Upload
invast-financial-services
View
79
Download
5
Embed Size (px)
DESCRIPTION
This Invast report focused on the report of BHP Billington, which is currently the largest stock on the Australian market. BHP has one of the best global portfolios and this year, now has costs under control. Consequently, we discussed buying BHP in the Wealth Preservation Portfolio, in the coming month. Additionally, this report highlighted the bull market run for Aussie 200 and the beginning of a major reversal between AUD/NZD.
Citation preview
Invast Insights
Week Commencing February 24, 2014
www.invast.com.au | 1800 468 278
This week we look at the following topics:
1.0 Why BHP’s result is a turning point
2.0 Aussie set for a bull market run
3.0 Gold risk/reward levels
4.0 AUD/NZD the start of a major reversal?
www.invast.com.au | 1800 468 278
www.invast.com.au | 1800 468 278
1.0 Why BHP’s result is a turning point
BHP Billiton is the largest stock on the Australian market and by a large factor.
It's been a tough few years for the mining giant, lower commodity prices and
legacy issues from cost blowouts have hurt earnings. Investors have also been
on the cautious side due to Chinese manufacturing numbers tending to print
lower. But last week’s numbers we believe will be a turning point for the stock.
Underlying earnings beat expectations by around 10% and the group is now
starting to create some large shareholder value.
For us, the most important takeout from
the result release is that BHP have
booked underlying returns on capital in
the order of 22%. The company’s cost of
capital is in the low teens, so that
returns on capital are almost double the
cost of capital. This is what creates
shareholder and leads to higher
dividends in the future.
www.invast.com.au | 1800 468 278
The 22% return on capital excludes investments on new projects which
haven’t yet gone into production, so there is some work still to do. BHP has
listened to what the market wants. Prudent capital management, no more
lavish acquisitions or growth at any cost. This report card is the first sign that
this feedback working.
BHP’s earnings are derived from two main sources, petroleum and iron ore.
There’s no point in spending too much time on iron ore. Our focus is more on
what BHP has reported and what this means for the average investor. Read on
below and we will tell you what we think. Back to the result, Iron ore prices
will continue to hold in the order of US$120 per tonne over the next five years
and that is good enough for BHP to generate an excellent return on capital. If
energy prices continue to hold solid, with Brent now at around US$110 per
barrel, BHP has one of the most attractive global energy portfolios to benefit.
We think the Board and management feel more comfortable with the
petroleum assets this time around relative to other result releases.
www.invast.com.au | 1800 468 278
So where does BHP make its money? The chart below explains everything
beautifully. Underlying EBIT is basically the most important earnings number
and tells the whole story, the second column from the left.
www.invast.com.au | 1800 468 278
Image: Breakdown of BHP’s operating divisions released to ASX on 18 February 2014
www.invast.com.au | 1800 468 278
Bottom line: BHP feels much more comfortable going into 2014, knowing it
has one of the best global portfolios and costs now under control. It’s all well
to grow your earnings but at the end of the day what matters is the rate of
return on investment. BHP has learnt an important lesson and we think the
results of better capital management will continue to flow through to
shareholders over the next decade. The stock will rally and could have a 5 in
front of it within twelve to eighteen months and we will take this opportunity
to start adding into our model portfolios. We plan to buy BHP in the Wealth
Preservation Portfolio next month.
Where to buy: In last week’s report, we wrote “Should report good numbers as
commodity prices rise and the currency moves around. Needs a good number
to breakout from here, long term buy regardless of the result” The good result
did see it breakout.
www.invast.com.au | 1800 468 278
2.0 Aussie set for a bull market run
When the largest stock in the market breaks through resistance, the rest of
the market usually follows. We’re taking a more positive view on the Aussie
200 index and while there might be some resistance at current levels,
potentially a small downward leg, the market should start trending higher for
what we think is the next phase of a major bull market run. There are many
reasons to sit on the sideline and remain cautious about the Australian
market but there are equally more reasons to start taking a bullish view. Some
of these are summarised below:
1. Record low interest rates are starting to feed through the corporate world
and a major feature of this reporting season has been the absence of large
interest charges or balance sheet issues. Most large Australian companies
have recapitalised their balance sheets over the past few years and exploited
cheap debt, not just in Australia but globally. The impact of the RBA’s interest
www.invast.com.au | 1800 468 278
rate cuts are still yet to have their full impact, monetary policy usually has a
lagging effect of around 12-18 months.
