From Jonathan Bayes, Chief Investment Officer, Partners Wealth Group.
We have A LOT to cover this week so please bear with me.
KEY TREND CHANGES ARE AFOOT
This week felt like we were finally seeing evidence of several important trend changes.
With global growth momentum as good as it’s been since the GFC, it has felt only a matter of time before we should be seeing higher bond yields and a stronger US-dollar.
This week that began to play out.
The US-dollar surged strongly away from 2-year lows, providing welcome relief to the Australian economy with the AUD itself pulling back to its lowest level since July at 76.6c.
We feel like the AUD has further room to fall, and this in the medium-term is welcome respite to the domestic economy and RBA.
U.S 10-year bond yields pushed up to their highest levels since March, landing at 2.46% by Thursday, but again, we feel like there is further to go.
Investors in yield sensitive securities such as property trusts and infrastructure should be wary of further falls in the months ahead. Valuations in the likes of Transurban (TCL) and Sydney Airport (SYD) are full as we have remarked for some time.
Another key trend change is emerging in oil, with WTI prices pushing to their highest levels since April, driven by the strength of economic demand and further indications from Saudi Arabia and non-OPEC partner Russia that recent collective efforts to cap supply could be continued through 2018.
We have held Oil Search (OSH) and Origin (ORG) through this oil malaise, and feel very confident that both shares have plenty to offer in the medium term.
MACQUARIE GROUP (MQG) – GREAT RESULTS & A BUYBACK
As our preferred Australian bank, we were thrilled to see this morning’s headline profit figures reinforced with news of a $1bn buyback (3% of capital).
Much of the beat in today’s profit figures came from performance fee’s which indicates some excellent performance within the core funds management group, but these fees are fickle and attract a lower multiple from the market.
Perhaps as a nod to this, the MQG second half dividend payout ratio came in under the group’s targeted 60-80% target level (56%), as an indication from MQG management that they don’t see the performance fee strength as necessarily sustainable.
That being said, a beat is a beat, and the company upgraded guidance to a ‘slightly increased’ profit on 2017, and announced the buyback.
The results and buyback this morning have put the stock at a record high ($97 was the high in 2007), and have thoroughly vindicated our recommendation early last year, with MQG having outperformed the major-4 banks strongly in that time.
ANZ BANK (ANZ) – AVERAGE
A far cry from MQG results were ANZ’s full-year profit figures released on Thursday.
Revenues were a little softer than broker estimates and seem to have led to some modest earnings downgrades this morning.
ANZ are now a long way into their portfolio re—balancing plan, which has yielded them a strong balance-sheet and the prospect for a 2018 buyback, but a distinct lack of earnings momentum.
It’s very hard to get excited by ANZ at these prices, nor any other major Australian bank for that matter.
The sector is stuck in a range as we digest slowly creeping ‘past-due’ loans, and is probably toward the high end of that range today.
BLACKMORES (BKL) – MORE SIGNS OF STABILITY BUT NOW FULLY PRICED
BKL delivered Q1 profit figures yesterday that again signaled the group’s 2016 inventory issues are now in the distant past, but they were far from the blowout figures its recent share price surge might have suggested.
We feel entirely strong in our belief that share-holders should have exited their positions north of $140, and that better levels will emerge to buy the share.
For the stragglers amongst us still holding stock, BKL has outperformed by almost 60% in the past 3 months, and now trades on 27x 2019 earnings – a hefty multiple for a business where only 30-35% of it is growing at a rapid clip.
We would suggest a figure nearer $110 might be a starting point again to BUY.
WESFARMERS (WES) – MORE AVERAGENESS (!)
Well, maybe it wasn’t that bad, but certainly its core Coles food business continues to struggle.
Coles food sales growth continued to be hit by fresh food deflation, and its combined food & liquor sales growth was the lowest since 2007, indicating a still highly competitive market and one dominated by WOW size at the present.
Bunnings was superb, and K-mart was also good, and this continues recent trends.
WES is again looking cheaper, but without any real earnings momentum it is super hard to warm to the stock.
WES is now at a 7-year low to the market, and though a terrific Australian company that one day will again perform as a share, is a stark reminder to investors that even great Australian companies deserve to spend time on the portfolio sidelines.
IN OTHER IMPORTANT NEWS THIS WEEK
China’s National People’s Congress this week elevated current President Xi Jinping’s status to equal that of former leaders Mao Zedong and Deng Xiaoping, identifying him as a ‘paramount leader’.
Of significance, a successor to Xi failed to emerge at the party congress leading to speculation that Xi might indeed extend his rule beyond the typical 10 years.
This is highly significant, as was Xi’s announcement of his intention to ensure China become the world’s top innovative nation by 2035, and more profoundly for China to achieve ‘global influence by 2050’.
This is a big deal, and for anyone watching aghast at the backward steps the United States have taken as a world player in the past year, only reinforced the momentum China is building as the world’s outright future superpower with its enormous One Belt One Road initiative across south-Asia.
The ECB pleased investors this week with its decision to reduce its monthly bond-buying by half (from e60bn to e30bn), tapping on the breaks of its massive QE program without indicating a more drastic or immediate end.
European shares surged on Thursday night and the Euro fell over 1% in support.
For more information on the above please contact your Partners Wealth Group advisor directly or on 1800 333 143.