ASX Weekly Wrap 27/02 - 03/03

Disappointing week for the XJO as the index lost 9.4 points or 0.16%. We continued to fade as earnings wound up and commodities remained soft. We will probably struggle over the next few weeks as a raft of stocks go ex-div and money is pulled from the market. On the other side though April should be a healthy month as dividend money flows back into the market. Our high this week was 5,776.60 on Thursday and our low was 5,675.00 on Wednesday.

As the reporting season came to an end this week we had more macro matters influencing the market. The most anticipated event was Donald Trump’s speech to congress. Many were hoping that it would give a deeper insight into some of his policies and plans moving forward, but alas they were to be disappointed. The speech itself was fairly bullish and well received by most. It was, however, thin on economic policy detail apart from a few hints here and there. Trump spoke of the mass infrastructure build he wanted to embark on, citing that he was going to ask for US$1Trillion from congress to complete it. Whilst he still has to get this past congress and find the funds this figure is much larger than the US$550bill most anticipated. As I wrote about some weeks back he will need a lot of steel, copper, concrete etc. to construct all these roads, bridges, power stations. This puts our resources industry in a good place as it will only put more pressure on supply and upward pressure on prices, especially iron ore. We shan't get too excited just yet as he still has to get funding. He may be over reaching with his target of US$1Trill on purpose to make sure he gets his lower target. Whatever the case construction isn’t expected to start until 2018.

Other take aways from the speech include ‘massive tax cuts’, a tough stance on immigration, drug trafficking, the wall and cheaper pharmaceuticals for all. Obviously the last one does not bode well for the healthcare industry as it will bring drug prices down, but is good for the general population. As I said it was a very upbeat and positive speech and gives us reason to stay excited.

The biggest pice of data to release this week was the Q4 Australian GDP figures, which were much better than expected. The market had forecast a +0.7% rise on quarter and +1.9% on year. The figure came in at +1.1% on quarter and +2.4% on year, much higher than anticipated. It also put to bed all the doom and gloom that evolved from the -0.5% anomaly of Q3. I wrote at the time of the Q3 figure that it would be a once off and many factors such as the drawn out election played into it.

I also wrote that I expected a strong fourth quarter, which was nice to see come to fruition. The +2.4% on year is lighter than we are usually accustomed to as we usually sit around the +3.0% in growth. I am expecting by the end of the year we will be back to that figure and may even surpass it. As expected though the Australian economy is starting to fire again which is positive for everyone.

Staying with the Australian economy theme we had our trade data for January come in yesterday. It was much lower than anticipated coming in at a surplus of just above $1.3bill. Most analysts had expected a figure of around $3.8bill. Its also much smaller than the $3.34bill we had in December. Whilst disappointing it is still very positive that we recorded a surplus and our third in a row. The last time we did that was in late 2014. Contributing to the lower than expected figure was a sharp fall in exports whilst at the same time imports soared. Exports fell mainly on the gold value and non-rural exports such as iron ore & coal. This perhaps was to be expected as our exports figures for these commodities were extraordinarily high for December. Moving forward we should still expect strong surplus’ as commodity prices and volumes remain relatively high. We will also start exporting a lot more LNG come the second half of 2017 so that will help build our figures. Whilst the number was lower than expected it is still very positive for the country and shows that the economy is improving. Below is a great chart showing the value of our main non-rural resource exports.

The final piece of economic data I want to touch upon is the Chinese manufacturing PMI for February. The PMI figure came in a higher than expected 51.6. This is above last month’s 51.3 and higher than the 51.1 expected. Once again any read above 50 shows that the sector is expanding at above trend growth. This means that China’s manufacturing sector is starting to build steam again. Barring Novembers figure of last year this is the best read on the sector sine July 2014 and the seventh read above 50 in a row. This gives further credence that the Chinese economy has bottomed and is now gathering pace again.

Just quickly I want to talk about the US official cash rate and 10 year treasury yields. No official move yet but it is now being priced in that there is a 90% chance of a fed hike in March. This comes from interviews with many Fed board members that were very hawkish. Janet Yellen speaks tonight so it is expected that it will further enhance the view that rates will indeed rise in at the March meeting. Along with this talk treasury yields are on the march again. They sat around the 2.35% level about a week ago. They are now touching the 2.50% area again, on the 10 year notes.

Only a couple of company earnings reports to comment on this week as reporting season wound up at the end of February. QBE Insurance (QBE) is one of them and one many of you hold in your portfolios, so I felt it needed to be covered. Overall it was a very positive report with underlying earnings +23% to US$844mill mainly on the back of net investment income that rose to US$339mill up from US$263mill a year before. This is great to see as it was exactly one of the main reasons a lot of you bought QBE. There was an opportunity to take advantage of the correlation between QBE’s share price/earnings and rising US Treasury yields. To see that play out as we thought it would is very encouraging. One negative for QBE was its insurance profit fell 3% to $1.06bill, but they did make comment and say that they believe the discount war for premiums that’s happening here in Australia is almost at an end. This means they should start seeing a better performance from its underlying business moving forward.

QBE also announced a $1bill on market buy-back over the next 3 years which is also positive for shareholders as it helps put a floor under the share price. It also shows confidence management have in company that they believe it is good value at current prices. Finally QBE increased its final dividend to 33cps up from 30cps a year before. That gives QBE a yield of roughly 4.3% around current prices. Their outlook for 2017 was of a bullish nature. They expect to release a further $350mill of capital from reinsurance. They are aiming to saving a further $150mill in expenses and $200mil in claims by 2018. They also made comment in that they wish to grow dividends and keep return on equity between 13-15%. The market reacted positively to the QBE result pushing the stock up 7.7% on the day before it settled much lower.

