Gong Xi Fa Cai!
This week we bounced. We didn’t get it all back, but we got back a few percent. In the U.S, the rebound was stronger and the S&P500 and NASDAQ got back 60% to 80% of the prior losses.
For now, global economic momentum remains sound and I think equity investors will remain sanguine to the steadily rising bond yield so long as the move higher is steady and not driven by a surprise bout of inflation.
Though we took the view 10 days ago that this rapid and surprising sell-off would find support, we equally want to acknowledge why it occurred and that we will inevitably find ourselves faced with further bouts of selling pressure as the year progresses.
As a reminder, we are late in this investment cycle, not early.
In equity-land the glass remains half full, but our hands are slowly tilting.
Why Q2 feels like the crunch quarter
For several months we have taken the view that Q2 would prove to be the time to move more defensively with portfolios. This viewpoint was formed for several reasons, not least of which being our expectations for a sound Q1 reporting season reflective of strong economic growth, but even more so because of our expectations that financial market conditions will begin to darken as we head towards Q3.
Firstly, the US Federal Reserve QT (quantitative tightening) will escalate as the year progresses, rapidly removing support for government bond markets.
Not only is history’s most unprecedented support for bond markets turning into a retreat, but with the Trump tax cuts invoked, the US government issuance of government skyrockets.
In essence, the world’s biggest buyer of bonds is now turning net seller and in a big way.
As Q2 progresses, Fed liquidity withdrawal escalates from $10bn a month in December (a drop in the ocean on a $4.5tln balance sheet) to $20bn currently, to $30bn in Q2 and then $40bn in Q3.
The weight on investment markets gets heavier and heavier.
Secondly, by quirk of statistics, US inflation numbers during the middle part of 2017 proved to be a low point (oil made its low near $42 in mid-June 2017), which means that as we run into Q2, the comparative CPI figures for the 4-months of May through to August this year are cycling against very low numbers.
Since we measure inflation on an annual basis, this simply means that there is a real chance we see some higher inflationary prints simply because last year’s numbers were so low.
Clearly, timing the market is the hardest game around, so we aim not to take too many chances and you should expect to see us turn more cautious between now and April all things being considered.
We sincerely hope that a few Australian stocks reach target levels in the coming month and we can use these as obvious means to raise cash levels.
Next Week’s results – we hold out hope in all of SEEK (SEK), Woolworths (WOW), APN Outdoor (APO) and Downer (DOW)
Before I run through the results from this week, a quick heads up for next week’s reporting.
SEK kicks the week off on Monday, and, having already upgraded earnings guidance at its late-November AGM, we think the result should be strong, possibly with further upgrades to come.
Downer (DOW) similarly has already upped guidance, and given heavy infrastructure demand along the eastern seaboard we think results should be good, with the faintest of faint hope that the group can make further strides in dispelling doubts over the recent Spotless acquisition.
Strong share price performances from media names HT&E (HT1) and QMS (QMS) this week give us some hope that APN Outdoor (APO) can similarly deliver a solid result and outlook off what we believe to be a very cheap valuation of 13-14x P/E.
In the case of Woolworths (WOW), we want to see increasing evidence that the WOW sales momentum is finding its way into improving profit margins, with perhaps the prospect of some earnings upgrades. All the feedback on trading this quarter is again strong, so with any luck WOW delivers some strong profits and we can look more closely at levels at which to close out our core positions.
Results of note for us this week – AMCOR (AMC), Origin (ORG), Healthscope (HSO) & Telstra (TLS)
All of these results were middling, with shades of gray around each, but in the case of HSO I would say very strongly, that the tide is turning.
AMC results missed forecasts marginally and for reasons that shouldn’t be a material surprise to investors. Raw material price rises have squeezed profit margins near term but will be recouped in the coming periods, whilst AMC’s business in Latin America and Russia/China had seen faltering volume growth.
