18 August 19
Market Matters Weekend Report Sunday 18th August 2019
18 August 19
Market Matters Weekend Report Sunday 18th August 2019
16 August 19
Phew - a big week comes to a close (TLS, OML, COH, NCM, SGR, HLS)
16 August 19
5 stocks we are considering into the current market panic & a word on recent performance (BIN, ALL, MQG, OZL, APX)
15 August 19
Not a good day to miss earnings expectations – market falls 2.85% (TLS, BKL, TWE, SUL, WPL, WHC, ORA, CWY)
15 August 19
Should we buy more gold stocks as volatility increases? - (CSL, EVN, GDX, MFG, NCM, NST, PGH, RSG, SAR)
14 August 19
A mixed day on the reporting front (PGH, CSL, NAB, TAH)
14 August 19
Income Report: Are we finding income opportunities amongst Hybrids? (NAB, TAH)
14 August 19
Overseas Wednesday – International Equities & ETF Portfolios (MFG, COH, CYB, BABA US, 700 HK, 2318 HK, SH US, TYU9, GOVT US)
13 August 19
Magellan to raise capital for future growth after reporting strong result (MFG, CGF)
13 August 19
Keep your fingers on the pulse, there’s lots going on (JBH)
The hectic month of February came to a close on Thursday and with it so too the half yearly earnings season for Australian companies. For the week, the market added +0.41% led by the Healthcare which added an impressive +3.71% and the Financials which added +1.40% however taking a step back and looking at the 28 days of February (29 days next year for a leap year so my eldest daughter told me this morning) - the rally in stocks was an impressive one, more so locally than on the international stage. The Australian market excluding dividends advanced by +5.2% while the US S&P 500 was up by +2.97%, the Dow Jones added +3.66% and the Nasdaq finished +3.44% higher, however it was Chinese markets that really impressed, the Shanghai Composite adding 12.82% for the month – punching through resistance thanks to more positive commentary around the Chinese / US trade discussions. If they break 3000, Chinese equities look poised for another 10% gain at least.
Shanghai Composite Chart
US market edged higher throughout the week with the S&P 500 adding 0.39%, however 2800 resistance is still holding for now. No change to our outlook at this stage, we still believe they have a strong risk to the downside with our target ~5% lower but we should a remember that tops, even short-term ones, generally take longer to evolve as opposed to bottoms which usually react like a tensioned spring board.
S&P 500 Chart
US Interest rates caught our eye last week with the US 10 year yield rising from 2.62% to 2.75%. One of the key factors supporting this recent rally in equities has been lower interest rates. While rising rates are an indication of economic strength, they also present a headwind for asset prices. Last year we saw two bouts of market weakness, both led by interest rates but interestingly, both for opposite reasons showing how twitchy the market is to movements in rates. Low rates are supportive unless they indicate a looming recession, while high rates imply economic strength, but too high and they crimp growth.
US 10-year Bond Yield Chart
Half yearly results have clearly dominated the news wires locally and we’ve seen some extreme volatility at a stock level driven obviously by results but more importantly, market positioning around those results.
Investors (including MM) where more bearish than bullish leading into reporting season and the outcome was not the ‘car crash’ that it could have been. The correction in global markets in December was driven by fears of a global slow down – an impending recession led by the US – however that negative backdrop generally speaking didn’t show up through weakness in earnings (yet).
According to Bloomberg data, 33% of company reports beat consensus expectations by at least 2% and 38% missed by the same hurdle. That’s a reasonable effort, pretty much in line with historical averages and when considering the markets net bearish positioning ahead of the results, it’s easy to comprehend why the market rallied so strongly.
We’re now likely to see a lot of attention turn to ‘cloud’s ahead’ given the more downbeat outlooks provided by a lot of companies. Weak housing and a looming election will get most airtime here – they seem to be the go-to risk factors locally, however we’d caution that these are known knowns for the market – not new, nor surprising in MM’s view, the counter side of these risk factors would actually be more influential on the market i.e. house price falls moderate and show signs of a bottom while Labor get in with a big majority providing political certainty in Australia, the first time we’d had it in over a decade.
Today’s report will dig into the various sectors and the trends that came out of reporting season, and importantly, how we intend to play them.
At MM we remain cautiously bullish for at the least the next 3-6 months hence we will continue to remain focused on sectors / stocks where we want to increase our market footprint.
1 Banking Sector
Commonwealth (ASX:CBA) and Bendigo (ASX:BEN) reported first half results while the other 3 major banks provided trading updates. Bank of QLD (ASX:BOQ) issued a profit downgrade.
- Competition in the home loan sector is high in a weakening market – not surprising and probably set to continue
- Short term funding costs went up which put pressure on margins. This can be shown through the 90 day bank bill rate below. Banks generally borrow short term and lend long term, so higher short term borrowing costs hurt - the trend has now reversed. The regional banks are most impacted by this theme so theoretically, should have the most to gain on its reversion
- Regulatory costs were high, and will remain high for a while – not new news and the outcome from the RC was clearly more bank friendly than it could have been
90 Day Bank Bill Rate Chart
- Banks to outperform from here, we remain overweight, holding CBA, NAB & WBC while we bought BOQ in the Income Portfolio into weakness this week. Regionals most oversold, WBC best value major, CBA the most likely to be sold into further strength.
Bank of Queensland (ASX:BOQ)
2 Diversified Financials Sector
Fund managers have been ‘hot’ as investors look for cheap leverage to a rising market, while some of the beaten down ‘sector dogs’ like AMP and IOOF have moved up from their lows.
