Weekly equities note
Written and accurate as at: May 05, 2017 Current Stats & Facts
The S&P/ASX 300 gained 1.2% for the week, to leave the market in the black for April (+0.4%) despite a shaky start to the month. It has been a choppy period in terms of thematic drivers as – despite a Presidential “tweet” or two prompting some optimism around tax – waning enthusiasm behind the Trump trade contended with fear and then relief regarding the French Presidential election. Ultimately, defensives and bond-sensitives had a better time of it than cyclicals; resources (S&P/ASX 300 Metals & Mining) slid -2.0% last week to finish down -2.2% for the month, while the S&P/ASX 200 A-REIT’s -1.4% fall last week left it up 1.1% for April.
A better-than-expected showing from French centrist candidate Emmanuel Macron in the first round of the election has increased confidence in his ability to beat Euro-sceptic Marine Le Pen in the run-off, due for Sunday 7th May. Gold sold off as a result which, in conjunction with continued concern over the production impact of recent seismic activity near its Cadia mine, saw Newcrest Mining (NCM) (-10.3%) among the week’s largest movers. Its smaller peer, Northern Star Resources (NST) shed -6.6%.
The government’s announcement that it could step into the LNG market to force net exporters to divert gas onshore in order to alleviate domestic shortages weighed on Santos (STO) (-3.3%) and Origin Energy (ORG) (-3.3%). The announcement was short on detail as to how LNG supply would be measured, assessed and the mechanism employed to force supply diversions – nevertheless, the possibility of intervention was enough to spook the market. Sirtex Medical (SRX) (-8.6%), which manufactures treatments for liver cancer, was also among the weakest stocks following a clinical trial which found that its SIRT product did not increase overall survival in patients.
Computershare (CPU) (+8.1%) did well last week, as its investor day provided more detail around its proposed new structure. CPU has enjoyed a strong run over the last 6 months, up 39.7% and outperforming the ASX 300 by 26.9%, as the market expects rising interest rates to boost the returns on the cash balances it holds in its share registry division. We remain cautious at this point; the market is now pricing in a significant turnaround in operational performance and we believe the leverage to a rising rate environment will not emerge as quickly as the market expects.
Qantas (QAN) (+7.6%) also outperformed as some market analysts upgraded it to a “buy”. This is a reminder that you never know what the catalyst for a stock to outperform may be – there was no specific new information to drive this change, however there is a sense that QAN remains a cheap stock in a market devoid of them, and investors are loading up as a result.
Elsewhere, some expectation that the Federal budget (due 9th May) could see an increase in infrastructure spending saw some movement from building and construction names; CSR (CSR) rose 7.0% and brick maker Adelaide Brighton (ABC) was up 5.5%. USD-sensitive stocks also did well as the AUD weakened; Macquarie Group (MQG) gained +6.0%, while Brambles (BXB) (+5.5%), James Hardie (JHX) (+5.4%) and Boral (BLD) (+4.1%) also strengthened.
Looking back over April, probably the key industry development was TPG Telecom’s (TPG) successful bid for mobile phone spectrum, becoming the fourth player in this market. TPG fell -13.6% for the month as a result, with competitors Telstra (TLS) and Vocus Communication (VOC) down -8.7% and 22.4% respectively. We have previously discussed our reservations around whether the price impact will be as great as the market fears. However in the near term the key development will be the ACCC’s ruling on whether all or part of TLS’s rural network should be opened up to competitors. An announcement could be made any day now (it was expected last week) but could have significant implications for whether TPG will be given a “free kick” in its move into the mobile market. That said, a “declaration” of TLS’s rural network would probably be challenged in court, pushing out any resolution on the issue.
Metcash (MTS) – one of our highest-conviction positions – was also weak in April, falling -11.5% following a 14.5% gain in March. The catalyst was speculation that there may need to be a second round of the “Price Match” programme in IGA stores as part of their strategy to equate pricing with Coles and Woolworths. Management have not commented and, crucially, there is no clarity on what proportion of any new price investment would be funded by MTS and what proportion by its suppliers. At this point, the market seems to be pricing a significant hit to MTS earnings, while we believe that any effect is likely to be far less than feared. Elsewhere in retail, Wesfarmers’s (WES) quarterly sales update was softer than expected, revealing that Coles continues to struggle with some strategy execution issues. WES fell -5.5% for the month.
Zircon miner Iluka Resources (ILU) was among the month’s best performers, up 12.9% on evidence of increased demand from Chinese property construction. James Hardie (JHX) (+9.6%) also did well. This bounce was reasonably predictable in that it sold off on some slightly disappointing quarterly results, then has rebounded as the market remembers that the underlying US housing market continues to do well. National Australia Bank’s (NAB) erstwhile UK unit Clydesdale Bank (CYB) gained +7.6% as the GBP strengthened in the wake of Prime Minister Theresa May’s surprise election announcement. Meanwhile gaming machine maker Aristocrat Leisure (ALL) was up 9.0% as its new Dragon Link game continues to perform well.
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