We have gone a little early with our AMC recommendation, and the strength in the AUD hasn’t helped the call. However, we see AMC as a terrific quality infrastructure type-player that will prove a portfolio stalwart in the coming year, and even more so if our ongoing belief in a weaker AUD finally materializes.
HSO figures were a modest miss again, but the bigger story should surely be the early success of its cost efficiency program and the manner in which the new CEO Gordon Ballantyne (former head of Telstra Mobile) has taken to his task so quickly and successfully. HSO reaffirmed its full-year profit guidance in spite of the first half profit miss, confident that cost efficiencies undertaken would flow through the remainder of the year, and that revenue growth from previous investment would similarly shine.
Notably too the company spoke of having hired Ramsay Healthcare’s (RHC) former head of Asian Hospitals back to Australia, in what appears to be something of a coup for the upper echelons of HSO management.
I have to say, I thought the heavy selling post result was short-sighted and wrong, and fortunately today we are seeing the HSO shares recover all of yesterday’s losses.
I think this is finally the turn in HSO, and fingers crossed for bigger and better things as the year progresses.
Telstra (TLS) results were more of the same thing we have come accustomed too, but credit where its due, the company are doing as good a job as they can on cutting costs to combat the impact of NBN’s rollout.
Mobile margins deteriorated only very marginally, and the company continued to add post-paid subscribers. Fixed broadband continues to absorb the brunt of NBN’s rollout, but the broader network and data operation is doing well on the top line.
I couldn’t help but notice TLS CEO Andy Penn today talking in the press about a move to bring forward 5G spectrum auctions, with this lobbying effort clearly a potential positive for TLS in terms of seeking an earlier deployment of this game-changing technology for the company.
We hate it, but we continue to persist with TLS down here given yield support, on the faith and hope we see the opportunity to exit TLS at higher prices later this year.
Lastly, Origin (ORG).
With the rebound in oil prices and its huge APLNG project now in operations, ORG posted a 50.7% rise in underlying EBITDA and 147% rise in underlying net profit. However, the headline figures were not so pretty, with net profit showing a $207m loss following $789m in write-downs. Despite this, ORG upgraded guidance in its Energy Markets division while maintaining production expectations for the second half of the year.
Positively, Origin remains on track to reduce net debt below $7 billion by the end of June, which should continue to be a positive driver for the shares. However, oil prices will likely continue to be the major driver for its earnings and share price.
For now, that’s it. Have a great weekend.
Friday 10am values
|S&P / ASX 200||5909||+114||+2.0%|
|Property Trust Index||1282||-5||-0.4%|
Thursday Closing Values
|U.S. S&P 500||2731||+150||+5.8%|
Key Dates: Australian Companies
|Mon 19h February||
Earnings – Brambles (BXB), SEEK (SEK)
Div Ex-Date – Boral (BLD)
|Tue 20th February||
Earnings – APN Outdoor (APO), BHP (BHP), Oil Search (OSH)
Div Ex-Date – Computershare (CPU), Dominos (DMP), IAG (IAG)
|Wed 21st February||
Earnings – APA Group (APA), Blackmores (BKL), BWX (BWX), Coca Cola Amatil (CCL), Corporate Travel (CTD), Downer (DOW), Lend Lease (LLC), SANTOS (STO), Wesfarmers (WES)
Div Ex-Date – AMP (AMP), Suncorp (SUN)
|Thu 22nd February||
Earnings – Crown Resorts (CWN), Flight Centre (FLT), Platinum (PTM), QANTAS (QAN), QUBE Holdings (QUB)
Div Ex-Date – AGL (AGL), JB Hi Fi (JBH), Woodside (WPL)
Div Pay Date – WBCHB
|Fri 23rd February||
Earnings – Woolworths (WOW), Regis Healthcare (REG)
Div Pay Date – AFIC (AFI)
For more information on the above please contact your Partners Wealth Group advisor directly or on 1800 333 143.