What we liked

  • The ASX 200 Index is trading back at 5999 points, just a whisker shy of the 6000 mark. The Dow Jones Industrial Average is trading at 24962.
  • Wages in Australia have risen stronger that expected in the 4Q. It indicates that there is inflation coming through in the jobs market. Wages rose 0.6% in the 4Q and 2.1% in the calendar year. Economists were tipping a rise of 0.5%. The best performing industry sectors were accommodation and food services, as well as media and telecommunications. Wages growth has only slightly outpaced inflation of 1.9% in 2017. Wages in the mining and resources industry showed the softest increases over the year, at 1.4%. Public sector health care and social assistance wages rose the most at 2.8%.
  • The US FOMC held its meeting this week. Federal Reserve central bankers are confident that an expansion with substantial underlying economic momentum could sustain additional increases in interest rates this year. Officials anticipate that the rate of economic growth in 2018 would exceed their estimates of its sustainable longer-run pace and that labour market conditions would strengthen further. Their view on inflation remains one of cautious optimism that it will move towards the 2% target in the medium term.
  • So far it’s been a good reporting season. Beats are slightly ahead (30%) vs misses (27%) as reporting season heads into its final week. Beats have come from financials, consumer materials, resources, consumer discretionary and health care sectors. The misses have come from the same sectors – consumer discretionary, materials and financials. Some of the notable beats this week were from A2M, ALU, LLC, CTD, FXJ, PGH, WOR, FLT, WEB, KGN. Whilst some of the misses this week have come from BWX, FMG, SUL, VOC, BHP, WTC, BAL, BKL, STO and QUB. Growth expectations for FY18 however remain lower than pre-reporting season.
  • The IMF expects the Australian housing market to land softly even though it is still between 5%-15% overvalued. The institution has praised the RBA and APRA’s efforts to take the heat out of the housing boom and lower risky lending. It said, “Given robust underlying demand from strong population growth and little evidence of a rising inventory of new residential units” there is little chance of a sharp housing correction. Housing prices would more or less stabilize rather than fall off a cliff. In general, things were moving in the right direction.
  • Apple looks set to take on Australia’s big banks. A recent study found that people are extremely loyal to their mobile phone operating system be it Apple’s iPhone platform or Google’s Android platform and that they would rather change banks to one that supported their phone than change phones. It could prove problematic for the three of the four banks who have not signed up to Apple Pay, which allows users to use their phone to tap and go, rather using a plastic card. ANZ is the only big bank signed up for Apple Pay.

What we didn’t like        

  • The RBA released its monthly minutes from its latest meeting. The central bank said it is keeping an eye on a large number of interest-only loans that are due to expire between 2018 and 2022. Some of which may not meet the more conservative lending standards currently being imposed. The number stands at around approximately $60bn in interest only loans written at the peak of the property boom that are due to reset in the next four years. Once these expire, they’ll switch to principal and interest repayments as originally contracted. The concern is that some borrowers that do not meet current lending standards for extending their interest-only repayments and will find the higher principal and interest repayments difficult to manage. If they find themselves in hardship, it could cause a knock on effect.
  • Shareholders of Platinum Asset Management (PTM) were dealt a bit of a blow this week after CEO Kerr Neilson, the legendary investor and founder of PTM decided to step back from the top job and to become an executive director. Shares fell 12% on the day of the announcement. Andrew Clifford, Platinum’s chief investment officer, will succeed Mr Neilson from July 1, 2018. Mr Neilson long-term record was outstanding and he has no reason to sell his equity stake in the company. His personal wealth was valued at $1.44bn by Financial Review Rich List 2017.
  • It’s been a savage week for some market darlings such as BWX and WiseTech Global (WTC) which fell 30% and 23% respectively. It’s concerning when most of the leading brokers had a Buy recommendation on both BWX and WTC days before their announcements. One research note from Goldman Sachs tried to calm investor nerves by saying that they weren’t overly concerned that BWX’s Sukin range was losing steam in China. It instead believes Sukin’s main markets are USA, Canada, and UK and is well-positioned to grow in them. Investors need to be careful with highly pumped up stocks such as both WTC and BWX especially when they don’t deliver better than expected results.
  • Weak spending and low inflation is bad news for retails who are going through tough times already. Strong competition in the retail sector, has placed downward pressure on the prices of consumer durables and food for some time. The RBA says more of this is expected to persist in the next few years. Low household income growth has constrained consumption and made it tough for some retailers this reporting season.

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