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Invast Insights
Week Commencing October 28, 2013
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This week we look at the following topics:
1.0 Where interest rates may be heading in Australia?
1.1 What this means for the Aussie dollar
2.0 Feedback from our Gold seminar
3.0 Monthly portfolio review
3.1 Proposed portfolio changes
4.0 BHP’s quarterly production report
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www.invast.com.au | 1800 468 278
1.0 Where interest rates may be heading in Australia?
Inflation has been the secondary consideration for the Reserve Bank of
Australia (RBA) for most of the year, the primary focus being jobs and
economic growth. Nothing scares central banks more than runaway inflation
and it was only less than two years ago that Glenn Stevens was sounding
alarm bells of inflation from the mining boom. In early 2008 the annualised
rate of inflation was printing in the mid 3% range while global financial
markets where heading south. Glenn Stevens – while speaking to investors in
London – in January 2008 played down the falls on financial markets and
warned that “uncomfortably high” inflation was the key problem facing the
economy. Then the global financial crisis hit.
Our point here is that Glenn Stevens has a history of stressing on inflation.
Last week’s 1.2% quarterly rise in inflation was above market expectations of
0.8% - it’s the first warning sign that low interest rates are starting to have
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an economic cost on the Australian economy. The trimmed mean measure -
which the RBA watches more closely - is still running at 0.7% for the quarter
which isn't as high as the seasonally adjusted headline rate. The year on year
rate of trimmed mean inflation is at 2.3% which is still within the lower end of
the 2-3% target band range.
While inflation from the mining boom has precipitated, housing this time was
the key standout inflation contributor, up 2% over the prior quarter and 4%
on the prior corresponding period. Higher house prices do provide economic
benefits as the wealth effect flows through but the unintended consequence
on other parts of the economy cannot be ignored either. You can't have a real
estate boom without prices flowing into other parts of the economy, the RBA
knows this very well.
At Invast we think further housing price rises are likely in 2014 - the residential
property market remains very buoyant. Property developer Mirvac (MGR)
recently updated the market across its business divisions and advised that
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its residential property development business was performing very strongly
with just under $300m of contracts for the sale of property secured during
the first quarter of the 2014 financial year.
The 1.2% rise by itself would not constitute a panic scenario if other economic
data was pointing downwards, but the RBA now finds itself with an
unemployment rate well below 6%, rising lending and retail numbers and
some positive signs coming out of the mining and resource space which has
been subdued for most of the year. It’s very difficult to see the RBA cutting
further from here unless we see unemployment rise above 6%. For now we
think rates are on hold and probably likely to rise mid next year - there will be
few analysts maintaining any forecasts to cuts off the back of these numbers.
Next is a breakdown of the September inflation composition basket – as
measured from the Australian Bureau of Statistics:
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1.1 What this means for the Aussie dollar
It’s hard to bet against the AUDUSD at the moment given the growth in
Australian inflation and lackluster jobs numbers out of the US economy,
which would postpone tapering until at least the first quarter of 2014. We
have previously written that a non-farm payroll number in the USA in the
order of 250-300,000 would trigger the market response but last week’s sub
150,000 print is miles away in terms of where the job market stands at the
moment.
Traders will continue to back the AUDUSD towards parity even though the
vulnerabilities of the Australia economy have not yet been completely
addressed. We still fail to see where the GDP growth gap from lower mining
investment will be covered. House prices are rising in Australia but housing
activity – as measured by building approvals – are still at levels below those
needed to offset the decline in mining investment as a proportion of GDP.
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1.2 AUD/USD Technical Outlook
Below are our short and medium term views on the AUDUSD based on the
above proposition.
We expect the AUDUSD to trade between 0.9500 and 0.9750 over the short
term, our focus is towards 0.9715 as the short term key level for the pair. At
0.9715 we see the 50% retracement of the drop from 1.06 – 0.8890 earlier this
year. The AUDUSD is severely overbought at this stage and as long as
AUD/USD fails to achieve a close above 0.9715 on the daily chart, we expect a
correction towards 0.9500 to occur before any further push towards parity.
Level 0.9500 is a key support for the pair in the past, and as recently as two
weeks ago was the key resistance. The level is also the 38.2% Fibonacci
retracement from 1.05821 – 0.88473, we believe bids are lined up around this
key level.
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Image: AUDUSD daily chart via Invast MT4 platform
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Over the longer term we could still see a potential for further push close to
parity, right around 0.9900 where the 61.8% retracement is located. Overall
technical still points to a potential correction first, as such we prefer shorting
the pair near current levels, until the overbought condition eases off and
buying back the currency at around 0.9500 support.
