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Australian shares have finished the week with a rally led by the big banks and market heavyweight CSL.
Friday, 22nd March, 2019
The ASX200 index closed up 28 points, or 0.45 percent, to 6,195.2 points, while the broader All Ordinaries was up 27.4 points, or 0.44 percent, at 6,280.9.
Health care led gainers, up a collective 1.21 percent, with global pharmaceutical company CSL up 1.52 percent to $197.19. Most sectors were up, aside from mining and telecom shares, which were down slightly.
The big banks were all up: Westpac gained 0.68 percent to $26.51; NAB was up 0.52 percent to $25.09; CBA gained 0.42 percent to $71.43; and ANZ rose 0.26 percent to $26.52. BHP was down 0.19 percent to $37.61 but most other miners were up, with Rio Tinto gaining 0.72 percent to $94.17. Gold miners were down, however, as the price of the precious metal dropped, and shares in St Barbara crashed 29.25 percent to $3.29, a 14-month low, after the gold miner said continued production at its historic Gwalia mine in Western Australia would have to rely on trucking ore rather than hoisting it out.
Suncorp was up 1.9 percent to $13.44 after it said shareholders would receive a special dividend of 8.0 cents per share from the proceeds of its Australian life insurance sale. Navitas was up 2.49 percent to $5.76 after AustralianSuper, private equity firm BGH and the education provider's own former CEO Rod Jones offered to buy the company for $2.3 billion.
The Aussie dollar is buying 71.07 US cents, from 71.46 US cents on Thursday.
|Equities / Fixed Interest||Close||Change||% Change|
|Currency||Close||Pts Change||% Change|
|$A vs $US||0.7106||0.0002||0.02|
|$A vs GBP||0.5406||
|$A vs EUR||0.6245||-0.0002||-0.03|
|$A vs YEN||78.73||--||--|
|$A vs $NZ||
ASX 200 Follows the Script
The Christmas 2018 blog was issued on Christmas Eve, because your diarist felt that that was close to the bottom of the ASX 200 correction of 11.2% which had occurred to 5642, having previously reached 6351 on 30th August. In the Christmas / New Year postscript issued in early January, the ASX 200 had recovered to 5800 and yesterday following a relief rally after the Hayne Royal Commission report, the market reached 6000. That’s a 9.7% uptick from the Christmas Eve low, delivering a useful restoration of value to client portfolios.
The March 2009 low was also strongly recommended by the firm and proved to be the low after the 2007 global financial crisis. The recovery was relatively quick with the ASX 200 recovering from a low of 3304 in March 09 to 4763 by September 09. The reason we and our clients find it easier to predict bottoms rather than tops is that when one spends several hours each day reading independent research reports, having morning meetings, having company visitations and webcasts etc, all of that activity is directed to understand the value of the companies we invest in. When those companies then trade at a discount to value, that makes them interesting investment propositions. And when enough of those companies are trading at attractive valuations, and there are a number of market related issues leading to a fall in the whole market, it makes sense that we are better able to predict bottoms than tops.
In the Christmas 2018 blog, Bank of Queensland (BOQ) was noted as a stock trading under $9.50 on a fully franked dividend of 8%. BOQ is currently trading at the $10.50 mark, that’s an 18% return (including dividend) in a short period of time.
The January blog submitted that the Hayne Royal Commission was a ‘sell the rumour, buy the fact’ event. I.e. bank shares had moved down prior to the Feb 1 report. We recommended astute investors to ‘Buy prior to the report date. There are a number of good buys across the market in Australia, some of which are noted in this Bourse. Likewise, the corrections overseas are providing selective buying opportunities.’ Consider Westpac. Even in 2015 when the banks fell from the high $30’s to around $30, Westpac held this level despite ANZ and NAB falling to around $25. Westpac has a market capitalisation of $90B. At $30 that’s $3B for each $1 market price fall. During the Hayne Royal Commission period, Westpac fell from $30 to $28, $6B reduction in market capitalisation. It then fell from $28 to $26, $12B down. Finally a couple of days before the release of the Royal Commission report, Westpac was trading at around $25, $15B reduction. Nothing that Hayne would write in his
report would cause a loss of $15B in market value for Westpac. While there has been some recovery after the report, today’s value in the range $26- $26.50 looks short of fair value (FVE).
So what are the banks worth? The sector that has particularly copped a change in its value is mortgage broking, with the commission failing to understand that over 50% of Australians go to a mortgage broker, because they get a better price and better service. While I was initially shocked by that 50% proportion, talking to several of our staff left no doubt about that view. Thus the Hayne Commission Report recommendations adversely against mortgage brokers are not in the best interests of the consumer. However mortgage brokers being treated as the fall guys is positive for the banks, if they pay less in trail commission to mortgage brokers. On the other hand the more significant issue is that there are a wide range of breaches of duty by the banks, insurers and superannuation funds which some legal firms will be considering in great detail. Evidence in the UK from these types of remedial issues is that they cost much greater amounts than initially anticipated and go on for much longer.
