Weekly equities note
Written and accurate as at: Apr 26, 2017 Current Stats & Facts
Last week began in the same vein as the several weeks before it, with cyclicals continuing to underperform rate-sensitives as expectations of economic growth in the US continued to wane. However the tide turned mid-way through the week, as both President Trump and his Secretary of the Treasury, Steven Mnuchin, reaffirmed their commitment to tax reform and indicated that it might come sooner than the market currently expects. Defensives sold off and cyclicals such as resources rallied as a result. That said, the S&P/ASX was still down -0.6% for the week, with Metals & Mining down -1.2% and A-REITs down -1.1%.
Iluka Resources (ILU) was the best performing resource stock, up +14.9% as its quarterly production report demonstrated an uptick in Chinese demand for zircon - a key component in tiles - on the lagged effect of the recent surge in residential construction. We think this stronger demand is unlikely to be long-lived, given the signs that the Chinese property market is already rolling over. There was some divergence elsewhere in resources; with Rio Tinto (RIO) up +1.8% while BHP Billiton (BHP) was down -1.1%. This was partly driven by the latter’s exposure to oil, which fell -7% for the week to roughly US $50 a barrel, on concerns that inventories remain high and that OPEC’s commitment to supply discipline may be wavering. This also weighed on Woodside Petroleum (WPL) (-3.1%) and Santos (STO) (-5.2%). At this point, we believe oil is likely to remain range-bound between US$50 and $60 range, with indications that the Saudis see US$60 as a reasonable cap for the oil price, beyond which higher prices start to crimp demand. There are also signs that inventories are being run down, but this is showing up through declining “floating inventories”– oil held offshore in tankers for an extended period – rather than in onshore facilities.
Iron ore bounced, in contrast, following its fall from roughly US$95 a tonne to the mid-$60 range today. We think the iron ore price remains fragile despite this arrested decline, with the possibility of further falls as tighter conditions in China flush out much of the speculative liquidity which flooded the sector in the last twelve months. Nevertheless, we think the underlying supply and demand fundamentals for iron ore remains supportive, as Chinese infrastructure construction picks up the slackening steel demand from the softening property market.
Gold weakened as the market’s concern over the latest spat between North Korea and the US eased. Gold miners sold off as a result, with the effect exacerbated for Newcrest Mining (NCM) (-6.2%) by confirmation that recent seismic activity near its Cadia mine, near Orange NSW, has caused damage which will result in disrupted production.
TPG Telecom (TPG) fell -9.4% following its successful bid for a portion of the mobile phone spectrum, allowing it to offer its own network to users; its current offer uses spectrum leased form Vodafone. TPG have suggested that they will offer aggressive pricing to win market share, however at this point we are sceptical on claims that they enjoy a substantially lower cost structure than competitors such as Telstra (TLS); it has paid a full price for its slice of the spectrum, and its planned capex spending looks on the light side when compared to what its peers are having to spend. The likelihood that it will offer substantially less geographical coverage than TLS, Optus or Vodafone also casts some doubt on its ability to meaningfully disrupt mobile phone pricing. TLS initially fell on the news, but firmed later in the week to finish up +1.7%. The key near-term issue for TLS is the imminent decision from the Australian Competition and Consumer Commission (ACCC) on whether it “declares” the telco’s rural and regional network, thereby opening it up for use by competitors. The case for declaration is not clear-cut despite TLS’ monopoly in some regions, given that it charges the same price regardless of location, meaning that urban users effectively subsidise users on the far more expensive regional elements of the network. Should the ACCC declare the network, it would also potentially weaken TLS’s appetite to invest further in rural coverage. There is a modest asymmetry in the outlook, in that while the stock would probably fall on an adverse ruling, there is already a high degree of negative news in the price which is already more than a standard deviation below its 10-year P/E relative to the market. A favourable result could see a bounce from these levels.
Elsewhere in the market, Coca Cola Amatil (CCL) fell -10.8% as management downgraded profit expectations only two months after delivering a relatively upbeat outlook at its half-yearly report, as the current focus on the deleterious effects of sugar continue to weigh on sales.
Amazon’s announcement that they planned to launch their full retail offering in Australia within the next few years, while merely confirming what the market already expected, saw retailers JB Hi-Fi (JBH) (-3.2%), Myer (MYR) (-6.7%) and Harvey Norman (HVN) (-4.6%) all fall. Rail freighter Aurizon (AZJ) (-3.8) also weakened as management downgraded earnings expectations as a result of flood damage to its network in the wake of Cyclone Debbie.
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 24 April 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.