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Image: AUDUSD weekly chart via Invast MT4 platform
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2.0 Feedback from our Gold seminar
We recently hosted Robust Resources (ROL) Managing Director Gary Lewis at
our Gold Seminar in Sydney on Friday 25 October to a full house of guests.
Lewis spoke about his company’s growth from humble beginnings, its ability
to structure deals and form solid relationships in foreign countries including
Indonesia where Robust has attracted very significant partners and sources of
funding. Lewis also spoke about the outlook for gold and other base metals
which are due to see pricing pressure into the future based on demand
fundamentals and current supply. He stressed the weak sentiment in markets
at the moment particularly towards the junior mining space. This fits well with
our view published last week to commence purchasing mining stocks. As we
write, the ASX200 Materials index is sitting above 10,000 compared to last
week’s lows of 9,800.
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The seminar also heard from Invast’s own analyst team which made the
following points:
• Continuing to see upside support for the gold price based on technical
levels and fundamental evidence including the increasing marginal cost of
production – something we wrote about in early September
• Inflation is likely to be a major investment theme over the next five years
and gold is just one method of hedging this risk, others include investing
in stocks which will see their earnings inflate also.
• The United States and other major advanced economies do carry very
high levels of debt but they are also likely to address this by printing their
way out of the problem, as opposed to collapsing. Traders need to capture
opportunities here.
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We plan to hold similar seminars over the next few months – for any
suggestions on topics please speak to your account manager and pass
through your ideas to the research team.
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3.0 Monthly portfolio review
It’s been a rocky ride for the Wealth Creation portfolio over the month – our
long gold position hasn’t worked out to plan but we continue to see upside in
the yellow metal and have previously written about why we hold this
position. The short S&P500 position has just turned positive thanks to a rally
in the Aussie dollar. Elsewhere, the portfolio is performing brilliantly. Empired
and Tandou are holding ground with reasonable returns while Adslot has
continued to shoot the lights out. The one single exposure has returned
$6,750 from a $10,000 investment – more than offsetting any short term
losses on the gold exposure. We purposely built this portfolio for the risk
tolerant investors, one who is looking at creating some wealth and willing to
take risks.
The portfolio aim was a target about 10% per annum. The return to date is
sitting at a very comfortable 12.8% - not bad for just two months of
implementation. If we annualise the return since inception we see a gain of
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76.8%. So far, so good. We think the next few months will see more upside for
Empired as the distortion from the recent capital raising works through the
market. There is more blue sky for the stock if results match expectations –
which we think they will. We plan to speak to Empired’s CEO in the next few
months and will publish our thoughts on the chat.
The Wealth Preservation portfolio is also in line with expectations having
delivered 1.8% return in the two months since inception. This isn’t an
exceptional result but the aim with this portfolio was always about stability.
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When the market rises the portfolio will underperform but more importantly
when things turn south, the list of quality names and diversity is expected to
hold up a lot better. Woodside Petroleum has given away some of its recent
gains but energy prices remain very favourable and we see the stock rising
above $40 per share sometime in the new year. The Japanese market
exposure – IJP – has also been relatively flat but we remain big believers of
the turnaround in the Japanese economy and are here for the long term, at
least three to five years. Westfield continues to disappoint but it’s only a
matter of time before the market starts looking outside of the banks and
resource stocks to find value and with a comfortable 4% plus yield, we aren’t
in any panic.
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Our drawdown portfolio is holding up very well considering the ultimate aim
is to generate a return of around 5% excluding franking credits. The
annualised return since inception is now running at almost three times our
target although this number should be treated as caution. There will be
volatility in markets over the year ahead. The portfolio has so far generated a
return of 2.6% when we include dividends due from TAHHA in mid November.
The cash balance is slowly growing and we will look to reinvest the proceeds
when the bank balance grows to around $5000. For the time being, our
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selections are bank balance grows to around $5000. For the time being, our
selections are unchanged and we continue to outperform cash term deposits
at a very comfortable level. It’s worth noting that the TAHHA and GMPPA
securities have not only delivered a nice dividend but also recorded
reasonable capital growth as more and more investors search for yield.
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3.1 Proposed portfolio changes
At this stage we don’t have an immediate urge to change any of our portfolio
holdings. We are thinking about removing Woolworths from the Drawdown
Phase portfolio and replacing it with a higher yielding, corporate bond or
hybrid type of exposure – something that can add capital upside as the
market increases its risk appetite. We’re keeping a close eye on Healthscope
Notes issued on the ASX under the stock code HLNG – these are securities
paying a coupon of 11.25% in quarterly payments which reset in mid 2016.
