Viewpoint: Bullish
As they say a picture tells a thousand words and the chart below of Commonwealth Bank (CBA) illustrates how the cream continues to float to the top in todays market i.e. CBA is only 8% below its all-time high compared to Westpac (WBC) which is well over 40% below its same 2015 level.
As we said earlier the banks have soared over the last few months e.g. the average return of the “Big 4” year-to-date is already well over 10%. While a clear tailwind for the sector has been created by the strong property market as it reduces the risks of bad debts, at MM we believe the main bullish factor is rising 10-year bond yields.
Sector heavyweight WPL is ~10% below last months high which feels pretty rich to us, we can see a test of $28 in the coming months. Last month influential UBS downgraded the stock to a hold with a price target of $26 saying it was fully priced above $27, we have no major argument with this view and the market certainly appeared to embrace the research sending the stock lower but a forecasted yield of 3.5% fully franked over the next year should be very supportive in our opinion.
Overnight crude oil hit fresh 1-year highs yet most of the local Energy Sector is down significantly over the same period e.g. Woodside (WPL) -25% and Santos (STO) -18%. Also, the stocks are well below their highs of January, the question we ponder today is whether stocks have got it wrong and are poised to play catch up with the underlying commodity, are they accurately predicating a downturn in the price of oil or are things simply now in equilibrium after stocks got carried away last month as equities rallied strongly.
US stocks rallied overnight with the financials advancing 2%, a solid performance in our opinion considering bond yields were very quiet. The game remains the same, sector rotation, and if the elastic band keeps stretching towards the financials at the expense of the resources, we will be tempted to tweak slightly in the direction of the later in the weeks ahead, bonds & the $US are likely to remain the key short-term.
The year is only one month old, and we’ve already seen major moves across financial markets with the craziness of the “Reddit Army” the most eye catching, we still believe there’s a lot more to come but its likely to be through more orthodox channels.
Lynas Rare Earths (LYC) explores and mines for rare earth minerals such as cerium and neodymium.
Stanmore Coal (SMR) explores for coal in Australia. The Company’s interests include a portfolio of coal assets within Queensland’s Bowen and Surat Basin coal provinces.
Pinnacle Investment Management (PNI) provides investment management services. The Company offers operational support, insurance, business management, compliance, financial reporting, and accounting services to Australian investment companies.
EML Payments (EML) provides payment card technology solutions. The Company offers prepaid disbursements and funding card programs for gaming payouts, government disbursements, healthcare reimbursements, and commission payouts. EML Payments serves customers worldwide.
