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Shares have had a strong day thanks to solid support for the banking heavyweights, but beneath the headline gains some smaller names experienced some wild share price moves on another busy day of profit reports.
The ASX 200 added 39 points, or 0.7 per cent, to 5554. The Big Four climbed by between 1 and 1.5 per cent, while CSL regained some of its recent falls, climbing 2.2 per cent.
Among other big names, BHP and Fortescue climbed, Rio eased lower.
But all the action was at the small end of town, where a flood of companies are coming to the market with earnings numbers.
Mining services companies received heavy attention, after Monadelphous plunged 17.8 per cent on its earnings update, while Bradken experienced a dizzying 22 per cent freefall before ending the session only 1.8 per cent lower. Fellow mining services business MacMahon dropped a hefty 17 per cent after.
Also coming back from the abyss was Lovisa – at first falling 13 per cent after its profit numbers but ending a milder 3 per cent down. Even wilder was Aconex‘s ride – down 13 per cent at one point but then actually closing 1.6 per cent up. Greencross experienced a similar, if less extreme, bounce following its report – falling by as much as 5.2 per cent but closing 1.5 per cent higher.
Also reporting were:
– Oil Search -0.8%
– Caltex -1.6%
– Healthscope +1.7%
– Virtus +2.9%
Winners and losers in the top 200. Photo: Bloomberg
Forget slow growth, the biggest risk now is financial instability – and central banks’ extreme monetary policies are fuelling those risks, writes BetaShares chief economist David Bassanese.
In the days leading up to the US Federal Reserve’s talkfest this weekend, the market is abuzz with talk of central banks reconsidering, if only in theory, their monetary policy frameworks.
As Bassanese says, the Jackson Hole symposium “comes at a time when investors are beginning to question the wisdom of ongoing extreme monetary stimulus”.
“Contrary to many critics, however, my concern is not that these measures have not worked,” he continues. “Instead, I maintain they’re simply not needed, as the global economy is as good as might be expected once allowance is made for slowing potential growth and falling commodity prices.”
“To my mind, the far bigger global risk now is the impact of persistent misguided extreme monetary measures on financial stability.”
Bassanese argues that while “global economic growth in recent years has been commonly perceived as disappointing”, much of that can be put down to ageing populations and weaker productivity growth.
“In other words, most of the slowdown in growth among developed economies since the financial crisis has reflected weaker potential growth,” he says. “Indeed, economic growth across the developed world in recent years appears to have been above potential, as evident from the fact that unemployment rates have trended down.”
Bass also argues that global inflation is low, at 0.9 per cent over the year to June, but not perilously so, and most of the disinflationary trend can be explained by lower commodity prices.
If Bassanese is right, central banks are wrong to resort to extreme monetary policies to fix economic problems that either aren’t as severe as commonly thought or which are unresponsive to central bank action (such as issues of demographics and productivity).
He sums up:
The great worry is that the bubble in bond yields now appears to be slowly but surely flowing through into equity valuations. Unless global central banks change course – and correctly recognise the reasons for apparently low global growth and inflation have little to do with deficient demand – they are at risk of creating yet another boom/bust cycle in asset prices within the next year or so.
We’re heading the wrong way and it’s time to turn back.
Central bank policies are misguided and risk heightening financial instability, BetaShares economist David Bassanese says. Photo: Karl Hilzinger
Soaring iron ore prices are likely to sag towards the end of the year and into 2017 as supply rises and steel demand fades, Citi says, adding to the list of banks that are calling time on an unexpected rally.
The raw material will average $US51 a tonne in the final quarter and $US45 in 2017 under the base-case scenario, analysts said in a report received Tuesday. That compares with a price of $US61.23 a tonne on Monday, and a year-to-date average of $US53.59.
“Believe it or not iron ore, coal are the hot commodities of 2016,” the bank said in the note, advising that investors “fade them as commodities stumble”. It added: “Don’t expect the strength to last. Structurally the world remains oversupplied with relatively low-cost material.”
While iron ore has soared more than 40 per cent in 2016 after three annual losses, banks are now queuing up to forecast the likelihood of further weakness ahead, with Morgan Stanley and UBS also flagging prospects for declines as 2016 unfolds.
