Australian Investment Blog

WHAT MATTERED TODAY

Friday saw a bullish day for Aussie stocks with the index rising strongly as coordinated buying across both the banks & resources played out, while today was a different story, resources were sold off while banks continued to rally (from a low base) – hence the index edged +10 points higher overall despite trade tensions overseas and weakness throughout Asia + selling in US Futures.

ANZ was the best of the banks adding 1.39% with NAB clipping at its heals up 1.38% followed by Com Bank and WBC. Combined the big 4 banks added +14 index point to the ASX 200 which tells the story of weakness across the broader market. BHP down -2.38% was a standout, although we did see some buying from intra -day lows. A few negative influences combining to hit commodity stocks at the moment – and we think there’s more to play out here, a topic we build on below.

Overall the ASX 200 index added +0.17% or 10 points to 6104 while the DOW Futures are trading down -116pts at time of writing.

I had a quick email from a subscriber today – Andrew Wielandt who is the Managing Parter at Dornbush Partners in Townsville. Whenever Andrew is in the big smoke we catch up. Andrew is in the US at the moment and wrote today…

Hi James – A good read, as always. Just a bit of backgrounding - I am currently in the US on an S&P study tour. We’ve done Chicago, New York and soon to head to Denver and Calgary (self funded I might add!). Interesting to note here, no one is talking recession. Everyone is “rah rah” about the US economy and are more worried about child immigration than the economy which seems to be booming. Just looking @ the Skyline, especially midtown NYC and it’s a crane-a-thon! Shoppers are madly consuming and everyone seems happy. Thanks AMW

ASX 200 Chart

ASX 200 Chart

CATCHING OUR EYE

Broker Moves; Iluka (ILU) in focus today with a positive note out from Macquarie saying that BHP Billiton’s decision to approve the development of the South Flank iron ore project will drive growth in Iluka’s royalty earnings from 2021 = net positive for ILU but stock not exciting here while the note from Citi on Transurban (TCL) is work a read – it fits in with our thinking that higher global interest rates may prompt an equity raising or lower payout plans given their big development pipeline…a topic we’ve covered in recent income reports.

Here’s the current broker calls….

· GUD Holdings Upgraded to Neutral at UBS; PT A$14.60

· Bapcor Downgraded to Neutral at UBS; PT A$7

· Primary Health Upgraded to Buy at Morningstar

· Rio Tinto Downgraded to Hold at Investec; PT 45 Pounds

· BHP Downgraded to Hold at Investec

South32 (S32); $3.85 / 1.28%; South32 has agreed to buy junior Canadian Zinc miner Arizona Mining for $1.75bil in cash, a huge 50% premium to the last traded price. South32 already holds 17% of the Toronto listed company, earning it a board seat and a close look at Arizona’s key asset, Hermosa, which holds zinc, silver and lead. The deal, although sizeable, doesn’t require South32 to raise debt, with enough cash on the balance sheet, however the asset is still in development phase and will require working capital to begin production. The purchase is positive given they know the business well however it has come at a cost – S32 paying well over market value it seems. We are negative South32 for its exposure to a range of base metals/commodities we don’t like – met coal being the biggest problem.

South32 (S32) Chart

Resource Stocks – why caution is warranted? Over the past 12 months BHP has rallied 45% while Commonwealth Bank (CBA) has fallen 15% before dividends. It’s clearly been a good year for resources however there are signs of weakness creeping in…a topic I wrote about in the Weekend Report however here’s a breakdown again of 3 key considerations playing into our thinking.

Global manufacturing data has peaked – for now. The long term manufacturing trends outline below highlight the cyclicality of global growth and importantly the key turning/inflection points that occur. The below chart goes back to 1998 however the two recent points of interest were in early 2016 and late 2017. The low in PMI’s in 2016 corresponded with the low in BHP at around $14 while we see clear signs that a high formed in December 2017, a clear negative influence on our local miners.

BHP is diverging versus the Emerging Markets; BHP has ignored major weakness in both crude oil and the emerging markets (EEM) over the last few weeks but todays move may just be the start of BHP starting to play catch up. The correlation between Emerging Markets and BHP is traditionally high, yet in recent weeks it has faltered. Warning No 2.

BHP v Emerging Markets Chart

The Base Metals Index hit our upside target; For a number of weeks we have suggested from a simple risk / reward perspective we believe the most likely next 10% move by base metals is down. The base metals complex has hit resistance at a time when global manufacturing has entered a flat spot and stocks are diverging away from historical correlations. The direction of least resistance seems down.

Bloomberg Base Metals Spot Index Chart

While these are 3 clear warning signs to sell resources, we will again become buyers into further weakness – the simple correlation between resource stocks and rising US interest rates is too hard to ignore.

BHP versus US 10 year bond yields

OUR CALLS

IGL was filled in the Income Portfolio today at $2.28

Have a great night

James / Harry & the Market Matters Team

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