18 January 19
Market edges higher, now approaching major resistance (APT)
18 January 19
Market edges higher, now approaching major resistance (APT)
18 January 19
Why are “professionals” worrying about the US corporate bond market?
17 January 19
Production reports dominate the news flow today
17 January 19
Will the RBA actually cut interest rates?
16 January 19
The market shrugs BREXT no deal, Euro data to end higher (ASL)
16 January 19
Income Report: Looking at opportunities to tweak the portfolio
16 January 19
Market Matters 2019 Outlook including our forecasts for the year ahead
15 January 19
The market gets into the grind – edges higher throughout the session (NVT, PPT, SYR)
15 January 19
Subscribers questions (TLS, PL8, CYB, GXY, IVC)
14 January 19
First day back and markets chop around par
The ASX is trading marginally lower at time of writing (- 18points) weighed down mostly by the energy sector following Oil’s big decline overnight while the financial stocks, led by the banks are trying hard to fend off the sellers. A lot of stock specific news about today with the NAB, ANZ and Orica (ASX:ORI) AGM’s being held – Bega (ASX:BGA) putting through an earnings downgrade and Medibank (ASX: MPL) announcing average premium increases of +3.3%, its lowest average increase in 18 years, obviously good news for consumers!
For the week, the MM Income Portfolio fell -0.30%, mostly as a result of weakness seen in Fortescue (ASX: FMG) & Genworth (ASX: GMA). In the current financial year the portfolio is down -2.47% versus its benchmark of RBA cash rate +4% which sits at +2.56% while the ASX 200 accumulation (including dividends) is down by -7.98%. Since inception the portfolio has added 3.72%, equating to 2.56% per annum.
Another hit for the banks from across the ditch
2018 has been a year when banks have looked to bottom on numerous occasions but have gone on to make lower lows, the latest hit to the sector coming from New Zealand last Friday. While we generally have a good relationship with the Kiwis, the outperformance of their stock market in 2018 versus our own, the dominance of the All Blacks and now the RBNZ’s plans to change the regulatory capital required for banks is testing that bond.
The 4 major Australian banks dominate the New Zealand market accounting for 88% of NZ assets. Without getting bogged down in detail, the proposed plan is to increase the tier 1 capital requirement for banks to 16% from 8% currently (although the major banks are currently at 13.4%) plus tweak how they risk weight assets on bank balance sheets which could impact the amount of capital they need to hold to absorb shocks – both moves are a net-negative for Australian banks. If the proposed changes are implemented (decision due in June 2019), ANZ would see the most impact, followed by NAB, CBA and Westpac.
Increased capital is not necessarily a bad thing in the longer term given it makes the financial system safer - which is what the regulator ultimately wants, however it impacts near term profitability. Essentially it’s just another headwind for a sector that has had the proverbial kitchen sink thrown at it in 2018 leading to a significant drop in share prices as shown below.
Banks have mainly faced earnings downgrades from the Royal Commission but there has also been an expectation of lower loan growth. This latter issue is largely due to tightening credit standards which licked off in 2015 and has been felt in falling house prices from the middle of 2017 onwards. Other measures were put in place to cool housing and improve housing affordability for first home buyers, such as a cap on investor and interest only lending which has had the desired effect. Looking at credit growth, particularly investor credit growth the cap has essentially put the kibosh on that market. From experience, I don’t want to pay principle and interest on my investment loans while the alternative, which is to pay additional interest of more than 1% is also not that attractive. Effectively banks have been aggressively discouraging investor and interest only lending given the APRA cap that was in place. This morning, APRA have announced the removal of that cap (as of January 1) so investor lending should start to recover from depressed levels.
The main issue from an income perspective flowing from the proposal in NZ to increase capital requirements, is the potential impact on dividends. NAB for instance has a payout ratio above 90 at a time when earnings are under pressure, asset quality is fine however the media is doing their best to undermine that and the local regulator is yet to make its formal ruling on what it will do (although we have a fair idea). The added impost from NZ is clearly another ball in the air for the banks that will feed more uncertainty.