Citi said that although iron ore’s strength may persist into October, after that a weakening of demand coupled with rising mine supply would probably hurt prices.
Iron ore “may face strong headwinds towards the end of 2016 and most of 2017,” Morse wrote, calling it a “darling” of commodities so far this year.
“Supply-and-demand balances in 2017 point to lower prices, with Chinese demand deteriorating and new projects by Vale and Roy Hill ramp up further.”
Iron ore’s blistering rally is tipped to cool soon. Photo: Tony McDonough
And while we mention the housing market, Westpac is raising rates on interest-only loans and cutting discounts on one of its key loan packages, according to an analysis of product rates by independent experts.
The bank is raising rates on the popular interest-only loans because it believes it will encourage customers to pay down debt, according to brokers.
It is also discreetly lowering discounts on its showcase Flexi First Option Home Loan packages that provide loans to principal and interest, interest-only and investor loans.
Banks are seeking to cover rising funding costs from paying generous deposit rates to local savers coupled with higher overseas’ funding costs.
“There is a real battle going on for deposits,” said Martin North, principal of Digital Finance Analytics, which advises banks and financial service companies.
Westpac has been quietly raising rates on interest-only loans. Photo: Louie Douvis Back to top
London’s soaring housing market is tipped to hit the brakes next year.
Values will fall 1.25 per cent, their first annual decline since 2009, as home buyers await the fallout of the UK’s vote to leave the European Union, according to a forecast from Countrywide.
Values will rise again in 2018 as a shortage of homes in the capital and low interest rates support prices, the broker said.
While record-low borrowing costs and tight stock levels pushed prices higher last month and are causing vendors to start asking for more on their homes, economists say that new property listings and record numbers of new apartment completions will keep growth under control.
“I wouldn’t expect the kind of pick-up we’ve seen in the last couple of weeks to continue in spring,” said Su-Lin Ong, chief economist and head of Australian research at RBC Capital Markets.
“It probably will be reasonably solid, given you’ve had the rate cut, and the labour market is in OK shape. I think the supply side of the story is an important one that shouldn’t be overlooked. There will be some reasonable supply.”
The RBA and economists have been predicting Sydney’s blistering house price growth to slow for a while now, but the market keeps defying expectations, not least thanks to ever lower interest rates.
So it’s that time of year – the time when firms report their annual earnings results and chief executives and their boards either claim credit for a great result or, at least sometimes, identify reasons well beyond their control for a not so great result.
Leaving aside the issue of “blame games”, there are two fundamental points that every investor should consider when reviewing an earnings result and the ensuing media discussion.
The first point to consider is the myth of “underlying performance”. We have become accustomed to firms releasing figures labelled underlying profit, core earnings or even – think about the inherent contradiction here – cash profit.
What these terms have in common is the exclusion of various expenses, and sometimes revenues, that are required to be included in the calculation of net profit.
An extensive research program at UTS Business School, funded by the Centre for International Finance and Regulation, has tracked this behaviour over the past 15 years.
While there is no doubt many firms have become frustrated with the increased inclusion of various mark-to-market, or “unrealised” gains and losses within net profit, these are not the only items we sometimes find excluded.
We often see a large item labelled “restructuring costs” which we are told by management and the board should be ignored when assessing annual profit performance.
Even more pointedly, we can also see that such items are often excluded from the calculation of managerial bonuses.
But what are restructuring charges? More often than not they are simply asset write-offs.
Now let’s be clear, when you invest you either expense the cost immediately – typically because of an accounting rule rather than the underlying economics– or you recognise an asset. That is Accounting 101.
Well, if you recognise an asset but then say it should be substantially downgraded or, worst case, written off completely, isn’t that an admission that the investment didn’t work out?
Why do so many boards and CEO’s get away with leaving so much of a balance sheet. IN particular, why shouldn’t asset writes be included when considering executive remuneration.
Qantas shareholders have cheered chief executive Alan Joyce’s efforts to turn around the marquee Australian carrier, helping the stock more than triple in under three years. Now they want to see a roadmap for reinstating dividends.
