ASX Weekly Wrap 01/05 - 05/05

A dismal week for the XJO last week as it proceeded to lose 87.50 points or almost 1.50%. Most of it was lead by weakness in the banks and resources space, but also I feel weakness in the AUD, which dropped from 0.7550 to below 0.74, also contributed heavily. Our high was 5,956.50 on Monday and our low was 5,827.20 on Friday.

As per the email I sent to you all on Friday, I am writing this wrap on the Monday 8th May instead of my usual Friday. This has allowed us a few luxuries in terms of seeing the results of US job numbers, WBC half yearly report and the French election. I will cover all below, but they all seem to fairly bullish for the market.

We will start on a sour note and get the bad news out the way with the Chinese manufacturing PMI index which was released last Monday. The reading came in at 50.3, below the 51.0 forecasted and below last month’s read of 51.2. Obviously this is a concern to see the manufacturing index slowing so sharply in April, but on the plus side it is still above that all important 50 reading which signals above trend growth. This is also one month of data and trend still shows solid expansion in the Chinese manufacturing sector. Let’s hope the May result is more favourable.

The April jobs numbers for the US printed a real bullish read on Friday night after a somewhat soft March. The figure came in at +211,000 jobs added to the US economy for April. This was above last month’s +98,000 and above forecast for a +190,000 addition. The unemployment rate dropped to an unexpected 4.4% due to the strong figures and a lower than expected participation rate. The only negative to come from the data was in relation to wages growth. This figure came in at +2.5% for the month, below last month’s +2.8% figure. Whilst the wages growth figure is slightly concerning the headline jobs numbers are very encouraging. It shows continued strength in the US economy and that maybe the weak GDP figure for the first quarter was just a once off. Some are forecasting a +4.3% increase in GDP for the second quarter.

Staying in the US and President Trump finally got his repeal of Obamacare and his own healthcare bill through congress late last week. It was a tight vote, as it only won by 6 votes, but it passed none the less. Once again this is important in terms of the confidence the markets have in trump and his ability to get policy through congress. His next test will be his Tax cuts, but that isn’t expected to see congress until August at the earliest.

The final event on the macro front was the French election which were decided this morning our time. As expected Macron won, but no one predicted the margin to be as wide as it was. Macron won with 65.8% of the vote. Le Pen got a mere 34.1%. This once again tasks a major risk off the table in terms of the markets and we should see a healthy lift in European indexes when they open up tonight.

We had three of the four big banks report over the last week or so, plus Macquarie Group. ANZ was first off the ranks with their half yearly report and it was a tad on the softer side of expectations. Profit came in +6.3% higher at $2.91 bill, a tad lower than consensus. Cash earnings came in at $3.41bill, +23% on last year and above the $3.39bill forecast. Much of the increase in profit was attributed to a $198mill decline in impairment charges, which has been linked to a decrease in exposure to the resources sector. Operating income did decline 3% to $9.996 bill when it was expected to be flat. Other important figures include their dividend remaining flat at 80cps (Fully Franked), return on equity rising to 12.5% from 11.2%, tier 1 capital ratio up to 10.1% from 9.8% and finally net interest margin shrinking to 2% from 2.07%.

Whilst it was nice to see underlying profit rise and ROE increase it was much the same story has we have seen the last few years within the sector. Net interest margin is still being squeezed but I feel this is where it stops as banks are now increasing rates outside of the RBA. Overall it was a solid report, but I dare say the market expected more in terms of operating revenue and interest margin. ANZ has since fallen close to $30 again after peaking at $32.95 recently. Also remembering it does go ex-dividend today for 80cps. However ANZ does look value again around these prices as the yield has climbed back to over 5.3% and they are trading at roughly 13x forecast earnings. Technically there is a chance they fall to the $29 support zone which would make them very cheap from a value perspective.

National Australia Bank (NAB) was next to release its results last week with a slightly better than expected set of numbers. Cash earnings came in +2.3% at $3.29bill, slightly ahead of consensus forecast. This was despite a 5.1% increase to its bad and doubtful debts which was attributed to some of their commercial real-estate exposure. Like ANZ their net interest margin contracted by 11 basis points to 1.82% from a year ago but was flat when compared to six months earlier. NAB maintained its interim dividend at 99cps. NAB is yielding 6.0% here (fully franked) and does not go ex-dividend until 16/5. Its share price has held up better than the ANZ since reporting, but is also trading on a cheaper multiple at 13.5 forecast earnings. Like ANZ I can see value here with maybe some weakness with a pullback to $32.

The final bank of the big four to report today was Westpac (WBC). As did NAB, WBC impressed the market with a solid overall report, but also with some very bullish commentary. Their cash earnings rose 2.9% to $4.02bill which was in line with most forecasts. They maintained their interim dividend of 94cps and their net interest margin contracted less than expected by 4bp to 2.05%. Finally their impairment charges dropped 26% or $174mill due to less exposure to single name risks. The rise in profits was attributed to their markets division, which performed strongly during the year.

