australia with its low cost and high quality production continues to benefit from strong tonnages and strong prices for its key commodity exports to China.
With respect to house prices, Bloxham said research showed that a material house price correction has never occurred in his experience when employment and incomes were growing, as is the present position in Australia. His conclusion was that a healthy correction to Sydney and Melbourne house prices was more likely than armageddon.
Australian elections should be viewed against the backdrop of a balanced Australian Government budget, courtesy of tax collections from the mining industry. Bloxham sees that backdrop resulting in spending commitments from both sides of politics, several prior to the NSW State elections. These spending commitments will be a plus for Australian GDP.
So there remains much geopolitical noise, as Paul said, that is what it is, noise. There are no known black swan events or X factors in Australia and so companies should continue to be valued on fundamentals in line with earnings, business models and management.
The overseas backdrop remains more challenging with geopolitical issues in the USA, Brexit in Europe and the China / US trade war. No doubt these issues will produce some further volatility, but what we can do as investors is what we do every day; understand the value of the companies we’re investing in and where independent research and other information points to a good value buying opportunity, such as Bank of Queensland or Westpac over recent months, then don’t let negative sentiment, which has led to the lower price, get in the way of some good buying.
And if portfolios had no losers, the returns would be higher. So time should be allocated to reviewing losers perhaps being more prepared to take a small loss – sometimes the market knows best. Burrell’s stop loss service may be a useful tool.
Happy Investing for 2019.
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