In your diarists view, it is prudent to reduce current bank FVEs by at least $1 for their remedial costs. This contrasts with an independent research report on ANZ this morning which has held the FVE at $29.
A final word on the last two months is that the market has reminded us that we need to look for value and not sentiment. That is not to say sentiment is irrelevant, because sentiment can hold overvalued markets at high levels for much longer than would be justified on the value basis. ‘The trend is your friend’ is the old adage. The US market is a case in point having the best January in 32 years. US monthly new jobs were up 304,000 (a very positive number for non-farm payrolls). Some wage inflation is starting to appear with 3.4% AHE (average increase in hourly earnings) year on year. The US 10 year bond ticked back up to around 2.7% and a number of commentators are saying the US on a valuation multiple of 16 times is not overly expensive, although one should rotate to value stocks now that imminent interest rate rises are off the table.
The US market highlights that it is more difficult to pick highs than lows because stocks buoyed on by sentiment will trade above fair value for a long period of time, as happened in 2000. And not all stocks are trading in that way, which makes it harder to sense the total market, particularly where it is as large as the USA.
Your diarist sees the elephant in the room in the US as the reduction in the tax rate from over 30% to 21%. Ultimately this is unsustainable and adds to the trillion dollar deficits in the USA. But the reversing of these tax cuts isn’t on the agenda in New York and being myopic, US markets may be the last to realise that some reversal of these tax cuts is inevitable and if the US market hasn’t corrected by then, it is difficult to see how it could sustain such a reduction in free cash flows to New York listed companies.
Returning to Australia, Paul Bloxham, Chief Economist HSBC addressed a FINSIA Economic Indicators lunch on Friday 1st February at the Brisbane Convention Centre. Paul has a positive view on Australian economic growth for the current year, including agreeing with the view that construction will move from commercial and residential property to infrastructure. In respect of resources, he noted that while a slowing in China is in the first instance consistent with less demand for coal and iron ore, that what a number of commentators have missed is that China has shut in a deal of their high cost / low grade production because of their objectives with respect to the environment. The shutting in of that high cost production means that Australia with its low cost and high quality production continues to benefit from strong tonnages and strong prices for its key commodity exports to China.
With respect to house prices, Bloxham said research showed that a material house price correction has never occurred in his experience when employment and incomes were growing, as is the present position in Australia. His conclusion was that a healthy correction to Sydney and Melbourne house prices was more likely than armageddon.
Australian elections should be viewed against the backdrop of a balanced Australian Government budget, courtesy of tax collections from the mining industry. Bloxham sees that backdrop resulting in spending commitments from both sides of politics, several prior to the NSW State elections. These spending commitments will be a plus for Australian GDP.
So there remains much geopolitical noise, as Paul said, that is what it is, noise. There are no known black swan events or X factors in Australia and so companies should continue to be valued on fundamentals in line with earnings, business models and management.
The overseas backdrop remains more challenging with geopolitical issues in the USA, Brexit in Europe and the China / US trade war. No doubt these issues will produce some further volatility, but what we can do as investors is what we do every day; understand the value of the companies we’re investing in and where independent research and other information points to a good value buying opportunity, such as Bank of Queensland or Westpac over recent months, then don’t let negative sentiment, which has led to the lower price, get in the way of some good buying.
And if portfolios had no losers, the returns would be higher. So time should be allocated to reviewing losers perhaps being more prepared to take a small loss – sometimes the market knows best. Burrell’s stop loss service may be a useful tool.
Happy Investing for 2019.
Disclaimer & Disclosure: Burrell Stockbroking Pty Ltd and its associates state that they and/or their families or companies or trusts may have an interest in the securities mentioned in this report and do receive commissions or fees from the sale or purchase of securities mentioned therein. Burrell Stockbroking and its associates also state that the comments are intended to provide information to our clients exclusively and reflects our view on the securities concerned and does not take account of the appropriateness of the recommendation for any particular client who should obtain specific professional advice from his or her Burrell Stockbroking Pty Ltd advisor on the suitability of the recommendation. Whilst we believe that the statements herein are based on accurate and reliable information, no warranty is given to its accuracy and completeness and Burrell
Stockbroking Pty Ltd its Directors and employees do not accept any liability for any loss arising as a result of a person acting thereon.
This document contains general securities advice only. In accordance with Section 949A of the Corporations Act, in preparing this document, Burrell Stockbroking did not take into account the investment objectives, financial situation and particular needs ('relevant personal circumstances') of any particular person. Accordingly, before acting on any advice contained in this document you should assess whether the advice is appropriate in the light of your own relevant personal circumstances or contact your Burrell Stockbroking advisor. If the advice relates to the acquisition, or possible acquisition, of a particular financial product, you should obtain a Product Disclosure Statement relating to the product and consider the Statement before making any decision about whether to acquire the product.
Burrell Stockbroking Pty Ltd (ABN 82 088 958 481), a Participant of the ASX Group and the NSX.