In commentary, to go along with these results, WBC noted whilst it expected house prices in Sydney and Melbourne to decline they thought the prospects for the Australian economy were very good and were seeing a continued improvement in business. Being Australia’s second largest mortgage provider all eyes were on the breakdown of the loan book. When it came to the much talked about ‘Interest Only’ loans, WBC’s profile looked very sturdy. WBC revealed 92% if all interest only loans had an LVR of <80% with only 2% above 80% LVR with <$100k in annual income. In fact 57% of their interest only loans had <60% LVR. This shows people have a lot of equity already tied up within these properties and can withstand a large downturn in prices before they got into any real trouble. This goes against what most media have been reporting the last two weeks making it sound like a lot of ‘interest only’ loans were on the edge. As I had expected this talk looks overblown.

WBC trades on a higher multiple than the others mentioned at around 14.2x forecast earnings. It does boast an impressive 5.5% fully franked yield though. It does sit right on support here at $34 and if it were to break that we could see it fall to approximately $32. As with the others they do look value here and would look cheap if they were to fall to that $32 target. I still remain bullish on the banking sector in the longer term and do see them representing the best exposure to an improving Australian economy.

Australia’s largest investment bank, Macquarie Group (MQG), released their full year results last week and surprised many as it beat to the upside. Their net profit came in at +7.5% to $2.22bill with most forecasting it to hit $2.11bill after MQG had said on numerous occasions they expected it to be in line with last year’s result. Its second half came in at +18% on the same time last year, mainly due to a lift in trading conditions and performance fees. 70% of MQG earnings come from annuity style business making forecasting earnings easier and more reliable. Its froth comes from the remaining 30%, which is from capital markets, and in 2017 this rose by 12%. MQG increased its final dividend from $2.40 to $2.80 in 2017 with a total yearly payout of $4.70.

MQG now trades on a 13.7x multiple on current earnings and 14.2x on forecast earnings after shares rose 5% on the back of these results. MQG yields 5% at current prices but with only a 45% franking rate. Given MQG’s propensity to under promise and over deliver they do still look like they have more room to move here and would be good value on any dips. MQG are forecasting 2018 earnings to be in line with 2017, but also said the same of 2016 & 2017 earnings and yet profit came in 7.5% higher. I love when management do this and generally so do share markets. I’d back management to beat guidance again in 2018 as they have done on the last three sets of results. If you are believer that financial markets are in for another robust year then MQG would give you solid exposure to that.

I was always taught growing up that if you didn’t have anything nice to say about someone then don’t say anything at all…. This would be the case with commodities this week. With the weaker than expected Chinese PMI number all commodities copped a hammering during the week. Iron Ore dropped top as low as $59t only to rebound Friday night to the $65t mark. However it is under pressure again in Chinese trade today down 3.5%.

Oil also was hit hard falling to as low as $43 a barrel before bouncing back up to above $45 again. This is based upon supply concerns again as US Shale oil producers hit their highest production numbers since August 2015. OPEC members will again meet in Vienna on the 25th May as Oil now stands around the same price it was last time they agreed to cut. As I have been saying for some time they will have to agree to continue current production cuts and possibly increase them in order to stabalise the price and get it going up again.

Gold continued its weakness and its path towards $1,180 an ounce this week as it fell further to $1,228. This is in line with global major risk factors dissipating and bond yields again rising. US 10yr Treasury yields have bounced off their lows of 2.17% a few weeks ago to again sit at 2.36%. The Fed has also signaled at their last meeting that conditions were still right to increase rates at least two more times in 2017. Again rising rates are usually negative for the gold price.

Technically the XJO remains in a bullish pattern. We should touch that 5,800 trend line in the next week or so and bounce from there. To me there seems enough positivity to keep us up. There is the old adage of ‘Sell in May & Go Away’, but I feel that has less relevance now than it used to due to the dilution of tax benefits you used to receive realizing a capital loss. The S&P 500 in the US is close to breaking out to new highs and so is the Dow Jones. The NASDAQ continues to push to new highs almost on a nightly basis. If there is a stabilization in commodity prices we may see some money move from the banks back into resources after they go ex-dividend. Now is also usually a better time for the speculative end of the market as liquidity drops and the top end of the market is quiet.

Obviously we had WBC report today, plus we had the French election news, but the rest of the week still has some interesting data to come. We have the Federal Budget released tomorrow night and as long as there are no nasty surprises in there I dare say it will be a non-event. We also have Australian retail sales tomorrow. Chinese CPI & PPI are out on Wednesday. I’d expect them to be soft after that PMI read. Finally we have US CPI and retail sales out on Friday night. CSR, BTT, GNC and XRO all report earnings this week as well.

Hope you enjoyed this delayed ASX Weekly Wrap. Enjoy your week and I’ll speak to you all soon. 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.