The airline, which has withheld dividends for seven years, is expected to announce a record annual profit tomorrow because of lower fuel expenses and faster-than-expected gains from Joyce’s restructuring.
Singapore Airlines and Cathay Pacific Airways have already restarted paying dividends after the global financial crisis. Qantas has made two one-off capital returns totaling more than $1 billion in the past year, while not reinstating the dividend.
“That’s what everyone’s been waiting for,” said Karen Jorritsma, Citi’s director of equities sales for Australia and New Zealand. “They’ve got the ability to do it, so I think it would be taken extremely well.”
Joyce said this month at a conference in Brisbane that the board would again be looking at ways to return cash in August. Joyce, who took the helm in 2008, has purchased fuel-efficient Boeing Dreamliners and retired old aircraft after the carrier posted a loss amid a fare-war with its biggest local competitor Virgin Australia Holdings. The Irishman also imposed a wage freeze and eliminated as many as 5000 jobs.
Regular dividend payments may be reinstated at the end of the year ending June 2017, according to First NZ Capital Securities. The brokerage also expects Joyce to announce another one-off return on Wednesday – a $500 million stock buyback.
A spokesman for Qantas declined to comment on any dividend policy before the company releases its results.
The turnaround helped Qantas build $2.3 billion in cash and equivalents on its balance sheet at the end of last year. Analysts expect Qantas to report net income of $1.13 billion for the year ended June 30, while revenue is forecast to be $16.3 billion.
Time to pay a dividend. Photo: Hulsbosch
James Grant, publisher of Grant’s Interest Rate Observer Photo: http://www.grantspub.com
The Swiss financial paper Finanz und Wirtschaft has run an amusing and interesting Q&A with James Grant, publisher of long-running Wall St investment newsletter, Grant’s Interest Rate Observer:
Do you think Fed chief Janet Yellen will make the case for another rate hike at the Jackson Hole meeting next week?
Janet Yellen is by no means an impulsive person. According to the Wall Street Journal, she arrives for a flight at the airport hours early – and that’s plural! So this is a most deliberative and risk averse person. We have been hearing for years now that the next time, the next quarter, the next fiscal year they will act. So I believe what I’m seeing: None of these days the Federal Funds Rate will go higher than 0.5%. I can’t see that happening.
Wall Street seems to think along the same lines. So far, many investors don’t take the renewed chatter of a rate hike too seriously.
The Fed is now hostage to Wall Street. If the stock market pulls back a few per cent the Fed becomes frightened. It has come to a point where the Fed is virtually a hostage of the financial markets. When they sputter, let alone fall, the Fed frets and steps in.
Obviously, the financial markets like this cautious mindset of the Fed. Earlier this week, US stocks climbed to another record high.
Isn’t that a funny thing? The stock market is at record highs and the bond market is acting as if this were the Great Depression. Meanwhile, the Swiss National Bank is buying a great deal of American equity.
Indeed, according to the latest SEC filings the SNB’s portfolio of US stocks has grown to more than $US60 billion.
Yes, they own a lot of everything. Let us consider how they get the money for that: They create Swiss francs from the thin alpine air where the Swiss money grows. Then they buy Euros and translate them into Dollars. So far nobody’s raised a sweat. All this is done with a tab of a computer key. And then the SNB calls its friendly broker – I guess UBS – and buys the ears off of the US stock exchange. All of it with money that didn’t exist. That too, is something a little bit new.
So what are investors supposed to do in these bizarre financial markets?
I’m very bullish on gold and I’m very bullish on gold mining shares. That’s because I think that the world will lose faith in the PhD standard in monetary management. I don’t want to suggest that it is the one and only thing that people should have their money in. But to me, gold is a very timely way to invest in monetary disorder.
Oil prices are continuing to fall, with Goldman Sachs warning that August’s price rally has been overdone and that a proposed oil production freeze at current near-record levels would not help rein in an oversupplied market.
Brent crude oil is down about 1.3 per cent at $US48.54 per barrel, after trading around $US51 late last week.
