From Jonathan Bayes, Chief Investment Officer, Partners Wealth Group.
The grind higher continued this week, with the ASX200 up a little under 1%.
Small & mid-cap managers continue to be the ones with smiles on their faces as the Small Ordinaries reached its highest level since 2011, and better yet, the Mid-cap 50 reached its highest level since 2008.
Strong global growth and a still compliant bond market are the key drivers of equity markets at the moment, and long may that continue, though my worries on US inflation and bond markets continue to rise.
Of news this week, China kicked off its 19th Communist Party Congress, and I guess if we took anything away from it, it was that China’s path for the coming 5 years was much less about ‘growth for growths sake’, with President Xi notably dropping his predecessor Hu Jintao’s 2010 promise to double GDP by 2020.
During 2017 it has become quite apparent that China’s leaders are determined to improve living standards, reduce pollution, minimize financial sector leverage, eradicate excess capacity and evolve the productivity of state-run enterprises, indicating a far more multi-dimensional view of China’s future social and economic development.
Miners – running out of puff
The absence of a re-commitment to the 2020 GDP target caused some selling across heavy materials markets, with iron ore down -4% on the week.
Interestingly though, despite the fall in iron ore prices to near enough to 3-month lows, Australian mining shares look like ending the week up, with RIO (RIO) and BHP (BHP) both within inches from their year highs.
This feels very tenuous to me, and more a reflection of equity market optimism than it does underlying earnings fundamentals, the latter of which are starting to fray with falling iron ore prices.
These stocks feel like the coyote in the roadrunner cartoons, and feel very much on borrowed time before a likely -10%+ type fall.
Let’s remember the big picture here. Australia’s 2-largest iron ore producers break-even in and around the low $30/ton range (last traded price still $60+/ton) and 2018 is looming as a year of substantial excess supply to the seaborne iron ore market.
Mantra Group (MTR) – started taking profits
A quick heads up for those yet to do so, but we are advocating for profit-taking in MTR at $3.90+, where the shares are now trading.
The Accor bid of $3.96 and the potential for perhaps an additional franking benefit of as much as 10c a share do suggest we are leaving a scrap on the table, but it’s important to remember that share-holders won’t receive their funds until at least February or more likely March, which is 6 months away.
This time value of money is likely worth 5-10c depending on the special dividend, so we think it likely that the shares will spend the better part of the next 3-4mths in the low $3.90’s, making us keen to take profits here and move on.
Blackmores (BKL) – strong, AGM next Thursday
Another re-cap, but encouragingly BKL shares remain within a whisker of our $140 target.
Next Thursday we will get BKL reporting its first quarter sales trends alongside its AGM, and again we are hopeful of continued solid sales momentum from its Asian franchise.
All the same, at over 30x earnings we think the market is now pricing in a lot of this optimism, and we feel like we can re-enter this share at fare more palatable levels from a risk/reward standpoint in the months to come.
Bank Sector Reporting season (& dividends) coming soon
Just a heads up that all of Australia’s major banks excluding Commonwealth Bank (CBA), are due to report full year profit figures in the next fortnight.
Macquarie Group (MQG) get the ball rolling next Friday, but will be followed by each of ANZ (ANZ), National Australia Bank (NAB) and Westpac (WBC) in the following 10 days.
To be honest, I would expect the profit figures to again be much ado about nothing.
Credit quality will be fine, lending volumes will show very modest growth, but net interest margins will continue to show competition to be robust.
With the market itself up 200pts this month it ought be no surprise that the banks stocks themselves have pushed back up to their highest levels since the May Budget’s ‘bank levy’ was announced.
That said, most of Australia’s major banks are now back up on 13-14x forward earnings and with low 5% dividend yields (excluding NAB, but where the dividend payout ratio does feel unsustainably high), so I fail to see these shares pushing materially higher in the coming month.
Dividends from each of these banks will be paid out mid-December.
For more information on the above please contact your Partners Wealth Group advisor directly or on 1800 333 143.
This information is general in nature and is provided by Partners Wealth Group. 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.