Based on the trading price at the time of writing, the yield to maturity is
currently running slightly above 8.5%.
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The reason for the high yield is that the market is concerned about
Healthscope’s high debt levels – gearing currently sits at around 62% with
total net debt of $1.57bn. We don’t think Healthscope runs a major financing
risk and note that the Healthscope Notes rank higher than common equity.
Healthscope reported operating earnings growth of 8.3% for the 2013
financial year and is backed by a portfolio of solid assets in the hospitals and
pathology space. If we continue to see an increase in risk appetite on the
market and improved results from Healthscope we will be adding the notes to
the portfolio and removing Woolworths sometime in the New Year.
Next is a brief snapshot of Healthscope’s view on the market segments in
which it operates, sourced for a presentation the company made to the ASX
on 28 August 2013.
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Image: Healthscope 2013 result presentation slide 6
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4.0 BHP’s quarterly production report
We published the following initial impression on the BHP quarterly
production numbers on the Invast website on 22 October 2013 titled “BHP
under promises and over delivers”.
The large, top tier mining companies have learnt lessons from the recent
downturn. Their effort to cut costs and focus on ramping up volumes is so far
progressing well, good enough to offset any weakness in commodity prices.
Today's quarterly from BHP looks solid on face value - under promising on
iron ore and over delivering by increasing the production guidance for the full
year to 212 million tonnes. A big tick here. The iron ore price has held up
relatively well and BHP, Rio Tinto, Fortescue and Vale are the key global
beneficiaries of this. Cash from operations is swelling very quickly.
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For us the iron ore story is no real surprise, what we really like from this
quarterly is the improvement in the petroleum division - an important
earnings contributor alongside iron ore. Petroleum has seen major investment
by BHP and many in the market have doubted the decision to go here - but
with energy prices solid and production volume ramping, BHP's board now
seems justified in its tilt to increase energy exposure. Total petroleum
production increased by 6% on the prior quarter and is comfortably above
the 60 million barrels of oil equivalent level which will please the market.
A few of the metals divisions have disappointed, but these are largely
insignificant to the overall earnings composition. Copper needs more
improvement but the copper price isn't exactly buoyant and so BHP has time
up its sleeve.
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Bottom line: BHP is the most attractive mining company in the world and
currently trading on an undemanding price to earnings ratio of around 13-14x
depending on which estimates are used. Invast published a report yesterday
calling a major rally in material stocks and we think BHP is right on the top of
our priority list in terms of buying opportunities. The link to the report is
contained below. There is nothing in this quarterly to suggest BHP is
becoming complacent in its capital management either which means the
balance sheet is likely to improve by a large factor over the next two years.
Keen to attend one of our seminars? Check out our trading education seminar schedule.
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5.0 Disclaimer
Please note that you are receiving this report complimentary from Invast Financial Services Pty Ltd (AFSL 438 283). Invast staff members may from time to time purchase securities which are included in this or future reports. The authors of this report may or may not be holding a position in the securities mentioned. Please note that the information contained in this report and Invast's website is of a general nature only, and does not take into account your personal circumstances, financial situation or needs. You are strongly recommended to seek professional advice before opening an account with us.
General Disclaimer: This newsletter contains confidential information and is intended only for the person who downloaded it. You should not disseminate, distribute or copy this newsletter. Invast does not accept liability for any errors or omissions in the contents of this newsletter which arise as a result of downloading this newsletter. This newsletter is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell any financial product. Invast Financial Services Pty Ltd is regulated by ASIC (AFSL 438 283 | ABN 48 162 400 035).
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Risk Warning: It's important for you to read and consider the relevant Product
Disclosure Statement, and any other relevant Invast Financial Services Pty Ltd
documents before you decide whether or not to acquire any financial
products listed in this email. Our Financial Services Guide contains details of
our fees and charges. All these documents are available here on our website,
or you can call us on +612 8036 7555. CFDs and Foreign Exchange are
leveraged products and carry a high level of risk and you can lose more than
your initial deposit so you should ensure CFD and Foreign Exchange trading
meets your personal circumstances.
General Advice Warning: Being general advice, this newsletter does not take
account of your objectives, financial situation or needs. Before acting on this
general advice you should therefore consider the appropriateness of the
advice having regard to your situation. We recommend you obtain financial,
legal and taxation advice before making any financial investment decision.
*Distributed with the permission of Invast.com.au