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Weekly equities note

Written and accurate as at: Feb 06, 2017 Current Stats & Facts

The S&P/ASX 300 shed -1.6% over the week, as some local earnings downgrades and poor results exacerbated a slight deterioration in the recent trend of optimism around global economic growth. There was an interesting reversal in the theme of cyclical outperformance and weakness in bondsensitives that has prevailed since the US election. This saw the S&P/ASX 300 Metals & Mining index weaken -3.2%, led by the heavyweights Rio Tinto (RIO) (-4.9%) and BHP Billiton (BHP) (-4.8%), while bond-sensitives such as Transurban (TCL) (+1.7%) and the broader A-REIT sector (-0.7%) outperformed.

This reversal is the culmination of three factors:

i) An unwind in USD strength. A strengthening USD has been a consensus trade since President Trump’s election and a pullback is not surprising, with his efforts to jawbone the greenback lower providing the catalyst. The recent USD retracement helps explain the underperformance in resources given the negative correlation between the two.

ii) There are fewer indications of US inflation than expected, despite strong ISM and payroll data. The lack of growth in average hourly earnings – which is somewhat puzzling given the increase in minimum wages in 19 states from 1 January – saw the Fed happy to sit on its hands and, more importantly, indicates that a May interest rate hike is more likely than March. This eased some pressure on the bond-sensitives.

iii) The People’s Bank of China (PBOC) tightened repo rates following the Lunar New Year, adding to concerns about the rate of global growth. We would not infer any dramatic negative implications for growth from this move; there is a technical element here in that the gap between real rates in the US and China had widened, prompting the PBOC to adjust it back to its usual range. Nevertheless, it is a sign that the Chinese authorities retain a close eye on growth and will not allow too much heat.

In combination, this checked the recent trend of increasing optimism on the global growth outlook. It is debatable how long this reprieve for bond-sensitives will last. We suspect that it will not be long-lived, given that the underlying economic environment remains in reasonable shape but a reversal is unsurprising given the momentum of this trend in recent months.

At a stock level mineral sands producer Iluka Resources (ILU) (-11.2%) was among the worst performers in the ASX 100. It has enjoyed a strong run in recent months – up over 40% since midOctober – as the market welcomed the new CEO’s message of discipline and cost cutting. However management flagged an impairment at its quarterly production update last week, which is likely to result in a statutory loss for FY17, against a back-drop of issues with production which weighed on revenue. Ansell (ANN) (-9.0%) was also weak, with little specific behind it except the possibility of some tempered expectations ahead of the half yearly report next week. Elsewhere Henderson Group (HGG) (-8.0%) fell as new partner Janus Capital announced weaker fund flows and Bluescope Steel (BSL) (-6.8%) gave back some of its recent gains as cyclicals underperformed.

Tabcorp’s (TAH) (-5.0%) result disappointed the market as the start-up costs for Sun Bets, their UK on-line wagering joint venture with News Corp, came in higher than expected. James Hardie Industries (JHX) (-4.4%) also missed earnings expectations. The company has been a victim of its own success; stronger-than-expected demand for its building materials in the US exceeded capacity and the requirement to ramp up production dragged on the profit margin, which was downgraded 3- 4% for FY17. While we agree with management that this is a temporary setback – and that they are likely to recover this margin next year – we are always wary of companies with increasing capital intensity, which may limit the upside to the stock.

Qantas Airways (QAN) (-7.9%) also underperformed after competitor Virgin Australia (VAH) pointed to subdued domestic demand in the leisure segment as the reason behind its disappointing quarterly trading update last week. The market remains focused on QAN’s management to see if they will alter their half-yearly guidance ahead of its announcement on 23 February. While there is no doubt that softer demand is weighing on seat yields, at this point the industry remains disciplined in terms of capacity, which does provide support for QAN’s bottom line. At the same time, from here on the company will be cycling lower figures, as demand began to weaken in Q1 2016. We retain our confidence in management and think that, at 6.5x next-12-month P/E, QAN remains attractive.

There were a handful of stocks which ended the week higher. AGL Energy (AGL) (+3.5%) is one beneficiary of sweltering weather on the east coast as the market expects a spike in electricity usage. Accommodation provider Mantra Group (MTR) (+7.8%) arrested its recent slide, while Downer EDI (DOW) (+6.2%) delivered a decent set of results as NBN-related and transport contracts offset the drag as mining services contracts roll off. Gold stocks did well as the USD weakened, with Northern Star Resources (NST) up 6.4% and Newcrest Mining (NCM) up 5.7%. 

 

 

 

 

 

 

 

This document has been preparedby BT Investment Management (Fund Services) Limited (BTIM) ABN 13 161 249 332, AFSL No 431426 and the information contained within is current as at 06 February 2017. It is not to be published, or otherwise made available to any person other than the party to whom it is provided. This document is for general information purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information in this document may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information in this document is complete and correct, to the maximum extent permitted by law neither BTIM nor any company in the BTIM Group accepts any responsibility or liability for the accuracy or completeness of this information. BT® is a registered trade mark of BT Financial Group Pty Ltd and is used under licence.

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