Markets reacts to higher rates (Banks, SUN)
BANG! A fairly quiet trading session on Wall Street overnight gets overshadowed by a big selloff on the Aussie Bourse today with the market grinding lower throughout the session. As we covered in more substance during the AM report today, clearly interest rates are going up – the Fed is telling us an much, and the market will gradually start to take note. Bond yields higher, $US dollar higher and mkt lower are the short term trends we’ve been discussing and this clearly played out overnight and on the Aussie market today. Weakness will become a buying opportunity shortly and our ~20% cash in both MM Portfolio’s feels about right here. We’re targeting a move towards ~5500 however have our targets outlined into weakness (as per recent Weekend Reports).
Overall, the Energy stocks did best, Santos and Woodside the standouts adding 1.79% and 1.84% respectively while the interest rate sensitive sectors struggled– a range of +/- 69 points, a high of 5708, a low of 5639 and a close of 5655, off -53pts or -0.94%.
ASX 200 Intra-Day Chart
ASX 200 Daily Chart
Banks – An interesting flash note out today from David Spotswood at Shaw singing from the same song sheet as the MM Investment Team….There seems to be a pretty good relationship with bonds and bank performance of late – when bond yields lift banks rally. You can put whatever narrative you like around this (stronger growth, less bad debts, helps margins, etc, etc). Last few months has broken down for some reason. We think value is pretty good for the banks, they are cum dividends, and the upcoming result should contain few surprises. A 9.5% gross yield for NAB and 8.9% for WBC are good enough for us, as are 12.3x PE ratios.
Source; Shaw Research
Suncorp (SUN) – Held their AGM and expanded on some of the aspects the market viewed as ‘negatives’ when they released results recently – the biggest of those being an acceleration in costs. At time of reporting, SUN poorly explained the reason underpinning the uptick in costs with analysts’ taking it as a permanent expansion, however more information has flowed, better explanations have been provided with company now saying that costs will return to $2.7bn in 2018/19. The increase in costs was associated with a re-positioning in the mkt, which will ultimately feed through to better top line growth….
The stock is on 12.6x 2019 earnings and 6.5% yield (9.3% gross yield), should grow at low single digits earnings and as we’ve been suggesting, earnings have upside if interest rates go up in Australia ($11.9bn investment portfolio, $9bn in low returning bonds, so +1% interest rates = +5% earnings). The other kicker could come from the sale of their Life Insurance Business. All up, good yield, cheap, benefits from higher interest rates, general insurance premiums going up and we rate management. The stock closed down -0.94% to $12.59…
Suncorp Daily Chart
Have a great night
The Market Matters Team
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