Analysts said the falls were a result of an overdone price rally this month which lifted crude by over 20 per cent between the beginning of the month and late last week. Since then, prices have fallen back by more than 3.5 per cent.
“While oil prices have rebounded sharply since August 1, we believe this move has not been driven by incrementally better oil fundamentals, but instead by headlines around a potential output freeze as well as a sharp weakening of the dollar (and exacerbated by a sharp reversal in net speculative positions),” Goldman Sachs said.
The bank said a proposal by members of the Organisation of the Petroleum Exporting Countries (OPEC) and other producers like Russia to freeze output at current levels “would leave production at record highs” and therefore do little to bring supply and demand back into balance.
Goldman also said the likelihood of a deal “may not be high” due to disputes between OPEC members Saudi Arabia and Iran as well as uncertainty over non-OPEC producing giant Russia’s willingness to cooperate.
The bank said it expected crude oil prices of between $US45 and $US50 per barrel “through next summer“, but warned that “a sustainable pick-up in disrupted production would lead us to lower our oil price forecast with WTI prices … to average $4US5 per barrel”.
French bank BNP Paribas said that “the narrative of a rapid re-balancing of the oil market has … met a few stumbling blocks” as “some of Q2’s disrupted supply returned, OPEC’s collective output rose, and US shale oil is being spared the dramatic year-on-year declines forecast earlier in the year”.
The August oil price rally has run out of puff. Photo: Oliver Bunic Back to top
Consumer confidence has hit a near-three year high, with good news from the jobs market and rising share prices likely causes.
The ANZ-Roy Morgan index of consumer confidence rose 3.6 per cent last week to its highest level since November 2013, a jump ANZ senior economist Jo Master said was likely influenced by buoyant share markets and news that unemployment had fallen in July.
Last week’s labour market report showed a jump in (part-time) employment and saw the unemployment rate tick down to 5.7 per cent.
“Higher levels of confidence are also consistent with another week of solid (housing) auction clearance rates – particularly in Sydney and Melbourne,” she said.
“While good news on the labour and housing markets appear to have boosted confidence recently, the key for the broader economic outlook is whether higher confidence can translate into spending, particularly given high household debt.”
CommSec economist Savanth Sebastian says super-low interest rates, cheaper petrol prices and lack of inflation across the economy all contributed to consumers getting their mojo back.
“In addition the recent lift in the Aussie dollar and improvements in job security would be looked at favourably by households,” he said in a note.
“However the key factor behind the lift in confidence has to be the fact that the election is out of the way. Households and businesses can now get back to spending, investing and hiring across the economy.”
So we’re all going to be driving electric vehicles in the next few years, right?
Well, not according to Julian Segal, who runs Caltex, which sells around $17 billion of petrol a year.
Since electric vehicles could wipe out his company, you could say he has a vested interest in pushing back against the future of the industry.
“It is going to take quite a lot of years before you see any serious dent – 15-20 years, so 2025 and beyond, it may have an impact,” he says. “There are one billion motor vehicles globally and with the replacement cost, it won’t happen over the next three, four or five years.
But what could have an impact – and it is one his company is looking at closely, is self-driving vehicles.
Download a Caltex app, he says, and you could order your vehicle from the nearby garage to pick you up, take you to where you’re going and it would then return to one of its garages – it has 650 nationwide – for parking, recharging and maintenance.
“The impact will be very substantial – eventually. It is a question very much of when the technology will be available. Not the next three to five yers, but beyond that. We’re watching it as an opportunity.”
As for electric vehicles, there is the need to scale up production and assembly, for the batteries as well, with the entire industry here still very much in its infancy.
Road signs mark parking bays for drivers to use electric vehicle charging points in Spain. Photo: Pau Barrena
The recent underperformance of blue-chip stocks has spurred large-cap fund managers to seek growth elsewhere and clouded the outlook for the top 20: one fund manager says they should remain the cornerstone of an investor’s portfolio while others believe they have little to entice buyers.
Steve Johnson, chief investment officer at Forager Funds, says despite their underperformance, blue chips still belong in a balanced portfolio.