Targeting a sell into further strength for the sector overall
Perpetual (ASX:PPT) Chart
3 Insurance Sector
QBE’s international exposure helped rather than hindered this time around and it delivered a ‘clear’ set of results, and rallied as a consequence – the wayward ship is turning.
We hold QBE and recently excited SUN. QBE now targets $13
QBE Insurance (ASX:QBE) Chart
4 Resources / Material Sector
The miners performed well in February helped by a combination of strong commodity prices and large scale capital management initiatives.
Large cap miners BHP, RIO & FMG are a ‘sell’ into current strength. We own Western Areas (ASX:WSA) & Alumina (AX:AWC)
Western Areas (ASX:WSA) Chart
5 Gold Sector
The AUD Gold price had been strong at the end of 2018 and early 2019 however its now starting to correct - some patience now warranted.
We are short term bullish the AUD which is a negative for Gold in AUD terms, we’ve seen insider selling in a number of names and technically a few stocks in the sector look tired – we are remaining patient.
Newcrest Mining (ASX:NCM) Chart
6 Energy Sector
Oil prices look positive with a test of $64 / +12% the next technical target. Given that backdrop, energy stocks remain a buy the dip scenario, and reasonable pullbacks are common.
WPL below $34 our key pick while Beach Petroleum (ASX:BPT) remains solid, however risk reward not exciting at current levels
Woodside Petroleum (ASX:WPL) Chart
7 Food Sector
A mixed trolley through February reporting however M&A activity in the sector is heating up. This is typical when highly cyclical stocks decline on the back of shorter term transient factors like weather.
Buying structurally sound companies into cyclical weakness can yield good results. This week we added Costa to the Platinum Portfolio
Costa Group (ASX:CGX) Chart
8 Consumer Services Sector
A heavily shorted sector and after a ‘less bad’ reporting period, some of the rallies have been significant.
We are looking at GEM as a small holding in the Platinum Portfolio, ALL needs to close above $26 to regain its bullish feel
G8 Education (ASX:GEM) chart
9 Healthcare Sector
The stocks with high hopes built into valuations disappointed during earnings season however those that had been weak showed improvement – some mean reversion starting to play out in Healthcare.
We bought RMD into weakness and sold COH into strength, both well timed moves. We are now looking at HLS for another buy in the sector.
Healius (ASX:HLS) Chart
10 Software & Services Sector
Exceptional results generally from the growth area of the ASX – the talk of valuations getting less airtime and talk of growth at a top line / user level the main discussion point.
We bought APX, ALU & XRO well into the December weakness, however we left a lot on the table after booking some good profits. We are looking to buy meaningful pullbacks once again.
Xero (ASX:XRO) Chart
11 Commercial & Professional Services
A diverse sector with the traditional companies exposed to Australian construction mostly showing weakness during reporting season, particularly influenced by weak construction activity in the December quarter.
BIN now has the opportunity to bed down the DADI acquisition which should transform the business from now on. We remain bullish BIN initially targeting $2
Bingo Industries (ASX:BIN) Chart
12 Telco Sector
While the sector still has earnings headwinds, these are starting to ease and share prices are reflecting that. More companies are looking to snub the NBN and focus on 5G while a change of Government in May could provide an opportunity for Telstra (ASX:TLS) to pick up the white elephant on the cheap.
The dynamics of this sector are improving and we remain comfortable holding Telstra. We flagged Vocus (ASX:VOC) as a buy in previous notes targeting $4.00, although risk/reward no longer works
Vocus Communications (ASX:VOC) Chart
13 Retail & Supermarkets Sector
Well known headwinds of higher competition and weak consumer spending remain and the recent updates from the two majors were weak
We have no interest in the two major supermarkets, and retail overall is tough. Ideally another leg lower in the retail sector after a weak start to the year will get us keen on this area of the market again.
Coles (ASX:COL) Chart
14 Real-Estate Sector
Residential and retail exposures were weak while companies with office and commercial exposures were stronger
Property as a sector is clearly on the nose however the elastic band will stretch too far, and remaining open minded to buy the sector should yield results – Stockland an example as outlined below in the ‘Investment of the Week’
Lend Lease (ASX:LLC) Chart
15 Transport & Utilities Sector
The bond proxies have benefitted from a pullback in global interest rates while still delivering their typically consistent earnings
This is an area we’ve avoided given our overall view around higher global interest rates which typically has a negative influence on the sector.
Transurban (ASX:TCL) Chart
Reporting season was ‘above average’ however the market was positioned for a below average outcome, hence the rally in stocks
We continue to target a pullback for markets, which can be bought, although no sell signals are being generated yet.
Chart of the week.
We highlighted the bearish ETF during the week however fresh lows now remain within striking distance.
MM will look to buy fresh lows in a bearish facing ETF
BetaShares Bearish ASX200 ETF (ASX: Bear) Chart
Investment of the week.
While property is on the nose, equity markets have a tendency to price 6-9months in the future. Stockland (ASX:SGP) reported a miss to expectations (only mildly) however the underlying trends in the result were okay.
We think it may be time to dip our toe back into property with Stockland down 30% this year.
MM likes SGP with stops below $3.40.
Stockland Ltd (ASX: SGP) Chart
Trade of the week.
We have been watching Bluescope Steel (ASX:BSL) recently and it almost got a run last week in this section.
MM is bullish BSL with a potential target ~$16.
Bluescope Steel (ASX: BSL) Chart
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. **Please note, this weeks chart pack will be updated Monday Morning**
Have a great day!
James & the Market Matters Team
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