Market Matters Report / Market Matters Weekend Report 16th July 2017

By Market Matters 16 July 17

Market Matters Weekend Report 16th July 2017

Market Matters Weekend Report 16th July 2017

The Australian market was higher overall this week putting on +62pts/1.08%, and importantly the days where selling ticked up were met with buying the following session – overall the Australian market has been weak, however we think it’s about to kick higher. US markets on the other hand have been strong with both the S&P500 and Dow Jones breaking out to new highs on Friday  after a few weeks of consolidation. Both indices remain bullish as does the NASDAQ following its ~4% correction.

S&P 500 Weekly Chart

During the week, the ‘reflationary trade’ remained supported with the materials sector doing particularly well, while we also saw the Insurance stocks trade strongly. IAG for instance made new all-time highs on Friday ($7.005) while Suncorp  traded above its 5 year range, closing out the week at $15.17 after being as high at $15.24. Suncorp remains our largest exposure in the Market Matters portfolio with a 12% weighting.

We haven’t written specifically about the banks in a while, and they’re topical at the moment given 1. They form part of the reflation trade 2. We had the US reporting season kick off last week and the banks dominate the early exchanges & 3. We have a large weighting towards them in our portfolio, holding positions in CBA from $79.66, Westpac from $32.03, Clydesdale from $4.71 and NAB from $31.85.  The typical May / June weakness has played out in the sector and we are now in  the ‘theatrically’ strong month of July. To date, the Banking Sector is up +1.39% versus the average post GFC gain for the sector of +4.49%.

For the broader market, the strong seasonality in July has proven elusive with the ASX 200 up just +0.77% in the first half versus a typical gain of +4.04%. In fairness, the May / June weakness was marginally deeper than what usually plays out and we’ve had the added complexity / uncertainty around the bank levy initially, and more recently, we’re awaiting the banking regulators determination / guidance on what ‘unquestionably’ strong actually means in terms of bank capital.

To give some background here, the new capital requirement from APRA is an unknown and because of that ‘unknown’ bank stocks have attracted less buying. At this point, we know banks’ will need to hold more capital - APRA have said as much, however the amount and timing of this is the variable - importantly, whether or not is can be done in an orderly manor over time. We suspect it will but only APRA knows for sure.

The main argument  from the regulator is that Australian banks need offshore funding to support their loan books and as a consequence, they need to stay ‘unquestionably strong’ to get this offshore funding – if banks have trouble accessing overseas capital, the economic picture for Australia would turn pretty bleak.  The funny thing (not if you’re a bank) is that the new bank levy actually makes them weaker, not stronger if you think of the banks in isolation. It does however make the Government balance sheet stronger and given there is an implied level of Govt support for the banking sector, by extension the banks benefit here as well. Swings and roundabouts but probably nothing changes, other than you and I are being charged more to fill a Government black hole!

However this all plays out,  will most likely be the key driver of bank share prices in the near term. Technically, the banks look primed for a strong rally from current levels on the back of weakness, consolidation and now….rally?

Westpac (WBC) looks strongest technically out of the big 4 and we have +7.5% of the portfolio in the stock.  Goldman Sachs upgraded WBC to a BUY last week and this prompted some decent buying on the news. Westpac has traded back to its longer term average PE, ANZ is also close while NAB and CBA continue to trade above theirs.

Westpac (WBC) Price to Earnings Ratio over time

Source; Shaw and Partners Research

1 day early – 1 day late

It was actually a very frustrating week for us on two fronts. We cut BT Investments  from the portfolio 1 day early, and our note to buy Star Entertainment (SGR) was published one day too late. Unfortunately, that is life in the markets and at times (like last week) it can be highly infuriating. Still, we’re comfortable being out of BT for reasons set out in the note at the time, however the guys at Macquarie upgraded the stock the day after and it popped up. It’s still too 50/50 for us despite their call and we’re comfortable on the sidelines.

Star on the other hand would have looked good in the portfolio around the ~$5.10 we expected it to open on Friday. News that Genting had sold a huge line of stock ($233m) at a very slight discount to market – all going to one Fund Manager (Perpetual) got the stock off to the races. Many fundies would have been thinking they’d get a slice of any block at a discount, so why buy on market. The fact it went all to Perpetual means that other managers who were patiently waiting, now need to step up and buy.  For now we’ll remain patient after the stock put on +3.52% on Friday to close at $5.30.

Star Entertainment (SGR) Daily Chart

QBE – A bid coming?

We wrote in the W/E report last week ‘We already own QBE however we continue to think the stock is compelling here given the backdrop of sharply higher interest rates’. This view continues to hold true and now we have more rumours around a potential takeover. Months ago, Allianz was apparently casting their ruler over QBE and now AIG are in the press as a potential suitor. Both are plausible given they have excess capital and both are currently conducting buy backs, and importantly have been on the record as saying they are interested in M&A. Allianz has a market capitalisation of ~A$122bn, AIG is capped at A$77bn while QBE is worth $A16.6bn. It seems any deal if debt funded by around a third could be high single digit earnings accretive for both. We continue to like QBE here.

QBE Weekly Chart

Standout technical chart (s) of the week

For those that trade breakouts the S&P 500 was a clear breakout on Friday and looks primed for higher levels. This can be traded through the S&P 500 ETF listed on the ASX , via code IVV

S&P 500 Daily Chart

Investing opportunities for the coming week(s)

  1. We are buyers of Star Entertainment (SGR) around $5.10 however may amend this higher depending on trade early in the week
  2. We are looking to add to our position in Newcrest Mining (NCM) however would prefer to see Gold spike under $US1200 before buying

Trading Opportunities on our radar

  1. We will again be keen to BUY Fortescue on a drop back into the high $4’s

Summary

Although markets have remained weak so far in July, we continue to target a good month, and potentially, an explosive move higher from here if bank regulators are measured in their approach

Our Holdings

Our positions as of Friday. All past activity can also be viewed on the website through this link

Weekend Chart Pack

The weekend report includes a vast number of charts covering both domestic and international markets, including stock, indices, interest rates, currencies, sectors and more. This is the engine room of our weekend analysis. We encourage subscribers to utilise this resource which is available by clicking below.

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 Friday.

Disclaimer

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 16/07/2017. 4.00PM.
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