The question now is, what is priced in?
The banks trade on a forecast P/E of 10.9x versus the ASX 200 which trades on 14.36x, a ~24% discount relative to its usual ~20% discount.
In terms of the banks relative to one another, NAB screens cheapest as you’d expect given they’re the mostly likely to cut their dividend, ANZ is a close second given they have most exposure to changes in New Zealand plus there are some rumours circulating about asset quality in some of their legacy holdings in Asia, while CBA has once again reclaimed its rightful premium against its peers. Relative to the group and 5 year average, Westpac screens cheapest while Bendigo screens most expensive
Peer Group Comparison
ANZ Bank (ASX: ANZ) $24.06
While we don’t own ANZ across either portfolio, its clearly catching attention given its relative value plus its sector leading capital position. The expectation was that ANZ would increase its current $3bn share buy-back program to $7bn which would have been supportive of the stock going forward, however the potential change to capital requirements in NZ may put that on ice.
ANZ (ASX:ANZ) Chart
In June 2016, ANZ was trading on a similar P/E multiple to today dragged down by a big decline in the market which saw the ASX 200 fall from ~6000 points in May of 2015 to a 4700 low in January of 2016, a ~20% pullback, BREXIT being one of the major reasons. As shown above, the ANZ share price bottomed out at $21.87, or ~9% below where its trading today.
ANZ P/E Trends
Commonwealth Bank (ASX: CBA) $69.55
We have CBA in the Income Portfolio from higher levels however we remain comfortable with the holding. CBA has agreed to sell its Colonial First State Global Asset Management (CFSGAM) business for $4.1bn and as a result, should be in a position to return around $3bn back to shareholders through share buy-backs.
Commonwealth Bank (ASX:CBA) Chart
CBA has experienced a P/E re-rate back up in this most recent market sell-off, and now trades at a premium to the sector, however it’s warranted in our view. Put simply it has better metrics relative to the other majors in terms of deposit funding, home loan distribution while it also has the best cost to income ratio.
CBA P/E Trends
National Australian Bank (ASX:NAB) $23.42
As is the case with CBA, we have NAB in the Income Portfolio from higher levels however we remain comfortable with the holding although there is room for improvement on the price we paid! The bullish case for NAB centres on its skew between commercial and residential loans. NAB is a business bank and therefore has lower exposure to a weakening domestic property market. In recent results, they showed the lowest level of new impairments, the lowest level of total impairments, the lowest net write-offs, the lowest 90-day past due number while they are carrying the highest bad debt charge – all in all, asset quality is good relative to peers. The downside is clearly the current payout ratio and the lack of room to move, plus they have the highest cost to income ratio and the weakest capital position in the sector.
NAB (ASX: NAB) Chart
NAB is the cheapest it’s been in the past 5 years and now trades in a single digit P/E.
NAB P/E Trends
Westpac (ASX:WBC) $24.53
WBC is rarely the best in its peer group and rarely the worst – it’s this stability that’s been at the cornerstone of WBC for decades. One area that has been an issue for it in recent times is the cap on interest only loans where the regulator (up until today) put a cap on the proportion of new loans that could be interest only. WBC still had 40% of its Australian home loans represented by interest only loans as at the end of 2H18, compared to 22%, 30% and 25% for ANZ, CBA and NAB, respectively. The cap removal we’ve seen today is a positive for the sector, however its less of a positive for Westpac given they still have less room to grow their interest only loan book relative to peers.
Westpac (ASX: WBC) Chart
Westpac is trading at its cheapest level in the last 5 years from a P/E perspective while on a price to book its trading on just 1.3x versus its historical 1.9x, making it 32% ‘cheap’ on that metric.
