TPG Telecom (TPM.ASX) FY16 result is at the bottom end of their guidance. FY16 underlying EBITDA was A$775m versus guidance for A$770-785m.
FY17 guidance has come down from consensus expectations of A$885m to now guiding in the range of A$820-830m EBITDA.
This is a weak result relative to their recent history of beating guidance and market expectations. Reflected in the markets 17% sell-off today!
TPM declared a $0.07 final dividend.
The big news in the market has been the recent repricing of risk. Yields in the treasury markets have ticked higher and we’ve seen selling across the board in equities, especially in defensive yield names. The ASX recent profit results failed to exceed the market’s low expectations and with a flat outlook for FY17 and forward PE multiples approaching 17x, it’s hard to build an argument that value exists, even after the recent market correction.
We’re cautious that the abnormal rate environment is the cause of inflated market valuations, rather than strong company profitability. Nevertheless, a combination of selective asset allocation, opportunistic investment timing on both the long and short side of the market, (using our proprietary algorithm signals) and the use of derivatives to enhance the returns from companies with a stable earnings outlook, provides an attractive investment case versus mainstream alternatives.
Watch the latest ASX Top 50 Monthly Strategy Recording to find out more.
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Macquarie (MQG.ASX) FY17 profit should be $2.1b up around 5% on the same time last year. FY17 earnings per share (EPS) $6.00 and dividends per share (DPS) are forecast to be $4.10, placing the stock on a forward yield of 5%.
There are no algorithm signals present and therefore, our short term synopsis of MQG is that the stock sits at fair value and subject to any large shift in volatility, the stock is most likely to consolidate and move sideways at or near current value.
The global financial markets appear to have entered a range bound phase based on two basic information sets: comments made by central bankers last week, and how that will effect the two central bank meetings scheduled for next week. The last 24 hours included rate decisions from the Bank of England (BoE), the Swiss National Bank (SNB) and a full slate of economic data from the US, but none of these risk events had much impact on G-7 currency rates.
If there was any market consensus from yesterday’s trading session, it was that the recent US economic data points have been soft enough to keep the FOMC from lifting rates next week, but not weak enough to push the USD Index much below the 30-day moving average at 95.30. The Fed Funds futures are showing less than a 20% probability of the Fed Funds target moving higher after next Wednesday’s FOMC meeting.
Interestingly, the USD/JPY, which makes up 14% of the USD Index price, has also traded down to its 30-day moving average at 101.80 after breaking above near-term resistance at 103.30 on Wednesday. The USD/JPY moved higher on expectations, of more aggressive stimulus measures from the Bank of Japan (BoJ) at their meeting next Wednesday.
However, counter-comments from other BoJ officials about the next policy move show there’s growing splits and indecision within the central bank about which types of stimulus mechanisms could be used, and to what degree. Considering that the primary goal of the BoJ’s open market operations has been to increase growth and inflation, while simultaneously weakening the JPY, their track record this year has been abysmal by every metric.
Recent Japanese inflation data has shown a consistent drift lower over the last five quarters, Industrial production and CAPEX have shown slight ticks higher (albeit from a historically low base) and the USD/JPY has been in a protracted down trend since posting a high of 121.60 in late January. All of this adds up to FX market internal indicators and options pricing showing the lowest expectations of the year that the BoJ can create a positive result.
Despite aggressive buying by the BOJ of Japanese listed securities and in particular through ETF’s, the Nikkei 225 has failed to develop a bullish technical pattern. At present, the pressure appears to remain to the downside and it’s only a break through resistance at 17,400 that would change the 12-month old bearish price structure. Both the Hang Seng (Hong Kong) and the Shanghai Composite (china) appear to be breaking-out and outperforming on a relative basis.
Nikkei 225 Index
Hang Seng
Shanghai Composite
On the 2nd of September, we made a blog post highlighting a group of stocks to place on your watch list. Among these were a number of property trusts and their indicated buy zones. Since then, as anticipated, we’ve seen bond yields move higher and selling in defensive yield names continue. We’re now at a point where a number of the names on our preferred watch list are in the “go zone”.
This post revisits the property trust names, however, there’re other sectors too that are now showing multiple buy-side signals from our algorithm engines.
Westfield (WFD.ASX)
GPT Group (GPT.ASX)
Scentre Group (SCG.ASX)
Stockland Group (SGP.ASX)
Goodman Group (GMG.ASX)
On September 7th, the SP 500 posted an all-time high close at 2184.00. At the same time, the US 10-year notes were yielding 1.53%, the US 30-years were yielding 2.23% and the 2-year notes were yielding .75%. Over the last five trading sessions, the SP 500 has dropped as low as 2118.00, or just over 3% from the 2184.00 high. Over the same period, the 10-yr yields have climbed to 1.68%, the 30-years to 2.46% (both 10% higher) while the 2-yr note yields have remained unchanged at .75%.
