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Weekly Market Review

Written and accurate as at: Nov 02, 2017 Current Stats & Facts

A week of AGMs, financial results, and quarterly updates provided plenty of news-flow which saw some dispersion in stock returns beneath the market’s flat aggregate return (S&P/ASX 300 -0.1%).

The Australian High Court decided on Friday that Deputy Prime Minister Barnaby Joyce was ineligible for his most recent election, depriving the government of its majority until a by-election takes place (assuming that Joyce is re-elected). At this point we are not reading too much into this in terms of market implications, although we remain mindful of the risk of a Liberal member crossing the floor in support of Labor’s long-threatened Royal Commission into the banking sector. That said, there is already plenty of negative sentiment around regulatory pressure built into current banking valuations.

The CEOs of large US investment banks JP Morgan and Citi were in town last week. Meetings with both underlined the degree of momentum behind tax reform in the US. There is a notion that, with corporate America displaying a preference for capital return over investment in a low-growth environment, there is an opportunity to leverage up to fund tax reform and force companies to reassess investment opportunities. At the same time, this is the last chance for Congress to achieve meaningful legislative success ahead of next year’s mid-term elections. There is therefore a degree of optimism which, if fulfilled, could be positive for both specific ASX-listed companies with US exposure, as well as for broader market sentiment.

Qantas (QAN) (-6.7%) was among the week’s worst performers, following its quarterly update.  Management’s messages were consistent with what they have been saying previously; that the current half is delivering strong domestic growth, with yields up 8%, and that this will naturally slow into H2 FY18. They also noted that oil costs have ticked up a bit – which will have a reasonably muted impact given they hedge much of their exposure here – and that their international business is likely to get a bit tougher in H2 as industry capacity edges higher, before seeing the benefits of its restructured deal with Emirates kick in in following years. They maintained guidance of $920m pre-tax profit for H1 FY18 – despite the oil price headwinds – which is in line with the market’s consensus. The stock has performed well, up over 90% year-to-date, and there is a sense that the lack of an upgrade was enough to prompt a round of profit-taking. The concensus valuation remains supportive, while free cash flow is strong and should support further capital return. Meanwhile there may be further benefits from cost reduction and from the restructured international business to support ongoing earnings growth.

ANZ (ANZ) (-2.3%) reported full year earnings. The result was messy due to the complexities surrounding the sale of non-core assets and the implications for separation costs, profit on sales, and stranded costs that result. ANZ have done well, up over 30% since we went overweight in mid-2016, and much of the valuation discount to its peers has disappeared.  Elsewhere in financials, IOOF (IFL) gave back some of the gains made since the announcement of its deal to buy ANZ’s wealth business, as the platform fund flows reported in the latter’s result were largely uninspiring. AMP’s (AMP) (-2.4%) quarterly flows were similarly lacklustre.

JB Hi-Fi (JBH) (-3.4%) weakened following its AGM, given a slowdown in sales comps for their Good Guys stores. This is at least partly driven by a pullback in discounting, so that the revenue hit from slower sales has some offset from better margins. Wesfarmers (WES) (-3.5%) reported quarterly sales, which revealed that while sales at Bunning remain strong – helped by a long period of dry weather – Coles continues to struggle. It gave back some of the gains made in the run up to the announcement and the stock remains in the $40 to $45 band in which it has traded for much of the last five years.

South32 (S32) (+8.5%) was one of the market’s best performers, as the alumina complex continues to do well as China shuts down capacity ahead of its winter. This was in stark contrast to Fortescue Metals (FMG) (-3.0%), which confirmed that the discount for its iron ore – which is generally lower grade than that supplied by the majors – remains at an historically high level. Elsewhere in resources, gas producers Santos (STO) (+2.1%) and Origin Energy (ORG) (+4.4%) did well as the oil price gained 5% for the week. There is some speculation that oil might be breaking out of its recent trading range, however all the movement has been in the spot price for oil in response to some short-term supply constraints; the long end of the future price is largely unmoved. This suggests that the market has not become structurally more bullish on oil. At the moment, any rise in longer-dated oil futures is seeing a spike in hedging at that price by US shale drillers, who then dial up production to meet the obligation thereby increasing supply. At this point this is acting as a brake on the longer-term oil price. The lack of reaction in global oil stocks to recent price strength suggests that the market is less convinced that oil is breaking out of its range – and the performance of the ASX-listed oil-linked stocks may owe more to the recent sell off in the AUD than better sentiment on oil.

Health care company Resmed (RMD) (+6.2%) delivered a decent quarterly result, with signs of an acceleration in the sale of their high-margin face masks while Flowgen machine sales continue to be strong. Macquarie Group (MQG) (+4.4%) was also strong following a good result. The challenge with MQG lies in the fact that earnings are being supported by a substantial flow of performance fees from the one-off sale of assets. 

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