Australian Investment Blog

Good Afternoon everyone

Market Data

What Mattered Today

Overseas leads were weak leading into today’s session however Chinese Manufacturing data out Sunday which was a tad light (50.1 v 50.4 expected) + a weaker than expected result from Westpac (WBC) – more on that below – got stocks offered in the morning and we saw a low of 5182….a drop of -70 points…Buyers stepped in from just before midday and bid up the mkt - pretty strongly….and we finished down just -9 points. A very strong session really given the early weakness and subsequent recovery from the lows.

We saw something similar in the U.S market on Friday where we had a number of obvious reasons/catalysts for weakness, which played out early, however the DOW finished more than +120pts from the session lows. A similar sort of move that happened on the ASX today which is a reasonable indication of underlying strength.

The 1H16 result from Westpac (WBC) out this morning was a miss and will prompt downgrades by most analyst’s today/tomorrow. In aggregate terms, it missed consensus by about 4% however we’ll likely see downgrades to FY16 numbers of about 2% and about 1% downgrades to 2017 numbers. We’d classify it as a slight miss, and the BIG negative reaction first up was clearly overdone. WBC had a morning low of $29.29 only to close on its high of $29.95.

Key points; WBC has announced 1H16 cash earnings of $3,904m, EPS of 118cps and interim dividend of 94cps. Market consensus below….

The main element of the ‘miss’ was around non-interest income, which is all the other activities a bank does excluding interest income charged on loans. Net Interest Margin (NIM) was a tad light v consensus but well up on last period driven by out of cycle rate hikes and improving debt markets. The issue for Westpac (WBC) and the banks more generally, is that earnings per share growth is negative, earnings revisions are negative and return on equity is falling. This means, that the stock can be owned for yield but it is highly unlikely that it will get re-rated higher UNTIL we see stabilisation in bad debts + they’ve raised the capital required to meet new regulatory benchmarks (thus new share issues stop and eps can start to track in the right direction)

As subscribers know, we bought Westpac (WBC) recently which was clearly too early. Normally we would consider ‘averaging’ into a position on any overreaction to the downside, which we think is the case with Westpac, however given our existing exposure to the banks, we chose not to in this instance.

A few of the other stocks we hold/have held are worth a mention today….Regis Resources (RRL) was sold into strength today above $3 after buying around $2.37. Although gold may push higher if the US Dollar breaks support, the risk/reward no longer stacked up so profit was taken.

Healthscope (HSO) briefly traded at $2.80 today but without enough volume/time to trigger a sell. More importantly, we are conscious of holding too much cash given the obvious strength underpinning today’s market (being bid up strongly from the lows…). HSO is a slow burner, a very good business with very good organic growth opportunities. We will review our ‘profit taking’ level in Healthscope (HSO) relative to our overall portfolio if/when it trades back up into the $2.80 range.

Telstra (TLS) had a cracker today – adding +2.80% to close $5.51 on news they’ll return $1.5 bill to shareholders, sometime before the end of the year. That decision isn’t completely new news, with most analysts having a $2bn capital management program baked into their numbers. In our view, the share price today is more about a reduction in risk premium. By confirming they’ll give $1.5bn back to shareholders, it simply reduces their capacity to make riskier acquisitions hence the slight re-rating today. Nothing in today’s announcement gets us optimistic on the stock for a longer term hold. We retain the view that TLS should be a stock actively traded for income...

ANZ report tomorrow morning before market. Look for cash profit around $3.4bn, a Bad Debt charge of -$940m for the half and a Dividend of 86cps.

Stocks & Sectors Today

Source; Bloomberg


ASX 200 Movers

***What Matters Tonight***

European leads are mixed with the FUTURES on the FTSE -58, DAX +21 & CAC +34
In the US DOW FUTURES are +26pts and the S&P 500 FUTURES are up +3

As the charts below shows courtesy of FACTSET earnings are declining yet prices (S&P 500) has remained reasonably strong. This is the trend that concerns us medium term….



….and looking longer term (annual pace)…shows earnings have flattened out at best and the market has run well ahead them.

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