Welcome to the November edition of The Burrell Blog; the second last for 2015!
In the week ending 13 November, the Australian share market fluctuated just above the 5,000 level. This retracement placed the market back to the closing level on the 30th September at 5,021 being 16% below the high of 5,982 at the end of April.
The driving factors behind these falls appear the same; strong job starts in the USA confirm the strength of the US economy, while the Australian Reserve Bank Governor following a public address was asked a question with respect to interest rates. His reply was that if there were to be a further move in interest rates, it was more likely down than up. This together with continuing poor commodity data from China and the resulting poor commodity prices reinforces a negative view on the Australian exchange rate. The net result of a stronger US economy and a weaker commodity sector of the Australian economy was that overseas investors again sold off the Australian stockmarket, fearing a fall in the $A:US from 72 to 65, or at least that is the most common expectation. On Monday November 16, following the Paris Black Friday terrorism attacks, the Australian market closed under 5,000.
Just as the market recovered in the 2 weeks after September 30 to 5348 on the 26 October 2015, it seems likely the market will again quietly recover 200-300 points over the next few weeks. There are two key drivers for this recovery: Firstly the dividend yield driver. For example NAB was trading on a dividend yield of 7% fully franked which equates to 10% gross. Where else in the western world can one achieve such a return with overseas interest rates near zero? While the banks might have some issues, none seem to be X factors. The increased capital base required by the new Basel and APRA (The Australian Prudential Regulation Authority) regulations may well lead to some lower return on equity, as foreshadowed by the chairman of Bendigo Bank at the Bendigo AGM last week. Even if dividends reduce a little, the bank dividend yields remain highly attractive and should justify higher prices for bank shares than currently. The second reason for the recovery is that notwithstanding how horrific the Paris terrorist attacks are, they do not indicate a systemic risk likely to fundamentally impact on global stock exchanges.
Over the past 6 weeks, the differentiation between commodities adversely impacted by the perceived China slow down including iron ore and coking coal vs commodities that had not been greatly affected including copper and steaming coal, this distinction seemed to become blurred with all four of these commodities weakening during the period. This meant that major commodity stocks including BHP and Rio have softened, with BHP then subject to the negative news of a tailings dam wall failure in South America. While CEO Andrew McKenzie showed how to handle such matters by personally flying to South America and taking responsibility as compared to the BP oil spill in the Gulf of Mexico where this course of action was not followed, the fact remains that the event is negative for BHP. An independent research report which we have available indicates the earnings per share impact is minor at 3cps (cents per share), but it creates a negative perception and the BHP share price has fallen much more than the fundamentals would indicate.
The Gulf oil producers in contrast have sought to differentiate oil as a growth commodity, given that the emerging markets of the world will be using increasing amounts of oil per capita as their economies grow. There have been several statements from Gulf oil ministers and the industry body indicating a view that oil prices will firm in the second half of calendar 2016. This would now seem to be the more probable view, although the timing on these oil price movements have continued to be pushed out from initial estimates.
Assuming there will be a firming in oil prices in the 2H16, the better course of action in respect to oil stocks such as Woodside and Santos is to hold existing portfolios and to take up the Santos rights issue.
In respect of other cyclical miners, the debate is whether the bad news of the commodity prices is fully reflected in the current share prices. With BHP trading around $20, independent research indicates that the stock should be valued at greater than this number. Cyclical stocks by definition go up and down in accordance with the economic cycles impacting on the commodity prices. The better view seems be to hold quality resource companies for the recovery in the cycle, assuming the portfolios are reasonably balanced.
In terms of portfolio reviews our Burrell advisors have been looking at stocks not correlated with resources or banking and having overseas earnings with strong business models, low debt and above average returns on equity. Seek would be an example with the leading human resources portal not only in Australia, but also in China through Zhaopin. The HR market has migrated from the daily newspapers so that whether employers place ads directly or utilise the services of a HR consultant, the market place is now Seek. The stock had fallen from $18 to $12.50 and has recently firmed on the disposal of the Seek education business. We see this disposal of the education business as a good move by Seek as the business was outside its core and a difficult business to achieve sustainable return on equity.
In the oil sector, Gulf state representatives are talking up the prospects of a recovery in oil prices in late 2016 and again a better view may be to hold these cyclicals given the price depreciation which has now occurred.
During the month Senior executives from Stockland presented at a breakfast for Burrell clients. The stock is yielding 6.2% and trading only marginally above stated net assets. This means when one buys a stapled security in Stockland, one gains exposure to approximately $9B in property assets. These assets are spread across retail shopping centres, logistics and business parks (sometimes referred to as industrial), office, residential and retirement living. With the residential land holding of approximately 80,000 undeveloped blocks held in the books at the lower of cost or net realisable value, it is quite possible that the net assets of Stockland are a little above the stated value. This would mean that investors are able to acquire Stockland stapled units and for that matter also Mirvac stapled units for approximately net assets i.e. we are paying nil for the Stockland and Mirvac businesses respectively. Debt is relatively low for both companies. The retirement living sectors for Stockland show projected increases in the previously low rate of returns to more acceptable levels over the next few years.
Regular readers will be aware that your diarist is a little cautious of valuations on the USA stock market. Consistent with this concern and while it never relates to all holdings in a market, it was interesting that for the week ended the 12 November 2015, US mutual funds had the largest weekly redemption since 2011 being $US 12.5B.
For PPS and IMP clients wishing to hold some funds in US dollars, Burrell Stockbroking’s trust account now includes a separate ANZ US dollar account where client funds may be held in US dollars. Should readers be interested in this service, please email your advisor or raise it in your next review.
In summary, the retracement to the 5,000 level represents good buying for Australian investors as overseas shareholders depart fearing a further fall in the $A:US exchange rate.
Cyclical falls in resources stocks indicate much of the bad news is built into current prices with BHP trading around $20. Independent research reports would indicate BHP as a buy at this level on value, rather than a sell on sentiment. However stocks outside the resource sector e.g. Seek may be of more interest from both a growth and sentiment viewpoint.
The property sector continues to be in favour based on supply and demand, with recent moves by the banks to take some of the froth out of the sector seen as supporting a more prolonged cycle and good news for both the economy and the banking sector.
Internationally, placing funds in a US$ account seems a useful strategy as we watch the US stock market through the first quarter of 2016 with some increases in US interest rates likely during that period.
Happy investing …
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.
Burrell Stockbroking Pty Ltd (ABN 82 088 958 481), a Participant of the ASX Group and the NSX.