When the US yield curve enters a phase in which longer dated bond yields rise, while the shorter dated yields remain unchanged, it’s called a “steepening yield curve.” Many market commentators consider a steepening yield curve a fundamental negative for stocks since higher yields on longer dated paper suggest the US Federal Reserve will further normalize the Fed Funds rate; which will push Treasury yields even higher. Along this line of thinking, current Dow theorists believe that the market could reach a “yield inflection point” whereby stock investors will sell shares and switch to the guaranteed returns offered with Treasury securities.
US 10 Year Bond Yields
US 30 Year Bond Yields
S&P500 Index
It’s worth noting last night’s reversal in the S&P500, from the support level indicated by the horizontal black line. This reversal may signal the rise in bond yields will soon exhaust. As a result, equity markets may then resume their rally higher. However, during times of economic expansion, both equities and bond yields can move higher in tandem. That’s just not been the case in recent times!
Boral (BLD.ASX) remains on our preferred watch list. The recent management briefing in San Antonio, Texas reaffirms what we see as positive industry trends in construction material prices and domestic strength in infrastructure spending.
FY17 NPAT forecast profit of $295m on EPS $0.41 and DPS of $0.27 places the stock on a forward yield of 4%. Underlying growth should remain in the range of 7%+ over FY17 and FY18.
On the above basis, the recent pullback in BLD warrants the stock staying on our preferred watch list, with a potential entry point at or near the current higher low formation.
Within the current sell-off Resmed, Sonic Healthcare & CSL look like reasonable opportunities in a back drop of increased volatility. Here are the entry levels to add to your watch list.
Resmed (RMD.ASX) – Buy at $8.50 – $8.70 range
Sonic Healthcare (SHL.ASX) Buy at $20.50 – $21.00 range
CSL (CSL.ASX) Buy at $96 – $102 range
After a slow start, last week turned out to be pretty solid for the USD as the unit was steady or stronger against all the G-7 pairs. Even though the mid-week economic reports on manufacturing were on the weak side and the US service sector expanded at the slowest pace in 6 years, Treasury yields moved higher supporting the USD’s rally. The US 10-year yield was up 16 basis points from the mid-week low of 1.50% and reached its highest level since the UK referendum in late June.
However, US equity markets were beaten down after Boston FED President Eric Rosengren said there was a “reasonable case” for a rate hike at next week’s FOMC meeting. These comments pushed the SP 500 just below 2120 and, from a technical perspective, sets up a very ugly chart pattern. The Relative Strength Index (RSI) dropped from 54.2 to 31.00 and the MACDs have rolled over on the daily charts.
It’s worth noting that this is just one day and the major equity indexes may reverse course in short order, but it’s a reminder of how vicious the market decline was in January following the FOMC’s initial rate normalization from the zero bound.
Ahead of the media blackout period in front of next week’s FOMC meeting, FED Governor Lael Brainard will speak on Monday at an economic conference in Chicago. Ms Brainard has generally been in the dovish camp, and has tended to emphasize the international risks of FED policy trajectory. Her speech, on the outlook of the US economy, will be closely watched by market participants.
In this sense, if there’s no change in her core position or tone, it would lend support to equities, lower yields and lead to a softer USD. One the other side of the coin, any hint that the FED has been sufficiently cautious and that the normalization objectives have been met could lead to an extension of Friday’s price activity.
This type of diametrical “cause and effect” price prognosis is the ugly underbelly of the markets that the central bankers have created, and is what they fear the most. On balance, we maintain the view that the Fed Funds futures market has underestimated the possibility that the FED will lift the Fed Funds target band to .50% – .75% next week, and short-term traders have overestimated the resultant equity market impact within the broader bull market pattern.
Even though the European Central bank (ECB) lowered their 2017 and 2018 growth and inflation forecasts, and acknowledged that the risks to these forecasts are skewed to the downside, Mr Draghi and the other ECB governors made no adjustments to European monetary policy at yesterday’s meeting in Frankfurt.
The overnight deposit rate of -.40% was left unchanged, as expected. However, the ECB also refrained from extending the timeframe of QE from the current date of March of 2017; which was disappointing since it was the only policy action that market commentators were discussing as a highly likely possibility. Bond yields across G-7 treasury markets traded higher, ( Euro zone stocks lower) in response as further stimulus, against a weaker economic outlook, appears be delayed.
Only in the eyes of the ECB can a slower pace of economic and inflationary deterioration be considered an improvement in overall conditions. During his press conference, Mr Draghi pointed out several times their stimulus options are not exhausted and that the ECB has the will, capacity and ability to do more within their mandate. This includes extending the QE timeframe beyond March of 2017, when needed.
After all was said and done, a lot was said and nothing was done. There was no date provided for the new staff forecasts which sets up a “FED” style data dependency for Euro traders until the next key meeting in December.
After trading in a narrow 30 point range around the 1.1250 level prior to the ECB meeting, the EUR/USD climbed up to the 1.1320 level just after the announcement. However, as the NY session progressed the pair reversed lower on the eventual divergence between US rates moving higher and EU rates drifting lower.
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