Be Mindful Of The Aussie Twist

This story features ARISTOCRAT LEISURE LIMITED, and other companies. For more info SHARE ANALYSIS: ALL

In this week's Weekly Insights (published in two separate parts):

-Be Mindful Of The Aussie Twist
-Resources Stocks: Follow The Money?
-Conviction Calls: Morgans, CS, UBS And Citi
-Rudi On BoardRoomRadio
-Hotel Operators: A Tale Of Two
-2016 – L'Année Extraordinaire
-All-Weather Model Portfolio
-Rudi On TV
-Rudi On Tour

[Note the non-highlighted items appear in part two on the website on Thursday]

Be Mindful Of The Aussie Twist

By Rudi Filapek-Vandyck, Editor FNArena

What if I told you one of the key barriers preventing the Australian share market to move significantly higher from its narrow trading range post May is the stronger-for-longer Aussie dollar?

I imagine many among you, readers of this story, would look at your investment portfolio and notice, yes indeed, the likes of Aristocrat Leisure ((ALL)), Amcor ((AMC)) and Ansell ((ANN)) -industrial companies with a big chunk of their revenues coming from overseas- clearly have found the going tougher, especially in August and September.

But the Australian dollar is not only weighing upon the short term outlook for exporters and multinationals, it is equally eroding further upside potential for local energy producers and miners.

Look no further than Citi's latest update on global commodity markets, with the analysts now forecasting commodity prices are likely to remain robust in the final quarter and moving into calendar 2018, with global growth momentum synchronised and strong and Chinese authorities accommodative, but also that the Australian dollar is likely to rally higher after a brief dip below US80c.

This implies the usual benefits from rising prices are not automatically flowing through to the bottom line of producers in Australia, or to their shareholders. In particular producers with significant operations in Australia will take a hit as their operational costs rise in a relative sense while revenues shrink through the translation back into local dollars.

(The latter only applies if companies report in AUD).

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Citi's revised outlook for the commodities sector in Australia now assumes AUD/USD will remain above 80c for the next three years (2018/20); this change in trajectory signals a break from prior projections by a double-digit percentage, in particular for the first two years ahead.

No wonder thus, one of the reports published carries the subtitle "EPS downgrades as strong AUD bites".

Yes, that's right, even with the outlook for most commodities having improved near term, a number of Australian producers is actually facing a reduction in profit forecasts, thanks to the Australian dollar.

Citi's update on base and precious metals producers contains 15 ASX-listed stocks. For ten of these stocks the broker's valuation/price target either declined or remained unchanged.

For Australian investors, investing in the resources sector has instantaneously become a tad more complicated as the local currency is increasingly poised to divide between winners and losers, on top of all other influences such as China policies, cash flow projections, production achievements and geopolitical risks.

Out-of-favour gold producer Perseus Mining ((PRU)) is the only one to receive an upgrade in recommendation from Citi, to Buy/High Risk, while nickel/gold producer Independence Group ((IGO)) is downgraded to Neutral and popular gold producer Regis Resources ((RRL)) is downgraded to Sell.

Citi's favourites are OZ Minerals ((OZL)) for base metals exposure and Evolution Mining ((EVN)) among gold producers.

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In a general sense, many an analyst is now anticipating further upside momentum for crude oil prices, while preferring base metals above bulks. Thermal coal in particular is being singled out as probably having run way too high in the short term, as concerns about the price for iron ore continue building.

Citi's forecasts imply a relatively steady outlook for crude oil in the year ahead, with only slightly lower prices for base metals one year out. Bulks are expected to deflate, while silver should outperform sideways moving gold. (You can blame the Fed for the latter). The analysts label themselves "neutral-to-bullish" with absolute preferences for cobalt and sugar. Among base metals, copper seems to have the most sustainable potential.

Analysts at CIBC in Canada also are bullish copper in anticipation of market deficits by 2023. They think zinc has the superior market fundamentals, in a generally positive setting for base metals, while oversupply in the molybdenum market should keep a firm grip on the price.

Deutsche Bank's favourites among local gold producers are OceanaGold ((OGC)) and St Barbara ((SBM)) on cheap valuations and Alacer Gold ((AQG)) and Dacian Gold ((DCN)) for development exposure. Analysts at UBS agree with Deutsche Bank the risk profile overall for gold producers in Australia has improved noticeably in years past with capital returns rather than M&A potentially the sector's new modus operandi.

UBS's sector favourite is Evolution Mining, while Alacer Gold is also rated Buy.

See also "USD And Energy August Report Card" from 31st August 2017 for an earlier take on energy stocks and the strong Aussie dollar.

In addition, paid subscribers can download "The AUD And The Australian Share Market" via the Special Reports section on the website.

Resources Stocks: Follow The Money?

