Views at a Glance / Income Report; A look at our positioning (NAB, SUN, HVN, NCK, VCX)

By Market Matters 13 December 17

Income Report; A look at our positioning (NAB, SUN, HVN, NCK, VCX)

Market Matters Income Update 13th December 2017

Yesterday we saw the market close above 6000 and it finally feels like the local bourse, buoyed by a flow of corporate activity will follow the usual path of seasonal strength from the middle of December into Christmas. We’re positioned for this in the Income Portfolio with cash of just 2.5% - the lowest since the portfolios inception. The portfolio got a ‘kick’ this week from Vicinity (VCX) which was bid up strongly yesterday following the Westfield (WFD) takeover which we covered in the AM report today. Elsewhere, the banks are starting to move higher, something we’re positioned for in both of our portfolios, while our position in Telstra is now showing a paper profit of ~7%.

In terms of the MM Income Portfolio over the past week, it added +0.78% versus a market which was up 0.70%. Overall, the portfolio has gained 7.32% since inception (5th July 17). A return we remain comfortable with given the lower risk & higher income potential of the portfolio. As it stands, and looking primarily at Bloomberg Consensus Data, the portfolio is expected to yield 7.38% grossed for franking, a spread over a 12 month term deposit of near ~5%.

In today’s report, we’ll look at the portfolio composition and start setting some ‘traps’ for the Christmas period.

This month the ASX200 has oscillated between 5938 and 6027, since the GFC the average range for a December is 282-points, with the lowest range still 188-points in 2012. Hence if 5938 remains the low for this December, with the top-side of 6027 tested this morning, we have some simple logical targets:

·         An average December since the GFC targets ~6220 for the ASX200, while the quietest still has an objective of 6125.

·         The average gain for December since the GFC is +2.5% which coincidentally has 6120 as the likely conclusion for this month.

Looking further out, the key trend that we need to be conscious of into early 2018 is higher interest rates, and this will play into our sector positioning into the new year. When we consider the MM Income Portfolio we break it up into equities and income securities, however we’re fluid in our allocations depending on what’s most attractive at any given time. As it stands, we have 35% allocated towards floating rate income securities, 62.5% in equities and 2.5% in cash, which given the strong seasonality into January, feels about right.

When we look at the equity allocation, we then break it down into sector weightings, however we’re not that concerned about it relative to index weightings, we’re more around weightings relative to the prevailing conditions and market pricing. For instance, we have little interest in Healthcare which is typically expensive, and therefore will likely struggle as rates go higher. We have a high allocation in the financials space currently which positions us well for higher interest rates yet that seems to work counterintuitively to our reasonable position in Consumer Discretionary – the retailers of Nick Scali and Harvey Norman. In that instance its’ about valuation and the ‘oversold’ positioning of the market in terms of Harvey Norman, while Nick Scali is simply a very good business that got sold down to an attractive level. It remains our best performing currently held positon.   

*The banks are included in the Financials weighting however we have separated it out here to provide some further detail.

Looking forward and planning our positioning we’re likely to;

Index – reduce our overall equity exposure into strength – around the 6125 level

Reduce our position in Suncorp (SUN) by around 50% should it trade above $15
Reduce our big overweight call on NAB (NAB) should it trade nearer $32
Sell Harvey Norman (HVN) around $4.50 – being a buyer again should it trade nearer $3.50
Sell Nick Scali (NCK) nearer $7.50
Sell Vicinity (VCX) above $3.05

In terms of Income Securities, the new Bendigo Hybrid (BENPG) lists tomorrow – and should do reasonably well given the strong demand for it + other new issues since this was launched.

Conclusion (s)

We are positioned for more upside in the market however will be looking to sell equities into strength. 

BENPG will list tomorrow – a new hybrid we have allocated 7.5% of the portfolio in 

We will continue to remain active in terms of our exposures in 2018

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Wednesday, or after the session when positions are traded.

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