Income Report / Income Report: Looking at opportunities to tweak the portfolio

By Market Matters 16 January 19

Income Report: Looking at opportunities to tweak the portfolio

Market Matters Income Report 16th January 2019

The ASX is trading marginally higher just before midday with news that the UK parliament voted pretty emphatically against the Theresa May sponsored BREXIT deal overnight failing to upset the bulls. She now faces a confidence vote tomorrow (which she will likely survive) before putting forward a new plan on Monday. The irreverence shown by the market to this current  process is highlighting a more bullish backbone at the moment, however  there is clearly more to come over the coming days / weeks.’

The ASX 200 is currently trading up +9pts / 0.16% at 5824

Since our last Income Note, banks have rallied well from depressed levels while the retailers have sustained some decent selling, Super Retail now the weakest link in the portfolio while our position in Nick Scali has gone from a strong profit, to a small loss. 

Since Dec 19, the MM Income Portfolio had added +1.34%. In the current financial year the portfolio is down -1.33% versus its benchmark of RBA cash rate +4% which sits at +2.98%  while the ASX 200 accumulation (including dividends) is down by -4.06%.

The MM Income Portfolio

Today’s report will focus on the composition of the MM income portfolio as we look to ‘tweak’ our exposures into 2019. As suggested above the portfolio is down marginally over the financial year to date underperforming it’s cash plus 4% benchmark which is always going to be a tough ask in a weak equity market. Using a cash + benchmark implies that this is an absolute return portfolio which means it should make a positive return over time, but that doesn’t mean it won’t go through periods where overall returns are negative. The exposure to income securities has insulated the portfolio well however a number of stocks have struggled. A FYTD return of -1.33% against a share market that is down -4.06% inclusive of dividends is not ideal, but sets a good basis to build from in 2019.

From an overarching perspective, we think more boring sectors will do best in 2019, Banks, Telco’s and even some select property plays given the fall in global bond yields. Resources will be choppy however we also favour this sector for yield in 2019. Consumer Discretionary stocks have been weak and we expect that theme to continue for the next 6 months at least however ultimately, we’d expect some good yield opportunities to play out if the sector overshoots to the downside. Insurance has been tough, and again, we expect that negative bias to continue in the first half of the year  while infrastructure should do better this year if global interest rates stay lower for longer. All in all, the above views mean some portfolio amendments are likely.

Consumer Discretionary

We hold Nick Scali (ASX:NCK) and Super Retail Group (ASX:SUL), both of which are cheap but on the nose. We’re down on both, more so on Super Retail and we’re looking to cut our sector exposure, with the view of revisiting if they overshoot on the downside.

MM is likely to sell both NCK & SUL in the coming days / weeks ahead, ideally into some strength

Nick Scali (ASX:NCK) Chart


We recently sold our remaining Suncorp from the MM Platinum Portfolio and now we’re looking to cut if from the Income Portfolio. While it pays a strong yield, SUN often has a very weak first 6 months of the year and a more bullish second 6 months both from an earnings perspective and in terms of share price.  

Technically SUN is now bearish, targeting a further ~15% downside.

MM is very likely to sell SUN in the coming days / weeks ahead

Suncorp (ASX: SUN) Chart

The Banks

We’re underweight bank equity in the MM Income Portfolio holding just NAB and CBA with a ~15%  portfolio weighting however we do have exposure through bank hybrids which we’ll cover below. We continue to believe the banks now have the worst behind them in terms of property falls and lending volumes given the move by regulators to remove the cap on investing lending late last year.

Their largely sustainable dividends feel attractive at current levels, especially if global bond yields are set to rise at a more modest pace e.g. CBA is yielding 6.25% fully franked.

MM is looking to trade the ranges in banks during 2019 with an eye on dividends, in the case of CBA broadly between $70 & $80

Commonwealth Bank (ASX: CBA) Chart


MM likes the Telco’s into 2019 especially if we do endure a prolonged bear market – historically Telcos outperform in weak markets and the Australian sector has been smacked since 2014.