If anything has become more obvious post the August reporting season in Australia it is that resources companies are now carrying the mantel of providing shareholders with extra cash benefits, thanks to higher-for-longer commodity prices and a remarkably disciplined supply response to date. The combination means the likes of Rio Tinto ((RIO)) are swimming in cash.

The fact has again been highlighted by Rio Tinto lifting its share buyback to US$4bn for this financial year. Analysts at Ord Minnett pointed out, combined with the US$4.9bn shareholders are likely to see coming their way in the form of dividends, total cash returns this year are poised to exceed 10% of the company's total market cap.

And analysts are anticipating more of the same next year.

Morgan Stanley noted a while ago how resources stocks have turned into cash cows with implied yields threatening, if not exceeding those of traditional sources of income for investors, not to mention the potential for share buybacks on top of elevated looking dividends (see Rio Tinto). FNArena's Sentiment Indicator, which ranks all stocks on forward looking implied dividend yields, now shows Fortescue Metals ((FMG)) is offering the highest yield on the ASX, at 7.75%.

Who would have guessed this one? In particular since share prices for the banks and insurers have not been particularly strong either in recent months. Fortescue is the only miner in the yield top twenty, but even so, Rio Tinto shares are yielding 5.29% and New Hope Corp ((NHC)) is seen offering 5.23%. Why are these share prices not substantially higher?

Morgan Stanley thinks it's because investors do not believe the current tsunami of cash that is being generated is sustainable, while history also shows mining companies are not that good in deriving healthy returns after spending peak-cycle profits. On both accounts, it is hard to argue with the evidence that has been accumulated over many decades, but for now, financial disciple throughout the sector has been restored, and investors won't say no to the extra benefits coming their way.

A quote from a recent sector report by UBS: "If the miners stick to their capital allocation guns then we believe the sector could yield 5-10% in capital returns (in addition to dividends) by end-2018; 10-20% in additional returns at spot prices."

Those UBS analysts, in early September, predicted the current cash bonanza for shareholders in the sector could well last for another 18 months or so. Depending on whether current prices can be sustained for much longer, companies including Whitehaven Coal ((WHC)), South32 ((S32)) and Fortescue Metals should be generating cash in excess of 20% of respective market capitalisations, calculated the analysts.

UBS's sector preference lies with Rio Tinto, BHP ((BHP)) and South32, for their cash generation and potential to return significant surpluses to shareholders.

Rudi On BoardRoomRadio

Audio interview from last week:

https://boardroom.media/broadcast/?eid=59c0972724704206917147eb

2016 – L'Année Extraordinaire

It was quite the exceptional year, 2016, and I did grab the opportunity to write down my observations and offer investors today the opportunity to look back, relive the moments and draw some hard conclusions about investing in the world today.

If you are a paid subscriber to FNArena, and you still haven't downloaded your copy, all you have to do is visit the website, look up "Special Reports" and download your very own copy of "Who's Afraid Of The Big Bad Bear. Chronicles of 2016, A Veritable Year Extraordinaire" (in PDF).

For all others who still haven't been convinced, eBook copies are for sale on Amazon and many other online channels. You'll have to visit a foreign Amazon website to also find the print book version.
 

All-Weather Model Portfolio

In partnership with Queensland based Vested Equities, FNArena manages an All-Weather Model Portfolio based upon my post-GFC research. The idea is to offer diversification away from banks and resources stocks which are so dominant in Australia, while also providing ongoing real time evidence into the validity of my research into All-Weather Performers.

This All-Weather Model Portfolio is available through Self-Managed Accounts (SMAs) on the Praemium platform. For more info: info@fnarena.com

Rudi On TV

This week my appearances on the Sky Business channel are scheduled as follows:

-Tuesday, 11.15am Skype-link to discuss broker calls
-Wednesday, 8-9pm hosting Your Money, Your Call
-Thursday, noon-2pm
-Friday, 11.15am Skype-link to discuss broker calls

Rudi On Tour

– I will be presenting in Adelaide on November 14th to members of Australian Investors Association and other investors, 7pm inside the Fullarton Community Centre, 411 Fullarton Rd, Fullarton. Title of presentation: Investing In A Slow Growing World – An Update

(This story was written on Monday 25th September, 2017. It was published on the day in the form of an email to paying subscribers at FNArena. This is part one. The second part will be published on the website as a separate story on Thursday).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's – see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: info@fnarena.com or via the direct messaging system on the website).

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BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

Paid subscribers to FNArena (6 and 12 mnths) receive several bonus publications, at no extra cost, including:

– The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
– Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
– Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
– Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow.
– Who's Afraid Of The Big Bad Bear? eBook and Book (print) available through Amazon and other channels. Your chance to relive 2016, and become a wiser investor along the way.

Subscriptions cost $380 for twelve months or $210 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): https://www.fnarena.com/index2.cfm?type=dsp_signup

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