Investment Theme
Brad Potter

Welcome to Nikko Asset Management’s 4 Minute reporting season wrap up on the week that was in Australian markets, and what we are reviewing in the week ahead.

Stocks and themes that stood out

There were two stocks that stood out to me last week. The first was Clydesdale (ASX:CYB), which is the UK bank that was spun out of NAB. It's been a tough time for Clydesdale over the last year, particularly with uncertainties around Brexit, but last week they reported that merger synergies from the Virgin acquisition are expected to be higher/or revised upwards. Their net interest margin was also up a little bit more as well, and as a result, the stock gained about 20 percent from a very low level, so that was a good result. The Brexit overhang is still there, and it looks extremely cheap to us.

Viva Energy (ASX:VEA) was another stock that re-rated quite substantially. That also was up 15 percent during the week after they finally recut the fuel deal with Coles for all the Shell service stations. In the long run, it's good for both parties, but the deal reflected the much better contractual position than Viva are in , and hence the reason why the stock re-rated substantially.

Probably the key theme was iron ore. The tragic dam failure in Brazil from Vale on 25th January has had a significant impact on the iron ore market globally. By 7th February, the iron ore price had risen 20 percent to be above $90 a tonne and we actually have seen all the stocks that produce iron ore such as a Rio Tinto (ASX:RIO), Fortescue (ASX:FMG) and BHP (ASX:BHP) up strongly on the back of that.

In the long run we expect supply response to these high prices and thus I don't think the prices will be sustainable. We're uncertain what the government regulators and prosecutors may do in Brazil in regards to Vale, taking into consideration that they've actually now had two dam failures, and so the tail risk remains.

The implications for Vale in the long term are not looking positive and the uncertainty around iron ore pricing remains.,On that basis our view is that iron ore prices will remain higher for a bit longer.

Our take on the Royal Commission

The Final Report contained no adverse material or new news that we didn't know about from the Interim Report earlier in the year. However, from a positive aspect, the fact that vertical integration wasn’t removed from wealth management was a positive given that was a tail risk.

The areas of focus from the Final Report, were cultural reform, access to banking services, regulators and regulation becoming more prominent, responsible lending, and the roles and responsibilities of intermediaries. We expect to see a tighter regulatory environment — we've already seen announcements from both ASIC and APRA to this effect — and we believe this will increase further, adding to compliance and control costs over time.

Remedial costs will continue to rise although we expect that to reduce over the next couple of years. The financial institutions will spend time and money trying to improve their culture and win back trust from the consumers.

What does reporting season have in store this week?

This week some of the bigger companies such as Telstra (ASX:TLS), Woodside (ASX:WPL), and AMP (ASX:AMP) are reporting (all on Thursday) and will provide plenty of interest.

AMP will be particularly interesting given they have a new CEO, having just lost the previous CEO and chairman due to the Royal Commission. There'll be a lot of interest on his strategy especially given the release of the Final Report of the Royal Commission.

There will be a lot of interest in Telstra’s results given the TPG Vodafone merger, the fact there's speculation around the NBN as to whether the government may write down that asset, as well as general competition around the mobile sector. So there's be plenty of interest this week for stocks, but it really ramps up in week three, so we’re looking forward to reporting our findings.

 

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