We’re unlikely to sell TLS in the weeks ahead and we may increase its current weighting if the stock falls to ~$2.80 ahead of the February dividend. We would be sellers ~$3.50

Telstra (ASX: TLS) Chart

Diversified Financials

It’s hard to get excited over the bulk of diversified financials given the current backdrop and likely volatility. The MM Income Portfolio holds Perpetual (ASX:PPT) which  is cheap but lacks a near term bullish catalyst while Genworth (ASX:GMA) is a complicated play, but overall is exposed to a falling property market.

Technically, PPT targets a bounce to ~$37 however the downtrend still remains. GMA could easily bounce ~10% however any rallies are clearly being sold, and we’ll look to sell any future strength, while we’d be concerned on a break below $2.10 on the downside. We covered PPT in more detail yesterday afternoon – click here

Perpetual (ASX:PPT) Chart

Resources & Materials stocks

We’re searching here for yield opportunities in 2019 and are currently reviewing Woodside (ASX: WPL) and Whitehaven Coal (ASX:WHC), while  we currently hold Alumina (ASX:AWC) and Fortescue Metals (ASX:FMG) -  a 5% weighting for both. Fortescue had a good December quarter and we’re expecting a positive report out on the 20th February. We remain comfortable with both holdings and have a bias towards increasing exposure towards the sector.

FMG remains bullish targeting $5 while AWC has great support around ~$2, although $2.60 is clear resistance.

Fortescue Metal (ASX:FMG) Chart

Industrial stocks

IVE Group (ASX:IGL) is a large printing business that remains cheap with good earnings and income growth likely over the next 12 months. It is now within the ASX 300 as of the latest quarterly rebalance and on P/E of 8 and yield of ~8% its remains a worthy holding in the income portfolio.

Technically the stock looks okay

IVE Group (ASX:IGL) Chart

Hybrids & Bonds

The income portfolio has a 37.5% weighting towards income securities that includes hybrids, a listed bond and 2 listed income trusts. We look to hold a minimum of 20% and a maximum of 70% towards income securities, so it gives us a fairly high level of flexibility. At 37.5% where towards the lower end of where we can be leaving a higher exposure to equities, which has hurt the performance of the portfolio in recent times. If stocks continue to move higher, we’ll look to increase our income security weightings and reduce our equities exposure.

Of this subset, we’re mostly exposed to financial hybrids  and over the course of December the median margin tightened 34bps over December to 3.25%, in spite of global credit spreads widening during the month. The key takeaway being that local investors are embracing hybrids when equity markets become volatile. At 3.25% over bank bills, the average bank hybrid is around fair value in our opinion..

Income Opportunities on the Radar

Woodside (ASX:WPL) $33.38; Clearly exposed to the Oil price which has been weak during the latter part of calendar 18, however a recent bounce seems encouraging. WPL is likely to yield 5.79% fully franked which, assuming the Oil price holds together looks attractive. Technically, we’d be bullish on $1 pullbacks.

Woodside (ASX:WPL) Chart

Whitehaven Coal (ASX:WHC) $4.56; Capital management the key here for this Coal Producer with strong cash generation on the back of strong coal prices, Wilsons for instance forecasting 51cps in FY19 putting it on a yield above 10%. At the end of 2018, news that Nathan Tinkler has launched legal action against the miner is a clear negative, however the company is confident of their  position (I’ve heard that before however this claim does seem weak)

Whitehaven Coal (ASX:WHC) Chart

Property; With global bond yields pulling back sharply at the end of 2018, some select property stocks are now worth considering. At the smaller end of town, Centuria Capital (ASX:CNI) looks interesting yielding ~7% while Charter Hall Retail (ASX:CQR) on an unfranked yield of ~6% is worth consideration. Both are now on the radar.

Charter Hall Retail (ASX: CQR)


We are looking to tweak the MM Income Portfolio over coming weeks, by reducing exposure to consumer discretionary & insurance

We are looking to increase resource exposure, and are now considering select property plays


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 16/01/2019

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.