WealthManaged - 29 February 2016

By David Lane - February 29, 2016

In spite of a relatively positive reporting season, the Australian share market continues to underperform its global peers. The ASX200 fell 1.5% last week, and is down 10.6% for the financial year-to-date. We have underperformed the US markets, and most European bourses. So far this year, only the German, Japanese and Chinese share markets have underperformed Australia.

As we come to a close of the reporting season, and dividend income is paid to investors, we believe that the Australian share market represents attractive long term value.  With volatility set to continue, however, the opportunities are appearing in the selection of individual securities, rather than investing across the whole market.

The concentrated nature of the market has meant that the share price movements of the 4 major banks, 2 major miners and Woolworths have taken a significant toll on the index.  Outside of the 20 Leaders, there have been a number of investments that have performed well over recent months.

The share market reacted very differently last week to the results of the two dominant staples retailers.  Wesfarmers (WES) announced an improvement in profit for the first half, driven by a 9.2% gain in its retail portfolio and strong seasonal trading.  Traders, though, focussed on the poor showing from the coal division (which seemed to be an obvious outcome), and drove the shares 7.5% lower.

Woolworths (WOW) shares, however, finished the week 2% higher, and have continued their strong performance this morning.  At the time of writing, WOW shares are up 3.8%.  This comes in spite of the company announcing a fall of 33% in net profit.  WOW made the long-awaited announcement of a new CEO, Brad Banducci who has lead the Woolworths Food Group, and was instrumental in the establishment of the Dan Murphy’s business.

While both businesses are working through a low growth environment, the recent decline in the fuel prices should provide a medium term boost to retail sales.  Woolworths acknowledged the deflationary impact has had the impact of suppressing sales growth.  However, as the population gets used to a sustained lower price at the bowser, this will likely flow through to stronger retail spending.  Commonwealth Bank have suggested that the drop in fuel prices equates to a 0.25% interest rate cuts.

While on the subject of Commonwealth Bank, CEO Ian Narev has spoken out about the rising press speculation of a housing bubble in Australia.  While the headlines have been spruiking the coming of ‘The Big Short’, Mr Narev does not believe that such a downturn is on the horizon.  The bank has, however, built the potential risks into their planning, and has a rigorous approach to extending credit.


  • The US economy grew at a faster pace than previously thought in the fourth quarter of 2015, with the latest official figures revising up the growth from 0.7% to 1.0%.  Most economists had thought the figures would be revised down.
  • US CPI data showed a flat reading in January when a modest decline was expected.  As a result, the annual rate of headline inflation rose to 1.4%; the highest rate since October 2014.  Durable goods orders rose 4.9% mom in January; a bigger than expected rebound from a December decline.
  • Europe’s annual growth rate of credit rose 2.6% in January (up from 2.4% recorded in December). Credit granted to general government grew 8.6% YoY in January versus 7.9% YoY growth noted in preceding month. The annual growth rate of credit to the private sector increased to 0.9% in January.
  • A survey on capital expenditure in Australia for Q4 was stronger the market had expected. Actual expenditure in Q4 rose 0.8% Quarter on Quarter, against the market consensus of a 3.0% decline.  Expenditure, however, was down 16.4% on the levels of a year earlier, largely reflecting the continued unwinding of the mining investment boom, along with subdued business spending in non-mining sectors.
  • Oil had a turbulent week after Iran’s petroleum Minister labelled the proposal that it should cap production at January levels a ‘joke’. In addition, Saudi Arabia’s oil minister dismissed the possibility of outright production cuts due to a lack of trust amongst producers.
  • The G20 meeting reversed the slump in Asian equities, with Chinese stocks gaining after the head of its central bank said the world's second largest economy is ‘strong’, and promised it still has enough monetary policy firepower to keep growth on track.
  • London Mayor, Boris Johnson, suggested he is prepared to lead the campaign for Britain to leave the European Union.  Largely seen as a play for the Prime Ministership, Mayor Johnson’s public declaration nevertheless adds weight to the campaign to exit and current polls suggest it will be a very close call. The referendum vote is to be held on 23rd June and is the first time in 40 years the British people have had a direct say on whether they want in or out.
  • Elsewhere in Europe, the EC’s economic sentiment index fell 1.3 points to 103.8 in February – a level that is still supportive of growth rates similar to that seen over the past year.  Preliminary February inflation reports were a touch weaker than expected in Germany, France and Spain.
  • China’s property market continues to produce mixed signals, with new home prices rising in 38 out of 70 cities in January.
  • Statistics New Zealand reported a trade surplus of $8m, compared with the market expectation of a deficit of $271 million (Bloomberg).  The booming tourism sector is now generating more export revenue than the dairy sector, with growth over the past 12 months offsetting much of the revenue loss in the dairy sector.

