What Mattered Today: Risk off again at IAG

James Gerrish

The market had another crack at the 6000 level today, but once again sellers stepped up and pushed the index lower into the close. No real bid tone in US Futures during our session, while Iron Ore Futures were trading more than 3% lower prompting some weakness amongst the miners. The overseas earners – the likes of Aristocrat (ALL), Macquarie (MQG), CYBG (CYB) did well today however it was the banks that provided most index support. Banks typically rally in December and we’re starting to see that play out, CBA the best of them adding +0.94% and we continue to like our overweight banks / financials call for the next few months. To that end, we paid up for Janus Henderson (JHG) today in the Platinum Portfolio, getting set at $48.28 after failing to get filled around the $47 region over the past couple days. The stock closed at $48.42

For the week, we’ve seen most buying in the Telco space for a change, with Telstra fighting back against the huge wave of negativity, while the Industrials has been out of favour

Weekly sector performance

Source:Bloomberg

Big stocks movers over the week

Source: Bloomberg

On the mkt today, the Telcos were again the standout while on the flipside, the Utilities struggled and closed -0.89% lower. An overall range today of +/- 33 points, a high of 6012, a low of 5979 and a close of 5994, up +16pts or +0.28%

ASX 200 Intra-Day Chart

ASX 200 Daily Chart

TOP MOVERS 1. IAG – Similar to the Berkshire deal they did a while ago, IAG today has announced 3 new quota share agreements which will reduce earnings volatility, boost insurance margins 250bps on a full year basis and free up $435m of capital. Having a quick go at the numbers, this could add 2-3% to EPS – however this is a stocks that is incredibly expensive on a historical context BUT, the business does provide a low risk exposure to insurance, they will do a buy back of stock, something around the tune of 400m in FY18 which would improve earnings per share by around 2%. Overall, the deal announced in a good one and is definitely value accretive, as reduces earnings volatility, releases capital and lifts ROE.

The also came out with FY18 guidance saying that insurance profit broadly unchanged and their reported Insurance margin 13.75%-15.75% (up 125bps).

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IAG PE – very stretched

Source; Shaw and Partners

IAG Daily Chart

2. Janus Henderson (JHG) – A stock we like and we amended our BUY price up today to around $48.30 with a 3% allocation. This is a reasonably cheap global fund manager with scale, we like its international exposure, and believe the financial space is where most money will flow should the market continue to track higher, and sustain the break above 6000.

Janus Henderson Daily Chart

Not a lot else happening around the traps today as we await the non-farm payrolls in the US tonight, with the market forecasting another +198k jobs being created which is strong but down on last month of +261k. Watch for wages growth which is more meaningful and the mkt is expecting a print of +0.3% here. It’s the pressure on wages that really shows how tight a labour market is, and it has a big bearing on inflation and therefore interest rates.

The US cash futures curve just keeps moving higher – tax cuts are stimulatory!!

Have a great night James & The Market Matters Team

Market Matters Disclaimer

Prices as at 07/12/17


James Gerrish

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.

Expertise

ASX:IAG ASX:JHG

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