Overall I was very pleased with the QBE results and comments regarding the outlook. We should continue to see increasing investment income and a stabilisation of insurance profit plus increasing dividends. I will continue to add QBE to long term portfolios below $13.

The final company I will touch upon this week is Harvey Norman (HVN). Whilst not many of you have exposure to HVN I still feel its important to talk about to get a view on the retail landscape. Like QBE’s result HVN’s was very impressive in its own right. First half profit rose 39% to a record $257.3mill on the back of strong housing construction. Excluding one-offs and property revaluations profit was +18% to $215.2mill. The dividend was increased from 13cps to 14cps and overall sales were up 5.9% for the half.

Many of you know my views on the retail sector in Australia. I feel in the long term it is an avoid. I will say, however, I do like HVN as a company and have done for a long time. Its unfortunate that their earnings will come under large pressure from forces outside of their control over the next few years once Amazon establishes itself here in Australia. As such it’s a company I cannot own or look to own in a portfolio. I will keep it on watch though as HVN is unique to a lot of its competitors mainly due to the property aspect of the company. HVN own a lot of their store locations which gives it a unique ability to increase/decrease rent to franchise owners during good and bad times. It also adds a a property value to their stock price. In fact based on their last report net property value was at $2.6bill. This represents a value of $2.34 per share. This means you are only paying $2.44, at a share price of $4.78, for the underlying retail business. This situation is very unique to HVN and one that could help set them apart from the rest of the sector in the future.

Looking forward HVN has a lot of headwinds to come in 2017 and beyond. Its not just Amazon eventually entering the Australian market its housing construction also slowing as well. HVN has a large correlation to housing construction as when people are building houses they often update their furniture and white goods. If this is slowing then those purchases will slow as well. At current prices HVN has a PE of 14x and a yield of around 6%. This may seem attractive on the surface but I feel the unknowns and headwinds to come mean HVN have to trade at a discount. I am still not prepared to pay these prices and still am not adding HVN to portfolios.

This leaves the most recent reporting season behind us. It was a very positive season and one of the better ones in recent history. Below are just a few quick statistics regarding the season and as it relates to the top 200 reporting companies:

- Of the 142 top 200 stocks to report 94% of them made a profit (excluding BHP)

- Aggregate profits rose by 37%

- Cash levels rose 11% to $110bill

- 88% of those reporting half yearly paid a dividend

- 67.5% of companies increased dividends

- The average dividend increase was 6.7%

- EPS rose on average 19%

- 69% of companies increased their profits

Just a couple of tidbits of information regarding stocks overseas. Many of you would have heard of the social media app snapchat. Well their company listed on the US exchange overnight and at a 44% premium to their IPO price. They finished the day with a US$33bill valuation. This would make snapchat the 9th most valuable company, by market cap, on the ASX. Wouldn’t it be nice to have a company of that magnitude list here every once and a while.

Also Macquarie Group (MQG), who are listed here and abroad, issued a hybrid note during the week with a 6.125% yield and maturity in 2027. They were looking for US$750mill in the issue and ended up getting US$11bill in bids. This is great news for MQG and shows the strength and confidence in the Australian investment bank.

Commodities were a bit subdued this week as the USD rose on the back of rate talks and hence commodity prices fell for the most part. Iron Ore dropped 4.5% in China trade overnight so it is expected to fall hard when the US spot price opens tonight. It closed at over US$92t last night. Oil also came off as Russia hadn’t cut production as much as anticipated. Gold also fell hard on the back of the expected rate increase and increased treasury yields. The only bright spark for the week has been Copper which has gained ground back up to 2.68 from 2.62 per pound. The big commodity mover this week has been Cobalt. Just a few months ago it sat at $20,000/t and as of today it has moved up to $50,000t. This is on fears of a pending supply shortage as the mineral is used heavily in lithium ion batteries.

Technically the XJO still looks as if it is headed towards the 5,650 level and will be up against it the next few weeks as a raft of larger stocks go ex-dividend and money is pulled out of the market. We should see this money flow back through to the market in April/May when these dividends are paid.

Its going to be quiet next week as there are no earnings to speak of and the economic data for here and abroad is fairly non-existent. We do have Janet Yellen speaking tonight and US Jobs figures for February are out next Friday night. Apart from that stocks such as CTX, TTS, MPL, OSH, QAN, SHL, BXB, ASX, BHP & TWE all go ex-dividend. Hence I wouldn’t expect much upward momentum from the market.

A quieter weekend for myself as I have nothing planned. Will be my first real test as we recently had foxtel cut off and this is my first weekend without it. Its going to stay quite hot here in Adelaide so it may be a good time to potter around the house and get those indoors jobs done. I hope you all have a great weekend and stay safe. Speak to you all next week. Go Crows!

heath@hlminvestments.com.au

0413 799 315

Important Notice

Any advice in this article should be considered General Advice only and does not take into account your personal needs and objectives or your financial circumstances. You should therefore consider these matters yourself before deciding whether the advice is appropriate to you and whether you should act upon it. I am happy to assist you in this process. To do so, I will need to collect personal and financial details from you before providing my recommendations. Please note the author may own shares in the companies mentioned in the above blog.