Company News

Qube Logistics (QUB): Takeover target Asciano (AIO) says it has held preliminary discussions with its rival suitors to jointly take over the company in an all-cash, $9.05 billion deal.   Australia's largest rail and ports operator said under the revised plan, the Qube-led consortium, along with Canadian infrastructure giant Brookfield, will make an all cash offer for the company at $9.28 a share.  Asciano said its board considers the potential deal will likely be attractive to its shareholders, but said a number of steps would need to occur before any binding proposal could be reached.   The company said it will continue to recommend the existing $9.01 billion Qube proposal until a better deal is finalised.

Monash IVF (MVF): The company behind the world's first IVF pregnancy in 1973 has increased its annual net profit guidance range amid strong demand for IVF treatment.   Monash IVF chief executive James Thiedeman was upbeat about the company's prospects after delivering a 27.6% jump in net profit for the six months ended December 31 from the same period a year ago.    Monash IVF offers a range of specialist diagnostic obstetric and gynaecological ultrasound and fertility treatments. 

Seek (SEK): Online job search company Seek has lifted its underlying half year profit by nine per cent to $102.4 million, thanks to strong earnings growth in both its Australian and international businesses. Statutory net profit for the six months to December 31 was up 50% to $275.1 million, as the company factored in the sale of international student recruiter IDP. Total sales revenue grew by 22% to $482 million.  Seek expects full year earnings growth of between 5 – 8%, with revenue growth in the range of 15 - 18%.

QBE Insurance (QBE): Insurer QBE has taken a 7.4% drop in full year profit, with a stronger US dollar, low interest rates and increased competition all taking a toll.    Net profit for the 12 months to December 31 was $US687 million ($A950 million), down from $US742 million for the previous year despite its insurance profit margin improving to 9.0% from 8.4%.    "I think I can say without doubt that this is the toughest marketplace I can remember," QBE chairman W Marston Becker said in a statement.    QBE will pay a final dividend of 30 Australian cents, fully franked. 

Crown Resorts (CWN): Crown Resorts' first half net profit has lifted only slightly after weak market conditions in Macau affected its joint-venture casino resorts there. Crown's share of profits from the Macau resorts fell 89% to $9.4 million. But revenue from main-floor gaming at Crown's Australian casino resorts increased by 9.8 per cent to $861 million.

Wesfarmers (WES):  Strong sales in the company’s retail outlets of Coles, Bunnings Warehouse, Kmart and Officeworks helped Wesfarmers boost NPAT by 1.2% to $1.39 billion.  Operating revenue was 4.7% higher at $33.5 billion.  Earnings Per Share(EPS) rose 2.6% and the dividend increased by 2 cents to 91 cents per share.  WES shares are today trading ex-dividend.

Woolworths (WOW):  On Friday, Woolworths announced a 33.1% slide in net profit before one-off items of $925.8 million, which was within the company’s previous guidance announced in October 2015. Sales revenue was down 1.4% to $32 billion.  In announcing the result and the appointment of the new CEO, Chairman Gordon Cairns stated that while progress has been made in the rebuilding process, “it will be a 3 to 5 year journey and there is much to do”.

The Week Ahead

  • US:  Nonfarm Payrolls, ISM Manufacturing PMI, ‘Super Tuesday’ primary election (13 states and 1 territory).
  • Australia: HIA New Home Sales, RBA Rate Statement RBA Interest Rate Decision.
  • Eurozone: Consumer Price Index, Producer Price Index.
  • UK: Markit Manufacturing PMI, Mortgage Approvals.
  • Japan: Foreign bond investment, Unemployment Rate.
  • China: Caixin China Services PMI.

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