WBC P/E Trends
Clearly, the banks are cheap and are pricing in a significant amount of bad news. They obviously face further risks around large house price falls, more significant fines, penalties and customer remediation that occurred in FY18 and importantly a reduction in Australian economic growth which would produce an increase in bad debts, however it seems to us that share prices are currently factoring in these threats and the banks are susceptible to ‘less bad’ news.
We hold the banks and believe they’ll reverse their underperformance in 2018, with outperformance in 2019, especially if the market remains volatile
As this stage, dividends are sustainable while capital returns through share-buys backs remain on the table.
Have a great day!
James & the Market Matters Team
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 Friday, or after the session when positions are traded.
All figures contained from sources believed to be accurate. Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy. Prices as at 19/12/2018
Reports and other documents published on this website and email (‘Reports’) are authored by Market Matters and the reports represent the views of Market Matters. The MarketMatters Report is based on technical analysis of companies, commodities and the market in general. Technical analysis focuses on interpreting charts and other data to determine what the market sentiment about a particular financial product is, or will be. Unlike fundamental analysis, it does not involve a detailed review of the company’s financial position.
The Reports contain general, as opposed to personal, advice. That means they are prepared for multiple distributions without consideration of your investment objectives, financial situation and needs (‘Personal Circumstances’). Accordingly, any advice given is not a recommendation that a particular course of action is suitable for you and the advice is therefore not to be acted on as investment advice. You must assess whether or not any advice is appropriate for your Personal Circumstances before making any investment decisions. You can either make this assessment yourself, or if you require a personal recommendation, you can seek the assistance of a financial advisor. Market Matters or its author(s) accepts no responsibility for any losses or damages resulting from decisions made from or because of information within this publication. Investing and trading in financial products are always risky, so you should do your own research before buying or selling a financial product.
The Reports are published by Market Matters in good faith based on the facts known to it at the time of their preparation and do not purport to contain all relevant information with respect to the financial products to which they relate. Although the Reports are based on information obtained from sources believed to be reliable, Market Matters does not make any representation or warranty that they are accurate, complete or up to date and Market Matters accepts no obligation to correct or update the information or opinions in the Reports. Market Matters may publish content sourced from external content providers.
If you rely on a Report, you do so at your own risk. Past performance is not an indication of future performance. Any projections are estimates only and may not be realised in the future. Except to the extent that liability under any law cannot be excluded, Market Matters disclaims liability for all loss or damage arising as a result of any opinion, advice, recommendation, representation or information expressly or impliedly published in or in relation to this report notwithstanding any error or omission including negligence.
Financial Services Guide
Date prepared: Wednesday, 22 November 2017
Last update: Tuesday, 6th November 2018
About this Financial Services Guide (FSG)
This FSG provides you with key information about a range of subscription services offered by:
Marketmatters Pty Ltd (Market Matters) Australian Financial Services Licence No. 488798 ABN (20 137 462 536)
Level 29, Chifley Tower, 2 Chifley Square Sydney 2000
T: 1300 301 868
E: [email protected]
In this FSG, “we”, us” and “our” refer to Market Matters.
Market Matters holds Australian Financial Services Licence No. 488798 (AFSL) and is responsible for any financial services that we provide to you.
This AFSL was issued on 8th September 2016.
The purpose of this FSG is to provide you with information about:
Market Matters operates a website, www.marketmatters.com.au (Website), where customers may, for the payment of a subscription fee, access certain financial information and general advice. In particular, the Website provides:
This FSG relates only to the Website Services.
What financial services we can offer in connection with the Website Services
As holder of AFSL number 488798, in connection with the Website Services we are authorised to provide general financial product advice to both retail and wholesale clients in relation to the following financial products:
The Website Services are comprised of general advice only. That is, none of the advice given on the Website or by provision of the Website Services takes into account any of your objectives, financial situation or needs (Your Personal Circumstances). Before acting on any of the information, advice or Website Services, you must consider the appropriateness of this information in light of Your Personal Circumstances and, if necessary, consult a financial adviser before making any investment decision.
