From Jonathan Bayes, Chief Investment Officer, Partners Wealth Group.
An early release of the weekly update this week given the public holiday in Victoria on Friday. The weather is turning and with daylight savings kicking in this weekend, the future is looking a little brighter. However, any strength in our share market seems likely to be tested in the coming weeks with the market down ~1% in September.
For the week to date we are flat and the market continues to sit right on the 2-year trend line, having broken through it last week.
Whilst the market has spent the better part of the calendar year trading in the sideways range of 5660-5800, we now appear headed for lower levels with the ASX200 sitting just over 1% above our yearly lows.
This short week
With next to no economic data released this week, the ASX200 had little impetus to climb higher or fall significantly.
Telcos weighed on the market this week falling 2.5% and are now down over 30% since January.
Telstra (TLS) which has fallen by similar levels this year continues to slide, falling to 5-year lows on Wednesday.
TLS now trades on a 1 year forward p/e of 11x and a dividend yield of 6.3% which is 9% grossed.
Whilst this does not ease the pain for shareholders, the decision to cut the dividend in August was a prudent one. The payout ratio of 95% was unsustainably high if TLS wished to fund future investments and reinvent itself as a technology player.
TLS still provides a great source of income in client portfolios and the decision to reduce the payout ratio and strengthen its balance sheet is intelligent.
The last thing I want as an investor is for a company to pay out dividends it either could not afford or at the expense of future growth.
On the plus, energy stocks were the standout performer with the sector reaching its highest levels since the end of May.
Oil Search (OSH) rallied 4.5% during the week despite the sale of 31m shares by the Papua New Guinean government last Friday.
The PNG investment in OSH since 2014 has turned out to be a poor trade and facing cash flow problems the government decided to cut its losses and move on.
With the PNG government coming off the share register OSH looks an even more attractive takeover target with Total and Exxon the most likely candidates given their stakes in PNG LNG and Elk Antelope projects.
Rio Tinto buy back
Rio Tinto (RIO) announced a US$2.5bn buy-back comprising an on-market and off-market buyback.
Following the sale of its Coal & Allied operations to Chinese-controlled Yancoal for US$2.69bn, RIO has decided its balance sheet is in a sufficiently stable position to pass on the proceeds to shareholders.
The off-market buyback will entitle shareholders to tender shares at a discount between 8-14% to the market price with the distribution of franking credits likely to ensure participation will be high.
Given the attractiveness of the offer, we anticipate a rather large scale-back however the tender period does not open for another 2 weeks and remains open for 1 month so we shall see.
The strength in RIOs balance sheet and its disciplined approach to capital allocation is clear given this is RIOs third buyback this year following a US$500m buyback in February and a US$1bn buyback in August.
US inflation uncertainty & interest rates
Janet Yellen’s speech on inflation, uncertainty and monetary policy threw further support behind a December rate hike.
Despite acknowledging the Federal Reserve may have overstated the strength of US employment and the rate of inflation, Yellen maintained it would be unwise to keep monetary policy on hold until inflation is back at the Feds target level of 2%.
Instead a consistent and gradual approach to rate hikes seems to be its mantra with a December rate hike and three additional hikes forecast for 2018 now popular amongst most economists.
Despite the slower than forecast growth in the US employment figures and inflation, the commitment to gradual rate rises ensured the USD added to gains versus its major rivals this week including the AUD which is back trading at 78.3c having reached 81c last week.
I will keep it short and sweet this week everyone given I only have three-and-a-half days to work with.
Next week we have a slew of economic data to hit the market so we will be back at it then.
Enjoy the long weekend.
Thursday 12pm Values
|S&P / ASX 200||5670||+15||+0.3%|
|Property Trust Index||1310||+6||+0.5%|
Wednesday Closing Values
|U.S. S&P 500||2507||+6||+0.2%|
Key Dates: Australian Companies
|Mon 2nd October||Div Pay Date – Altium (ALU), GMPPA, WBCPC, WBCPG|
|Tue 3rd October||
Div Ex-Date – MYOB (MYO)
Div Pay Date – Boral (BLD), Coca-Cola Amatil (CCL), Fortescue (FMG), Tatts Group (TTS)
|Wed 4th October||Div Pay Date – CIMIC Group (CIM), Inghams Group (ING), Wisetech Global (WTC)|
|Thu 5th October||
Div Ex-Date – Auckland International (AIA), Sims Metal (SGM)
Div Pay Date – Adelaide Brighton (ABC), Costa Group (CGC), Corporate Travel (CTD), Pact Group (PGH)
|Fri 6th October||Div Pay Date – Automotive Holdings (AHG), Caltex (CTX), Crown Resorts (CWN), G8 Education (GEM), Greencross (GXL), Invocare (IVC), Mantra Group (MTR), Treasury Wine Estates (TWE)|
For more information on the above please contact your Partners Wealth Group advisor directly or on 1800 333 143.