From Jonathan Bayes, Chief Investment Officer, Partners Wealth Group.
Ok. Brace yourself.
Maybe I got out of bed on a different side today, but on two key points of view, my thoughts are trying to become more balanced.
Some near-term (only) economic optimism
Firstly, the local Australian economy is doing a little better as each month goes by.
Building approvals are steadying after a dramatic -40% fall in apartment approvals early in 2017.
New house approvals are also recovering back to the 2-year average after a -10% fall away.
This is good news since construction is increasingly the lifeblood of our economy, something I have said time and again.
Secondly, manufacturing is picking up again too after a brief period of consolidation.
To be sure, in no way does this counter the massive structural issues Australia’s economy faces.
Australian household debt and Australia’s lack of wage growth remain a material drag on our economic potential in the medium to long term, but in the very nearest of near-terms, our economy is trying desperately to catch a modest breeze.
Australian Banks – so what about a Royal Commission
Secondly, on Australian retail banks, my near-term view is a little more sanguine than it has been in some time.
You might ask why, particularly in light of this week’s Royal Commission announcement, but the simple reason is that they have already been beaten up pretty dramatically.
The bank sector this week is at a 12-month relative low to the ASX200.
Everywhere else in the market, valuations are screeching away to 10-year highs (or near enough), but the banks are not.
The Royal Commission will undeniably draw greater scrutiny over a sector we love to hate, but it is unlikely to impact near-term earnings materially.
In the longer term, the Commission will definitely exacerbate the negative perception around the major-4 banks and further fuel the likely disruption the entire sector will face as customers increasingly find less reason to have to deal with a major bank.
The banks really aren’t much different to Telstra (TLS) or those retailers facing Amazon (AMZN) in the long term.
But in the short term, there’s not much in it.
Employment is improving and this will underpin credit quality, meaning that the banks just aren’t that bad in the overall scheme of things.
Again, just like my comment on the economy above, there are massive structural issues trending against the banks as they do the Australian economy, but in the very near term there is actually less to worry about than the headlines of a Royal Commission might suggest.
Context – important
I hope this context is clear on both banks and the local economy.
Secondly, to be very clear too, none of this makes me materially more optimistic on the local share-market.
Valuations are pushing the high end in many instances, and the risk/reward of investment has become increasingly marginal.
We like what we like, but in terms of opportunity we remain well disposed to a continued high cash weighting and we will as always sit it out until such a time as value emerges.
Seek (SEK) – a stock we love got an upgrade this week
We mentioned last week that SEK job ads were growing at their fastest rate in 12mths, and this week SEK upgraded earnings guidance by around 3% at their AGM.
Quixotically the share price fell on the news, but that shouldn’t be a concern to anyone.
The company is going gangbusters and has an extraordinarily strong growth profile from its market-leading presence in large emerging economies such as China and Brazil.
IF you didn’t get the chance to BUY SEK in the low $15’s when we recommended it, never mind, but promise me you will be the first to buy some again in the mid-$17’s if we get some market consolidation.
This stock is an out and out medium-term winner and should be in everyone’s Christmas stocking for 2018 and 2019.
OPEC and Russia confirmed an extension until year-end 2018 of the production cuts announced earlier this year. Though widely expected, this is good news and should underpin oils recent rally to 2-year highs.
Oil Search (OSH) and Origin (ORG) are both due earnings upgrades for 2018 with oil at these levels.
Importantly too, free-cash flow at both company’s looks a lot better than their headline P/E might suggest, so I think this is the start of a recovery in performance from both shares.
Telstra (TLS) – more NBN hijinks
It never rains, but it pours.
TLS this week lowered their 2018 earnings guidance modestly in response to the NBN’s announcement it was suspending sales on HFC cable for 9 months due to sub-standard quality.
The downgrade is modest and relates largely to a delay TLS will face in the receipt of its compensation payments from the Federal Government, meaning the downgrade is really one of timing.
TLS is absolutely friendless right now, but I would note that mobile competition, though fierce, is not materially worse than analyst expectations at present, and that the fear associated with entrance as a 4th mobile operator remains premised on that group agreeing terms on a mobile roaming deal with one of the majors, and that remains still far from certain.
On my reckoning, with $12bn to $14bn widely agreed as the net present value of TLS’ NBN compensation revenues, the core TLS business trades on somewhere around a 10x – 12x cash earnings multiple over the coming years, which makes it over 40% cheap to the local market.
TLS has its problems, but the share price is certainly discounting them.
Chinese manufacturing was fine last month, and early indications of US growth remain similarly solid.
The incoming Fed Chairman Jay Powell testified to the US Senate this week, giving a strong indication the status quo on rates will be maintained, and that he foresaw a reduction in the Fed’s balance sheet to around $2.5-3 trillion (from $4.5 trillion currently) over the coming 3-4 years (think that number over).
He also endorsed the idea of simplifying bank regulations for smaller banks, and of amending the Volcker-rule which significantly limits commercial banks abilities to trade on its own balance sheet.
This news spurred the US banks sector unsurprisingly.
Tax reform remains a key focus in the US, but we learned little new this week.
I’ll leave it here.
Have a great weekend. It’s December!
Thursday Closing Values
|S&P / ASX 200||5970||-16||-0.3%|
|Property Trust Index||1423||+32||+2.3%|
Thursday Closing Values
|U.S. S&P 500||2648||+51||+2.0%|
Key Dates: Australian Companies
|Mon 4th December||Div Ex-Date – BENPF, NABPA|
|Tue 5th December||Div Ex-Date – CWNHA, CWNHB|
|Wed 6th December||
Div Ex-Date – CBAPC, CBAPD, CBAPE, CBAPF
|Thu 7th December||
Div Ex-Date – BT investment Management (BTT)
Div Pay-Date – MQGPA
|Fri 8th December||Div Pay-Date – AGLHA, WBCPD|
For more information on the above please contact your Partners Wealth Group advisor directly or on 1800 333 143.