A sell off amongst the banks after a strong rally last week + weakness in US Futures on more trade war concerns put pressure on our market today, with the ASX 200 seeing its best levels in the first 15 mins of trade hitting a high of 6250, before sustained selling saw the market edge lower all day. It will be very interesting to see US trade tonight – the NASDAQ is very close to giving a SELL signal if futures are a guide as I type away this afternoon – a potentially key night ahead for US stocks. If they do close at or below levels being indicated by Futures now, expect some activity on the portfolios tomorrow, specifically around buying a negative facing ETF on the US market such as the Betshares US Equities Strong Bear Hedge Fund which trades under the code of (BBUS). This is a currency hedged play (unfortunately) however it’s the simplest way (in our view) of gaining short US equity market exposure.
Locally, CBA was front and centre (-2.3%) after announcing plans to hive off its wealth management and mortgage broking businesses into a separate entity which would reduce reputational risk + importantly will free up capital to focus on the real driver of earnings – the retail banking business. Elsewhere, Metcash reported okay numbers + announced a $125m buy back which saw the stock pop on open (short covering I presume) however the optimism was short lived and the stock gave back the early gains.
CBA took -11pts off the index today…
On the sector front, the energy stocks were best benefitting from a resurgence in the Oil price on Friday – the materials were okay but still look vulnerable here in the short term, while the banks weighed.
Overall the ASX 200 index fell 14points or -0.24% to close at 6210.
ASX 200 Chart
ASX 200 Chart
CATCHING OUR EYE
Broker Moves; Credit Corp (CCP) has bucked the ‘short report’ thesis that was circulating last week recovering all of their lost ground. When such as explosive thesis is written (as was the case last week) its validity is obviously down to substance, but (as with most things in this industry) it revolves around track record, something that Checkmate seems to be light on…Morgans were quick to upgrade the stock again after slapping a ‘cautious’ hold on it last week…JP Morgan also more optimistic on the stock.
· ANZ May Commit A$6.75b to Buybacks Through FY19-20: Ord Minnett Likely to see A$2b/half in FY19, slowing in FY20
· Northern Star Upgraded to Buy at UBS; PT A$7.50 – double upgrade with the note saying Long-term output target may be raised to 700kozs/yr
· Credit Corp Upgraded to Add at Morgans Financial; PT A$21.14
· Credit Corp Upgraded to Overweight at JPMorgan; PT A$20.50
· CYBG Downgraded to Sell at Investec
· Metro Mining Reinstated at Morgans Financial With Add; PT A$0.34
Northern Star (NST) Chart
Metcash (MTS) 42.85 / +2.15%; announced their full year results this morning, and surprised to the upside. Sales and underlying profit ($14.5b & $215.6m respectively) were inline, however EBIT at $332.7m was 3% above the consensus view. Growth in hardware sales was the biggest driver of the beat, with construction and DIY activity higher than expected, a sign of a growing sector rather than Metcash taking market share from Bunnings. Probably the most important part of the result was the announcement of a $125m buy back, highlighting management’s belief in the business after what has been a difficult few months as more players enter the Australian supermarket space. We like Metcash, and it has run well after informing the market of a sizable impairment just a few weeks ago.
We prefer MTS over WOW & WES on valuation grounds, and the buyback will be supportive. The market is split on the stock with 5 b buys, 3 holds and 4 sells with a consensus price target at current levels.
Metcash (MTS) Chart
Commonwealth Bank (CBA) $72.16 / -2.30%; A lot happening in the banking space today with Com Bank announcing plans to spin off their Wealth Management and Mortgage Broking business into a separate entity – still owned by CBA but clearly a stepping stone for complete divestment. The entity will house Colonial First State, the CFS Global Business, Aussie Home loans + their life insurance business. When done (sometime in the 2019 FY) it will represent about 5% if CBA profits on about 10% of revenue. The view now – in a post Royal Commission world, is that a financial planning network provides reputational and earnings risk – a life insurance business brings life insurance risk specifically around decisions on claims and the rejection of claims brings reputational and earnings risk while the revenue margins in wealth management are falling faster than bank margins are – all of these risks seemed to come to a head at the Royal Commission with some scathing examples outlined. That said, CBA’s response has been swift under new CEO Matt Comyn.
Commonwealth Bank (CBA) Chart
No trades across the MM portfolios today.
Have a great night
James / Harry & the Market Matters Team
Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.
James is a Portfolio Manager within Shaw and Partners heading up a team that manages direct equity and option portfolios. He is also the Primary Contributor to Market Matters, a daily investment report that offers real market insight.