Week In Review

• The three key lessons from Reporting Season and what aspect is the worst since the GFC;
• Industrials sector leading the ASX through Reporting Season;
• Big Four Banks dragged the market down this week, only to be out-paced by the Australian Grocers as the weakest performers;
• Mid-caps reign supreme; a list of the Market Darlings and small gold companies you, woulda, coulda, shoulda had; and
• The leading themes on the ASX to look for; inverse oil exposure; Consumer Discretionary – domestic entertainment, gold and the narrowed field of Tech-leaders that are really powering the market

Economy and Indices

The Australian market is coming to the end of Reporting Season this week. Once again, a lot of the market movements have come from company-specific news. With the strong influence from Australia’s listed companies it is of little surprise that Australia’s major trading partners played insignificant roles influencing the direction of Australia’s market this week.

US markets are up this week, Chinese markets down and European markets were mixed (at the time of writing).

With the majority or Reporting Season out of the way,

Australian Market Correlations over the last month:

– US = Very Weak
– UK = Insignificant
– German = Insignificant
– Chinese = Insignificant
– Japan= Very Weak
– India= Very Weak

Reporting Season Lessons:

Here are Citi Group’s analyst Tony Brennan’s three key take-aways from this Reporting Season are:

1) There continues to be moderate earnings growth in most sectors (excluding resource earnings);
2) Earnings Growth is still fuelled by cost-cutting / cost-discipline behaviour);

a) EBITDA growth comes in at 8.1%; and
b) Sales growth continues to be relatively flat (aggregate sales growth for Dec-15 is +1.9%;

3) The market payout ratio remains at historical highs (~78%) however analyst forecasts are anticipating the payout rate to decline to around 64% in FY18.

Observing the earnings changes shows that the consensus FY16 market earning per share (EPS) growth has continued to drift lower (now at -8.9% vs -5.3% in Jan). This makes FY16 the weakest year for earnings growth since the GFC.

Sectors

Sectors on the ASX are a classification which is given to each listed company to describe the industry group they operate within.

The top three sectors this week were:

1. Industrials

This sector has been re-shaped since the mining and mining services industry fell out of favour after 2008. Industrials are now led by transport companies, representing seven of the 10 largest in this sector. This means the Industrials sector often represents and ‘inverse-oil’ trade and its performance can be dictated by the price of oil. The other large Industrial shares have a positive exposure to the USD.

Together these two biases make this sector less of a representation of the Industrials’ performance in AU or the ASX in general (‘Beta’), but a function of the USD and oil prices.

As oil has a reasonably flat week, the strong performance has been driven by Cimic (CIM, old Leightons), Transurban (TCL) and Brambles (BXB)

The largest names and best performers in the sector are MQA, SYD, QAN, TCL and AIO.

2. Property

Also known as ‘AREITs’ (XPJ) and is fairly well spread across the sector. This sector is rather defensive with consistent yields and rather steady asset/company values.

Since the Big 4 Banks dropped out of favor in April 2015 this sector has stopped rising and churned sideways, however notably better than the overall ASX.

3. Consumer Discretionary (retail)

This sector is more evenly spread than most sectors on the ASX and provides a balanced view of the sector.

Consumer Discretionary shares performed in line with REITs this week; held their ground, which was better than the majority of the market.

The Weakest sectors were:

4. Consumer Staples

Woolworths (WOW) and Wesfarmers (WES, ‘Coles’) dominate this sector.

WES reported and was down significantly this week which places and WOW is down to fresh lows this year which makes this sector the worst performer this week by a long margin.

5. Financials (Excluding Property)

Financials (ex. Property (XXJ)) is dominated by the Big 4 Banks. Because of the Big 4 Banks’ dominance on the XJO this reinforces the ‘Beta’ driven market moves of this sector, which means because of XXJ’s sheer size on the XJO, it’s difficult for either index to move in the opposite directions.

Recently there has been a de-coupling of the large banks in Australia; CBA and WBC have recovered more than ANZ and NAB. This shows a higher risk has been attached the latter two, which appears to be attributed to a risk of raising more capital.

The Big four have provided market updates for the quarter and have been the heavy weight on the ASX this week leading the market lower.

3. Energy (oil and gas)

Energy is a cyclical sector and its performance is often a function of the world prices for oil and gas commodities. However in the midst of Reporting Season, the largest shares in this sectors have been the driving forces behind this week’s rise.

Woodside (WPL) is the largest in this group and its reports were received well by the market this week, so too was Origin Energy (ORG) and Santos (STO).

It’s worth noting that most of the shares in this sector are down over 30% in the last year.

Segments

Segments are the classifications given to companies of similar sizes for their market capitalisation (total company value by share price).

Within the ASX Top 200, the segments are:

– The 50 largest (‘Fifty Leaders’) and generally called the ‘blue-chip’;
– The next 50 companies (from 51 to 100th largest) are the ‘Mid-cap’ shares; and
– The last 100 of the Top 200 (from 101 to 200th) are the Small-caps’.

This week the Small and Mid-Caps have considerably out-performed the rest of the market this week.

This out-performance was helped along by these leading companies:

CIM, FMG, SPK, FPH, FBU, NST and MQA

The Fifty Leaders provided the weakest performance this week. The biggest contributors to this fall were the Big Four Banks and WES.

Market Darlings:

These are the shares we all wish our portfolios were filled with – the leading shares of the leading groups on the ASX.

Leading Market Themes

Gold Companies on the ASX have provided strong returns as a function of the commodity’s price on the world markets.

The number of Technology leading the ASX higher have dropped off dramatically over the last few weeks. The remaining leading companies are providing specific software solutions to a targeted (or niche) markets. A lot of these companies are small and mirco-caps and some are not even in the All Ords index (XAO).

‘Inverse Oil Exposure’ has continued to perform well. These are companies whose bottom line is positively impacted by lower oil prices. Examples are SYD, QAN and other transport related companies. SLK has been one of the best performers from this group and one small-cap to note is ZNZ who import, distribute and sell transport fuel.

There are less Consumer Discretionary shares leading the ASX after reporting season. The remaining companies provide domestic entertainment and low-end retail products.

The numbers of leading food-related producers/distributors are also performing but have narrowed to those with a strong international focus. The leaders of this group have a common thread of selling in to China and have been providing a proxy for food sales into China.