His comments come at a time when retail and large institutional funds, including AFIC, are moving out of big caps into the mid-and-small cap space in search of growth amid a low-growth, low-return environment.
Last financial year, the top 20 stocks by weight underperformed the broader market by the biggest margin since 1989, according to Forager.
In the 12 months to July 31, the small ords index had gained 30 per cent, while the ASX 20 had fallen 0.9 per cent.
But as investors move down the index, many are understating the risks involved. According to Mr Johnson, small caps deliver more misses than hits in terms of earnings expectations, and while the companies that beat forecasts are handsomely rewarded, the share prices of those that miss can be savaged.
“The reaction of APN Outdoor is an example of perfection being priced into a stock,” Mr Johnson said following the advertising media company’s results on Monday, where the share price fell more than 30 per cent after the company trimmed its full-year earnings expectations, to the chagrin of shareholders.
While Mr Johnson said he saw little value in the top end of the market, its reliability for dividends and defensive qualities in an economic downturn was still critical.
Atrium Investment management senior portfolio manager Tony Edwards agreed the stocks did not appear cheap on a valuation basis, but saw little impetus to invest in the top 20.
“A number of the largest companies in Australia don’t have any growth or don’t have much growth and are facing low return on capital,” he said.
“That’s a very difficult equation to generate simple returns. It’s forcing large-cap managers up the risk curve.”
“Telstra is a big company, but Telstra doesn’t have any growth. It’s investing offshore and taking on more risk to grow its business,” Atrium’s Tony Edwards says. Photo: Bloomberg
Rail haulage group Aurizon is considering external candidates to replace chief executive Lance Hockridge, with the company’s board expected to decide on a successor next week.
The rail group is believed to have received a shortlist of three external candidates from its executive search firm to replace Mr Hockridge, who has run the company for six years and led it through its initial public offering in late 2010.
The shortlist is not believed to include former chief operating officer Mike Franczak, who is preparing to return home to Canada after leaving Aurizon at the end of 2015.
The succession process comes as Aurizon struggles to find new sources of growth following the slump in coal prices, which have hurt haulage volumes.
Mr Hockridge and his direct reports did not receive short-term bonuses in 2015-16 because they failed to meet key performance hurdles, including earnings targets, with the CEO’s total pay package down 42 per cent to $3.2 million from $5.48 million a year earlier. Annual net profits fell 88 per cent to $72 million.
The company has also been forced to write off hundreds of millions of dollars for scrapped rail and port expansion projects in the West Pilbara and Queensland’s Galilee Basin.
New chairman Tim Poole, who replaced John Prescott in September, has been overhauling the group’s board, bringing in former AGL Energy CEO Michael Fraser and Macquarie banker Kate Vidgen.
Mr Poole has said he wants to bring in people who can adapt to “a rapidly changing business environment.”
Aurizon shares are up 1.5 per cent to $4.68.
Aurizon CEO Lance Hockridge is expected to be replaced by someone from outside the company. Photo: Michele Mossop
Shares in Ooh Media have jumped close to 10 per cent after the company’s half-yearly results reassured investors. But today’s move is still shy of the 20 per cent wiped off the Ooh’s market cap yesterday after peer APN Outdoor’s profit report spooked shareholders.
The company said gross profit was up 40 per cent against the previous year’s half to $60.1 million. Six-month revenue was up 18 per cent year-on-year to $146.6 million.
Crucially, Ooh’s boss Brendon Cook reaffirmed the group’s guidance for EBITDA of between $68 and $72m for the full year.
oOh!media has reassured its investors by reaffirming earnings guidance. Photo: Supplied Back to top
Lazard Asset Management portfolio manager Aaron Binsted believes a focus on valuation is going to be more critical than ever and says investors should get comfortable buying stocks with a lower dividend, or leaving it in cash until the price of a stock is right.
“Investors need to be alive to the risk of overpaying for yield when strategies tout a premium to interest rates or a stockmarket as their main attraction. While simple rules can be attractive, they can at times be wrong,” he told the AFR.
Here are three stocks that fit the dividend bill for Lazard:
Suncorp, that trades on a grossed up dividend yield of 7.56 per cent, according to Bloomberg, Woodside Petroleum that trades on a yield of 7.36 per cent, and Sky City Casino that offers investors a 4 per cent yield.