If you are seeking to acquire a specific financial product or security, you should obtain a copy of and consider the Product Disclosure Statement or Prospectus for that product before making any investment decision.
The Website does not provide a trading platform or access to a trading platform. There is no ability to purchase or sell financial products through the Website.
How do I access these services?
You can access these services by going to www.marketmatters.com.au and following the prompts and steps required to sign up for membership. Please read all terms and conditions carefully.
Fees and benefits payable to us and our associates
The Website is a subscription-based service. A monthly fixed subscription fee is payable to Market Matters when you subscribe to the Website which will vary depending on the type of subscription for which you subscribe. At the date of this FSG, the monthly subscription fees are as follows:
Current subscription fees from time to time are provided on the Website.
The Website does not currently feature third party advertising. Market Matters reserve the right to advertise at a future time for which they may receive remuneration. Any such advertising will be independent of any other content on the Website.
All representatives of Market Matters (Market Matters Staff) receive a salary paid by Market Matters. Market Matters Staff may also receive performance-based bonuses which are based on profitability, the number of subscribers and subscription renewal rates.
How do we manage potential conflicts of interest?
Market Matters have implemented policies and procedures to mitigate the risk of conflicts of interest. These include:
Market Matters Staff are encouraged to express independent views and opinions on the topics they write about. This is established through ongoing training, external audits and our conflict of interest and staff trading policies. Market Matters Staff are required to serve the best interests of the subscribers, without consideration of any commercial or personal interests.
How is my personal information dealt with?
If you have a complaint about our services, you should take the following steps:
Contact us and discuss the complaint directly. If you do not feel comfortable discussing the complaint with us or your complaint is not satisfactorily resolved within 2 business days, please telephone Market Matters, on 1300 301 868 and ask to speak with the Complaints Officer. We suggest you put your complaint in writing at this time so that the issues are fully documented and understood by the parties. Your complaint should be addressed to:
The Complaints Officer
Level 29, Chifley Tower, 2 Chifley Square Sydney 2000
Market Matters will review your complaint within 45 days and attempt resolution. If you are still not satisfied with the outcome, you may take your complaint to an external dispute resolution scheme. Market Matters is a member of the scheme operated by the Financial Ombudsman Service. You should write to:
Australian Financial Complaints Authority Limited
GPO Box 3
Melbourne Vic 3001
Phone 1800 931 678.
You may also wish to consult ASIC in relation to your complaint. ASIC’s website contains information on complaining about companies and people and describes the types of complaints handled by ASIC. You can contact ASIC on its free call infoline:
Tel: 1300 300 630 or email [email protected]
We maintain professional indemnity insurance to cover our employees and Authorised Representatives (including us) for the financial services they provide, having regard to the following:
If you require further information about these compensation arrangements please contact us.
Terms and Conditions
This website, www.marketmatters.com.au, is published by Marketmatters Pty Limited (ABN 20 137 462 536) ('Market Matters', 'MM', 'us', 'we', 'our') Australian Financial Services Licence 488798
Financial Services Guide
Market Matters Financial Services Guide (FSG) is located here, and contains important information about the financial services provided by Market Matters. You must read our FSG and consider it in the context of your Personal Circumstances before acting on any advice. By accepting the terms and conditions you are acknowledging that you have read the FSG.
Provision of the Reports
Reports and other documents published on the Market Matter’s website (‘Reports’) are authored by Market Matters. The Reports represent the views of Market Matters based on technical analysis of companies, commodities and the market in general. Technical analysis focuses on interpreting charts and other data to determine what the market sentiment about a particular financial product is, or will be. Unlike fundamental analysis, it does not involve a detailed review of the company’s financial position.
The Reports contain general, as opposed to personal advice. That means they are prepared for multiple distribution without consideration of your investment objectives, financial situation and needs (‘Personal Circumstances’). Accordingly, any advice given is not a recommendation that a particular course of action is suitable for you and the advice is therefore not to be acted on as investment advice. You must assess whether or not any advice is appropriate for your Personal Circumstances before making any investment decisions. You can either make this assessment yourself, or if you require a personal recommendation, you can seek the assistance of a financial advisor.
