From Jonathan Bayes, Chief Investment Officer, Partners Wealth Group.
Australia regained some modest ground this week, both in absolute performance and relative to its major index comparatives from offshore.
As at Thursday’s close, the ASX200 is up +1.5% though we look set to give back a little bit today.
We are also at our highest point in 3 months, but before you get excited, this is only +3% above our lows, and still firmly within the same ~3% trading range we have been mired in since May.
This week was notable for new highs in the ASX Small Ordinaries index, which rose to a level not seen since 2011.
We have noted on several occasions the sensitivity to economic improvement that the small-cap sector has, and this is bearing fruit with continued outperformance.
Also notable this week was the surge higher in two of our preferred names, being hotel group Mantra (MTR) and supplement-retailer Blackmores (BKL), both of which led the market gainers week to date.
Mantra (MTR) – Accor takeover confirmed
In MTR’s instance, it was confirmed this week that French hotel giant Accor would acquire MTR for $3.96 in cash, pushing the stock +20% on the week.
We recommended the shares a year ago at $3.30, and like several of our medium-cap share recommendations from 2016, we were made to suffer before finally yielding the fruits of the call, and are pleased that we persisted and even added to our positions in our models.
We feel confident the deal will complete, but note that its unlikely to do so before March or April 2018 – a full 6 months away – and this is why we sent out our recommendation for holders to TAKE PROFIT in the share at $3.90 or above.
Blackmores (BKL) – running, but why?
With BKL, this week’s +11% rise is slightly more perplexing.
The stock has bounced +50% from its lows barely 6 weeks ago, and is clearly back on track following its well-publicized inventory issues from 2016.
Infant-formula maker Bellamy’s (BAL) upgraded profit guidance this week, and may have helped sentiment towards other China nutrition plays, but on the whole we remain both pleased and perplexed with the rapid ascent in BKL’s share price.
BKL have their AGM in a fortnight on the 26th October, and they will also report Q1 sales at that time. We expect it to be solid.
That being said, when we recommended BKL shares in August last year at $128, earnings forecasts were at least +20% higher than they are today, so we do expect it to become more difficult for BKL shares to push on materially higher from here.
We love the longer-term story and we think BKL earnings forecasts are arguably under-clubbed after last year’s inventory write-offs, but we do note that nearing 30x earnings for BKL does make it look increasingly fully-priced.
Perhaps near $140 we turn it. Let’s wait until then.
AMCOR (AMC) – BUY.
We are looking to BUY AMCOR (AMC) this week, and I would urge you all to take a closer look if you haven’t already.
We are talking about one of the market’s most reliable earnings growers, and that it is now on only a 10% or less premium to the market makes it far too cheap to ignore in a relative sense.
Moreover, AMCOR generated real cash-flow of substance, and not just accounting profit, surprise, surprise, making this thing a stand-out in my mind for the medium-term investor.
The stock is largely flat over the last year, not unlike the ASX200, so now is a great time to be buying it ahead of some strong share price outperformance in my opinion.
Local Economic News this Week – Auction Clearance Rates & Improving Business & Consumer Confidence
A few one-liners on the local economy this week include the continued easing in weekly auction clearance rates to 12 month lows.
Already we are seeing Sydney house prices turn negative on a yearly basis, and I would expect the trend to continue for a softer spring selling season.
Nothing to worry about unless you’re an over-levered property investor, hopefully just an orderly consolidation after 3-4 years of phenomenal growth.
October NAB Business Confidence remained within spitting distance of its decade high, though interestingly forward orders have started to tail off.
Businesses reported profitability as strong as it has been since pre-GFC which is great, but the lack of follow through to business capex is indicative of a faltering productivity.
On the consumer side, the Westpac Consumer Confidence index bounced nicely this month which is good given the weakness felt across discretionary spending in recent months.
Within the data the encouraging takeaway was that consumer expectations are on the rise, and of further note too, Western Australian confidence has really rocketed ahead, having been at a 2-year low in July to now being at a 3-year high by October!
US Economic Data this week throwing off conflicting signs
Where this week’s data locally proved to be incrementally positive, the data out of the US this week seemed to be going in the opposite direction.
We all know that the US economy is cooking with gas right now, that employment is full and that both service and industrial sector activity is back at pre-GFC levels, so it was of interest to see both consumer confidence and small business confidence fall further in recent weeks.
Weekly Consumer Confidence in the US has fallen to a 3-month low, but much more importantly, Small Business Confidence has fallen to its lowest level in 2017.
Small Business Confidence is so important because it is the life-blood of America’s economy, and the driver of employment.
When Trump was elected on a platform of reforms aimed at making it small business more profitable, the economy took off (as you can see from the spike in the red line post the election in November 2016), but his inability to effect real change is now starting to become a problem.
If his recent tax proposals fail to pass, or indeed are watered down in effectiveness, then the US share-market will most certainly dip alongside a disappointed electorate.
This is key stuff and one of our major concerns leading into the end of 2017.
Finally, creating further confusion for markets was the release last Friday of September payrolls in the US which showed a jump in wages growth to 7-year highs.
Of more concern potentially was the upward revision to figures released in August and July, implying that data coming through might indeed be underreporting the significance of the growth.
This is another real issue for us to watch and makes me concerned that US treasury bonds still face genuine risk of a more pronounced sell-off precisely at a time when US consumer confidence is, in fact, rolling over.
A double-whammy if you will.
Again, just fuel for some conservatism into year end.
Have a great weekend.
Thursday Closing Values
|S&P / ASX 200||5794||+143||+2.5%|
|Property Trust Index||1326||+27||+2.1%|
Thursday Closing Values
|U.S. S&P 500||2551||-1||–|
Key Dates: Australian Companies
|Mon 16th October||Div Pay Date – Bluescope (BSL)|
|Tue 17th October||
AGM – Cochlear (COH)
Div Pay Dates – Vanguard ETFs
|Wed 18th October||
AGM – Brambles (BXB), CSL (CSL), Origin (ORG)
|Thu 19th October||Div Pay-Date – Carsales (CAR)|
|Fri 20th October||
AGM – Insurance Australia Group (IAG)
For more information on the above please contact your Partners Wealth Group advisor directly or on 1800 333 143.