All three have reported their latest earnings.
- Suncorp said it had taken out a new reinsurance policy. The company has paid out more than $1 billion in claims from “natural hazard” events, such as storms and bushfires, in the financial year ended June 30, 2016 but has also entered into an agreement with Challenger to sell annuities.
- Woodside is still on the hunt for acquisitions or acquisitions after the oil and gas player’s recent $US430 million deal in Senegal, and last week declared a first-half dividend of US34¢ per share, down from US66¢ a year earlier.
- Trading conditions at Skycity Entertainment’s Australian casinos are tipped to remain soft, although the casino operator posted record revenue and profit figures after a stellar performance from its New Zealand business.
Aaron Binsted from Lazard Asset Management says be careful paying up for high dividend stocks Photo: Jessica Hromas
Healthscope says its hospital expansion program remains on track with 10 projects under construction across Australia, as the private healthcare firm posts a 18.9 per cent jump in annual profit.
Chief executive Robert Cook says the new financial year will “continue to be a year of significant capital investment” in its hospitals, which is expected to deliver 762 additional beds and 43 operating theatres by the end of fiscal 2019.
The company completed seven hospitals in 2015/16, equating to 163 additional beds and nine new operating theatres. It currently has 10 projects under construction in Victoria, NSW, Queensland and the Northern Territory.
Healthscope’s net profit from continuing operations rose to $182.8 million for the year to June 30, thanks to boost to capacity, pathology operations in New Zealand and lower interest expense.
Mr Cooke said the result was underpinned by the “robust performance” of its Hospitals and New Zealand Pathology divisions, while a reduction in the group’s interest expense as a result of its post-IPO capital structure having been in place for the full financial year also helped.
“Our Hospitals division delivered good earnings growth and margin improvement from underlying operations and successfully renewed multi-year contracts with our largest health fund partners, Bupa, Medibank and HCF, providing funding certainty for future periods,” Mr Cooke said.
The Hospitals unit’s underlying operating earnings rose 8.3 per cent to $354.9 million, with margin expansion of 50 basis points.
The group’s pathology business in New Zealand delivered a 21.8 per cent jump in underlying operating earnings to $50.7 million.
Healthscope declared a final, unfranked, dividend of 3.9 cents a share, up from 3.7 cents last year.
The shares are up 3.3 per cent at $3.
Healthscope chief executive Robert Cooke. Photo: Patrick Scala
The net worth of the world’s richest person – Bill Gates – has hit $US90 billion ($118 billion) for the first time, fuelled by gains in public holdings including Canadian National Railway Company and Ecolab.
Gates’s fortune is now $US13.5 billion bigger than that of the world’s second-wealthiest person, Spanish retail mogul Amancio Ortega, and $US23 billion higher than the third-richest, Warren Buffett, according to the Bloomberg Billionaires Index.
At $US90 billion, the Microsoft co-founder’s net worth is equal to 0.5 per cent of US GDP.
For the record, Australia’s richest person is property developer Harry Triguboff, whose fortune was estimated by BRW this year to be $10.6 billion – or about 0.65 per cent of Australia’s GDP. Triguboff comes in at No. 153 in Bloomberg’s list of global billionaires.
And following on from that last post, here’s the context for today’s nasty adjustment in mining and oil services stocks.
You’re still laughing if you were brave enough to hold these stocks at the beginning of the year.
Here’s a wrap of the punishment being handed out to mining (and oil) services companies this morning after Bradken and Monadelphous‘s earnings came in short of some perhaps slightly inflated market expectations for the sector (see next chart for just how inflated).
Monadelphous has been savaged after full-year profit fell 37 per cent due to the sustained slowdown in the resources sector.
Monadelphous reported net profit of $67 million for the year to June 30, down 36.7 per cent on the previous year, while sales revenue was 26.8 per cent lower at $1.37 billion.
Monadelphous said tough conditions would continue, with business expected to be “challenging” in coming years due to a dearth of new contracts and surplus capacity among service providers keeping profits slim.