The Reports are published by Market Matters in good faith based on the facts known to it at the time of their preparation and do not purport to contain all relevant information with respect to the financial products to which they relate. Although the Reports are based on information obtained from sources believed to be reliable, Market Matters does not make any representation or warranty that they are accurate, complete or up to date and Market Matters accepts no obligation to correct or update the information or opinions in the Reports.
If you rely on a Report, you do so at your own risk. Any projections are estimates only and may not be realised in the future. Except to the extent that liability under any law cannot be excluded, Market Matters disclaims liability for all loss or damage arising as a result of any opinion, advice, recommendation, representation or information expressly or impliedly published in or in relation to this report notwithstanding any error or omission including negligence.
Past performance is not a reliable indicator of future results. Brokerage costs have not been included in the calculation of performance. As financial products rise and fall in value, returns may be negative. Performance figures are not intended to be a forecast. Market Matters does not guarantee the performance of or returns on any investment.
Employees and/or associates of Market Matters may hold one or more of the stocks reviewed on this website.
Subscriptions and Subscription Prices
To access premium content available on the Market Matters website you must subscribe to one or more membership categories available on the website.
To subscribe to the Market Matters website you must go to the Memberships page of the website, provide the information marked as ‘Mandatory’ and select the payment option for the price quoted (at the time of your transaction). You will then receive a verification email from Market Matters indicating that your subscription and payment have been accepted and you will be able to access the premium content.
Prices published on the Market Matters website are quoted in Australian Dollars (AUD) and are inclusive of GST and/or all other duties and taxes. Market Matters has used reasonable endeavours to ensure that prices for subscription to its services are published accurately on the website but these prices are subject to change and Market Matters reserves the right to change these prices and will notify you of any increase by email (with the price increase to apply from the time the next payment is due).
Marketmatters Pty Ltd (ABN 20 137 462 536) will issue a tax invoice to paying subscribers in relation to any supply that is subject to GST in accordance with A New Tax System (Goods and Services Tax) Act 1999.
Any member is entitled to cancel their membership at any time. In the event a member does wish to cancel their subscription, cancellations must be notified in writing to:
Level 29, Chifley Tower, 2 Chifley Square, Sydney NSW 2000
or by email to: [email protected]
All cancellations of month-by-month subscriptions will be cancelled and not billed again the next month.
All cancellations within 14 days we be entitled to a full refund. Any introductory gifts, such as iPads, must be returned in their original condition before a refund will be made.
All cancellations made after 14 days of subscription commencement will not be entitled to a refund unless in the event of extenuating circumstances, at the sole discretion of Market Matters.
Subscriptions will automatically renew on the expiry date of current subscription. In these instances the subscription will be renewed at the current rate published on the Market Matters web site, using the same credit card that paid for the initial subscription, unless otherwise requested by the subscriber. A subscriber who wishes to cancel after being renewed in this way will have a “14 day cooling off period” in which they can request to discontinue and will receive a full refund for the renewal payment, this can be done in writing to:
Level 29, Chifley Tower, 2 Chifely Square Sydney 2000
or by email to: [email protected]
Market Matters has not reviewed any of the websites which link to this website or to which this website links. Market Matters is not responsible for the content of any other website or pages linked to or linking to its website. Following links to any other websites or pages shall be at the user’s own risk.
Copyright © 2013 Marketmatters Pty Ltd (ABN 20 137 462 536). No part of this website, or its content, may be reproduced in any form without the prior consent of Market Matters.
This Agreement is governed by and is to be construed in accordance with the laws of New South Wales, Australia. You agree to the non-exclusive jurisdiction of the courts of New South Wales, Australia in respect of any proceedings concerning this Agreement. This website is not available to US persons and by accepting these terms you confirm that you are not a US person.