Australian Investment Blog

While our technical view of US stocks suggests an explosion to the upside is close at hand / underway, the picture for the banking sector is not as rosy. We still believe the Australian Banking Index can recover towards the 8600 area which is ~13% higher. Importantly for the "big 4" our target areas are:

1 ANZ Bank $24.12 - yields 7.26% fully franked, next dividend in October - target $27.50/$28 area.
2 Commonwealth Bank (CBA) $74.37 - yields 5.65% fully franked, next dividend in August - initial target $81.
3 National Australia Bank (NAB) $25.43 - yields 7.79% fully franked, next dividend in November - target the $30 area.
4 Westpac Bank (WBC)$29.40 - yields 6.39% fully franked, next dividend in November - target the $31 area.

While a 10-15% rally from the banking sector may feel improbable to many we remind you of how strong rallies can be from unloved sectors when investors get a sniff of a recovery. We only have to think of the gold, iron ore and oil sectors in 2016 to know how quickly sentiment can change!

Two things we will be considering when evaluating strategies around the banks moving forward:
1 Yield - With term deposits paying under 3% in Australia and likely to go lower, the excellent fully franked dividends on offer from our banks should be supportive short term.
2 Time - We still believe that CBA will "range trade" for another 12-18 months hence any strength, especially after its August dividend will be considered as a selling opportunity.

ASX200 Banking Index Monthly Chart


The US Banking Sector is almost 25% below its 2015 high, clearly significantly underperforming the overall market, which is less than 2% the equivalent milestone. At this stage, it feels that this relative weakness will continue.

US S&P500 Banking Sector Monthly Chart


The Financial Sector has struggled with a number of individual stocks directly exposed to the uncertainty of BREXIT. Overall, similar to the banking sector, we can see a 10-15% rally from the sector, but today we will focus on the 2 stocks we hold and importantly our current plan.

ASX200 Financial Sector (ex-property) Weekly Chart


Henderson (HGG) has been hammered since BREXIT became a reality causing us painful paper losses. The strong recovery in European indices should be a support from the HGG share price and we remain optimistic that we can exit the stock around $4.20 for a relatively small loss.

Henderson (HGG) Weekly Chart $3.77



Macquarie has also been sold down since BREXIT, but as would be expected has fared far better than HGG. We remain comfortable that we can exit MQG in the mid $70's region i.e. at breakeven, or even a small profit.

Macquarie Group (MQG) Monthly Chart $68.90




Summary

While we remain bullish equities over coming months, unless we see some significant change in sentiment, the banking / financial sectors will not be leading the charge. We expect a 10-15% rally from the sectors overcoming 6 months which is still very healthy.

We will continue to look at exit areas for our HGG and MQG positions over weeks / months to come.

Watch out for this weekend's look at VOC, which we may purchase next week.

· Watch for Market Matters alerts.


Overnight Market Matters Wrap

• The US markets were stronger for a third straight day, with the Dow closing up an impressive 235 points (+1.3%) to 17,930. The S&P500 closed up 28 points to 2,098.
• The Dow has now recovered around 80% of its post “B” lows; however traders were saying it was a mixture of recovery, plus positioning into the end of the quarter.
• Oil took a turn for the worse with traders commenting that it was likely profit-taking ahead of the long weekend (Independence Day), together with the news that supply from Nigeria had increased from 1.6m to 1.9m barrels per day. The oil price fell US$1.48 (-3%) to US$48.40/bbl
• Gold held reasonably steady, but finished lower, down US$2.20 to US$1,324.70/oz putting in its best month since February.
• Iron Ore might help the resources here in Australia, with the price rising US$1.77 (+3%) to US$55.66/t.
• The ASX 200 is expected to open around 40 points higher to the 5,274 area, as indicated by the September SPI Futures this morning.

Regards,
The Market Matters Team
28-34 O'Connell St
Sydney, NSW 2000


All figures contained from sources believed to be accurate. Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy. Prices as at 30/06/2016. 5:00PM.

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