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Weekly market review

Written and accurate as at: Sep 05, 2017 Current Stats & Facts

The S&P/ASX 300 shed -0.3% last week, continuing what is now a three-month trend of chopping sideways. Resources did well; the S&P/ASX 300 Metals & Mining index gained +2.3% as key commodity prices continued to strengthen, with iron ore creeping up towards $80 and copper remaining strong. A-REITs also rose, up +1.1% (S&P/ASX 200 A-REIT) as bond yields remained flat. Sabre-rattling on the Korean peninsula saw gold strengthen and it has now broken out above its technical trading range.

The positive momentum in these sectors was offset by weakness among the banks. Commonwealth Bank (CBA) fell -2.9% as the market continued to focus on its governance issues, while Westpac (WBC) (-2.4%), National Australia Bank (NAB) (-1.1%) and ANZ (ANZ) (-0.2%) all lost ground. The announcement of APRA’s prudential inquiry and the departure of the CEO before the end of FY18 has seen CBA’s traditional valuation premium to its peers all but disappear. Ironically, these issues have overshadowed a decent earnings result. Lower competitive intensity in mortgages and better system liquidity have seen deposit margins creeping upwards – a trend that benefits CBA more than its peers given it enjoys the largest deposit book. Nevertheless, at this point investors remain wary of the market’s largest stock.

Telstra (TLS) (-6.4%) also dragged on the broader market following NBN Co.’s announcement that it would not allow the securitisation of its long-term payment stream, thereby removing the possibility of near-term debt reduction and share buy-backs. TLS has now fallen -28% since the start of the year and is a standard deviation below its 10 year 12m forward P/E valuation. This rating reflects the bulk of the challenges facing the company; the key risk at this stage remains that it squanders capital to bolster earnings.

The issues facing TLS and CBA reflect an interesting aspect of the market today. When you throw in changes to the board at BHP Billiton (BHP) and speculation in the media today over a management change at AMP (AMP), you have a period in which there is significant uncertainty over the outlook and strategy for some of Australia’s most prominent stocks. An unpredictable outlook for a large chunk of the market can be challenging for investors – but it also creates opportunities that active investors can exploit, taking advantage of investor wariness around some of these companies.

We are also at a point where dividend yield is an increasingly supportive feature of the market.  CBA is now yielding almost 6%, before franking credits, as is WBC and TLS. BHP is on a free cash flow yield of above 8% and increasing distributions. Its +2.7% gain last week, and almost 7% gain for the month, reflects not only improved commodity prices but also, we believe, the sense that the market is recognising that strong cash flow, changes to the board and better capital discipline can support a steady pipeline of capital return to shareholders. In an environment where term deposits are hovering around 2%, a gross yield of ~8% from blue-chip stocks starts to look attractive and can provide a decent level of support for the broader market.

Elsewhere, the retail sector had a forgettable week. Harvey Norman (HVN) (-10.7%) disclosed decelerating sales in its report, but the market’s key issue is the ASIC investigation into whether HVN’s structure constitutes a genuine franchise relationship or not, with significant tax implications dependent upon the outcome. If HVN does have to focus on restructuring, it could provide a window of opportunity for JB Hi-FI (JBH). JBH shed -7.2% for the week, with little beyond the periodic spikes in concern over Amazon to prompt this. HVN’s poor sales trend served to further demonstrate JBH’s continued strong performance and reinforces the notion that the latter is far better placed to withstand the competitive pressure that Amazon’s arrival would bring.

Nine Entertainment (NEC) (-12.6%) fell in response to the news that American network CBS would buy out the ailing Ten Network (TEN), with the market concerned that this signals the entrance of an aggressive new competitor into Australian media, bidding up the price of content and sports rights. CBS’s move can be more reasonably explained as the rational move of a creditor – they have a significant output deal with TEN. Stepping in shores up this deal and prevents the loss of revenue. 

Building materials company Boral (BLD) (-5.7%) was also among the week’s worst performers. Management guidance did not reflect the leverage to a strong US construction cycle that the market expected, due partly to a pick-up in energy costs. Qantas (QAN) (-5.3%) was also weak, with a lack of news suggesting a degree for profit taking following its strong run. Domino’s Pizza (DMP) (-4.8%) and Bluescope Steel (BSL) (-4.4%) both continued to slide following disappointing results.

Medibank Private (MPL) (+6.6%) did well as management flagged the potential for reforms in the private health care system.  Newcrest Mining (NCM) (+3.9%) did well on the back of gold, while the absence of any negative news from Metcash’s (MTS) AGM saw it gain +3.4%. Resmed (RMD), which manufactures machines to treat sleep-related disorders, gained +4.3%. There was little specific news to prompt this beyond the notion that we are moving deeper into a favourable product cycle with its new model facemasks.

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