Australian Investment Blog

The ASX200 enjoyed an excellent Thursday closing up 48-points / 0.86% and suddenly we commence the last day of a tough week only down 39-points from last Fridays close, and importantly in our opinion the markets are now well positioned for a Christmas rally. The recently battered Healthcare Sector led the gains rallying +2.7% but all sectors closed in the black except the Telcos which slipped -0.35% as Telstra (ASX: TLS) seemed to lose its safe haven allure. The important banking sector remains firm with Westpac (ASX: WBC) the worst of the “big 4” still closing up +0.35% but considering WBC remains down –18.4% for the last year an ongoing squeeze higher by the influential banks feels a strong possibility to MM.

Its important to bear in mind that if we are correct and the ASX200 can reach say 5950 during a Christmas rally that’s only an average of 10-points gain per day from yesterday’s close i.e. we expect a slow staircase style “climb up the wall of worry” into 2019 with different sectors probably taking it in turns to perform the heavy lifting – the usual characteristic of a December rally is no selling as opposed to aggressive buying.

MM remains bullish the ASX200 short-term targeting a “Christmas rally” to the 5900-6000 area.

Overnight US stocks were closed for Thanksgiving Day but the S&P futures were weaker in line with European equities. SPI futures are pointing to an open down around -0.5% for the ASX200, the market will face a minor test today of whether recent buyers have the confidence to hold their positions over the weekend.

Today’s report is going to look at 4 major China facing stocks following the news that the world’s second largest economy have allowed its citizens to spend more on “Cross border e-Commerce” (CBEC).

ASX200 Chart

We will look into the characteristics of a typical Christmas rally in more detail when we are fully convinced one is unfolding i.e. we don’t want to tempt fate after our recent aggressive foray into domestic equities. However an interesting set of characteristics only comes to light when we delve into the statistics with a pen and calculator - a quick snapshot since the GFC:

1 – The Christmas rally starts in November over 50% of the time and when it does the Nov / Dec high is usually in the last 48-hours of December but it then usually kicks a little higher into mid-January, or even early Feb.

2 – When the swing low before the Christmas rally is in December the high is again in the last 48-hours of December but the market does not have the momentum to push higher into January / February.

Time will tell if we have seen a meaningful swing low this week (November) at 5594 but if we have 2 points are clear:

Firstly, be patient with general selling as the market usually rallies into the last 48-hours of December and secondly don’t be surprised if the market has a little “gas left in the tank” for Q1 2019.

ASX200 Seasonality Chart

Is it time to buy China facing stocks?

Yesterday China facing stocks greeted the news from the economic goliath of no changes to current CBEC regulations plus they increased the amount people can spend each year. China’s actions albeit relatively small do feel conciliatory at a glance with regard to trade.

1 – China increased the personal limit on purchases through CBEC to 26,000 yuan p.a. from a previous cap of 20,000 yuan.

2 – Obviously the increase in the personal annual purchase limit means that consumers can buy more products from overseas through CBEC i.e. on-line.

The health supplements market in China is currently in the top 3 categories for Chinese consumers buying through CBEC and it appears to present strong opportunities for growth into 2019.

1 A2 Milk (ASX: A2M) $9.90

A2M rallied almost 6% yesterday largely fuelled by the positive news out of China. The stock recently reported a strong start to the financial year with net profit growing almost 65% to NZ$86m although they did warn the result was helped by strong foreign exchange movements.

China remains A2M’s growth market with its market share up to 5.6% from 5.1% also while the is US still in its early days its moving ahead nicely. All sounds good under the hood with management expecting strong growth for the full year but at a slightly lower rate than the first 4-months.

Technically A2M looks good targeting ~15% upside although the reaction to its recent profit update has been muted i.e. there appears to be plenty of sellers into strength. A2M has a relatively high but justifiable valuation with a current Est P/E for 2019 of 29.1x.

MM is now neutral, to slightly bullish A2M.

A2 Milk (A2M) Chart

2 Bellamy’s (ASX: BAL) $7.55.

BAL has experienced a major correction since late March with the stock correcting a huge 70%. Yesterday BAL managed to bounce +4.7% but it still closed near the lows of the day as sellers took advantage of the “pop” higher to unload stock. Obviously the reported changes to the official Chinese “cross border e-commerce channel (CBEC)” are good news for the stock but not enough to quickly change an entrenched bearish trend.

BAL’s has a lower valuation than A2 Milk which makes sense to us, it’s currently trading on an Est P/E for 2019 of 19.3x.

Technically BAL is neutral although a strong bounce would not surprise – traders could consider buying a move back above $8.10 i.e. jump on board a bounce as opposed to catching the falling knife.

MM is currently neutral BAL.

Bellamy’s (BAL) Chart

3 Blackmores Ltd (ASX: BKL) $133.40.

BKL bounced 5.9% yesterday but like BAL it’s been a tough year with the stock still 20% below the years high. The vitamins business trades on a similar valuation to A2 Milk (A2M) which on the surface may feel a touch optimistic. BKL reported a net profit after tax (NPAT) of $70m in August with earnings up 19% on the year with growth again into China while Australia / New Zealand numbers were soft.

However the 22% growth last year in China was primarily across e-commerce platforms highlighting the positive influence of yesterday’s news.

MM is neutral BKL.

Blackmores Ltd (BKL) Chart

4 Treasury Wine (ASX: TWE) $14.29.

Similar to the other China facing stocks TWE bounced 5.7% yesterday but it still remains almost 30% below the years high. The wine business has an average valuation within the group as investors juggle with its potential growth outlook moving forward – the stocks trading on an Est P/E for 2019 of 22.7x.

TWE had a bad October, like many growth names, but the weakness has continued into November due to poor export data from Wine Australia which showed poor traction into the US, just where TWE is focusing its new efforts for growth.

MM is neutral with a slight short-term positive bias on TWE

Treasury Wines (TWE) Chart

Conclusion

The savage corrections these 4 stocks have suffered is a perfect illustration of optimism – pessimism regularly being stretched way too far – in this case stocks facing China were bought by investors at crazy valuations with no sensible concern for risk.

Unfortunately none of these 4 stocks are currently exciting to us although a bounce in most would not surprise – if you forced my hand I would buy A2 Milk (A2M).

Overseas Indices

The S&P500 was closed for Thanksgiving.

We are still bullish US stocks into Christmas / 2019, especially if the S&P500 can close above 2675, only 1% higher.

US S&P500 Chart

European indices are now also neutral with the German DAX hitting our target area which has been in play since January. To turn us bullish we still need to see strength above 11,800.

German DAX Chart

Overnight Market Matters Wrap

· The European markets fell overnight in quiet trading while US markets were closed for Thanksgiving. The FTSE 100 closed ~1.3% in the red while the Euro Stoxx 50 was 0.86% lower.

· Slowing economic growth and concerns around Brexit are keeping traders bearish. British and European leaders are due to meet on Sunday with some details still to be thrashed out. The pound rose as confidence grew that a crash landing can be avoided.

· US Fed watchers are starting to become more dovish in their commentary. Future rate hikes are likely to be accompanied by a more conservative approach.

· Metals on the LME were mixed, while both iron ore and crude oil fell. The Saudi energy minister said they see January oil demand to be weak and that they will adjust supply to avoid a glut.

· The December SPI Futures is indicating the ASX 200 to open 26 points lower towards the 5665 level this morning.

Have a great day!

James & the Market Matters Team

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.

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