Even though there is large anecdotal evidence that the broader Australian
economy is struggling, the stock market usually front runs the economy by
around six months. The impact of cheap money in Australia is already starting
to have an impact on higher inflation, something the RBA has warned. Rising
price pressures will feed through into the stock market. Higher inflation for
example is positive for retailers like Woolworths when the average price of a
basket of goods and services rise. This means higher earnings growth and
when interest rates are low, investors chase yield driving stock prices even
higher. Don’t confuse the economy with the stock market.
2. Resources are a major part of the broader market and resource stocks have
been in a slumber for at least two years. We’re starting to see the very early
signs of a recovery here. BHP Biliton is one obvious example but results have
also been better than expected for stocks like Rio Tinto and Fortescue Metals
www.invast.com.au | 1800 468 278
– both key index constituents. Even stocks like Newcrest Mining which have had a horrible past few years have bounced strongly off their lows. Newcrest was large trading at around $11.15 as of the time of writing compared to its recent low of $6.96.
The first stage of a mining recovery is stabilising commodity prices. Iron ore is currently stable at around US$120-125 per tonne and this is the most statistically significant bulk commodity for the Australian market. Other commodities are important but they don’t represent a large part of the index. Panoramic Resources for example is a key nickel miner but it is statistically insignificant to the broader market and so what happens in nickel does not really dictate what happens to the broader Australian stock market. As commodity prices recover, mining companies start to report improving numbers.
The next phase usually sees mining companies tapping the market for cash through capital raisings. We think this will be a prominent theme over the next six months. Western Areas is a perfect example of this – announcing a large capital raising last week. Investment bankers and brokers will be
www.invast.com.au | 1800 468 278
licking their lips at the prospect of more deals coming to market. When
companies raise money, they start spending on growth which is positive for
the mining services stocks. Drilling, bulk handling, front end engineering and
eventually construction and procurement are all set to grow in 2015 and
beyond. We think the mining stocks are all in the very early stages of the next
uptrend.
3. We’re noticing more talk of large IPOs and deals coming to the market.
While this is still largely an anecdote, sentiment can change quickly. The
successful IPO of Dick Smith, Veda and Nine Entertainment Group late last
year have no doubt encouraged plenty of other vendors who have been
eyeing the IPO market. The Australian government is also contemplating
privatising key assets as it needs the cash to balance its fiscal situation –
Medibank private and potentially Australia Post are the most obvious
candidates. Deal flow is positive for the market, it brings with it liquidity and
interest from a whole range of other investors. It also creates new benchmarks
for valuation and could see existing listed companies rise as comparable
valuations flow through the market.
www.invast.com.au | 1800 468 278
The three points above are all small positives in isolation but when taken
together they become key drivers of a major upward trend in markets. Your
authors have seen similar market trends emerging and develop. Usually when
the newspaper headlines spell doom and gloom it is a good trigger to buy.
Newspapers are currently running front page stories about huge job losses in
the Australian economy, spiralling unemployment and the demise of local
industries. This is a major contrarian signal. It’s time to start turning bullish
when the newspapers are negative and as the stock market usually front runs
the economy and it’s time to start buying the Aussie market.
We believe Invast clients have two options – either buy direct shares with the
guidance of our monthly model portfolios or alternatively take a Long
Position in the Aussie 200 index which we provide via our MT4 platform.
Below is a monthly chart of this index position with our key technical levels
via Invast MT4.
www.invast.com.au | 1800 468 278
www.invast.com.au | 1800 468 278
The Aussie 200 index is trading above the Ichimoku cloud with solid support
at around the 5000 level (4996 to be precise). We doubt that this level will be
tested again in the near term but it might be a good level for a deep stop loss.
There is some obvious resistance at around the 5400 level which is where we
are at as of the time of writing, we expect this to remain so for the coming
weeks. If we can nudge above this level and form some solid support, the next
upward leg could see a major rally towards 6053 or thereabouts. The jury is
split among the Invast trading desk in Sydney – the technicals don’t
necessarily show major bullishness but our fundamental views should not be
completely discarded because of this. The bulls among the analyst team are
winning the argument for the time being. We believe long the Aussie market
with the key levels above in mind, also make sure you visit Invast’s daily
technical analysis by Vito Henjoto to keep your positions updated.
3.0 Gold risk/reward levels
We have had a flood of client interest in the gold price in recent days and so
www.invast.com.au | 1800 468 278
have adjusted our levels accordingly. The recent move above US$1300/oz has
come as the Federal Reserve continues to taper but US data equally printing
lower than expectations – setting off an argument that perhaps cheap money
will be around for a bit longer than expected and with inflation rising, gold
stands to remain a major beneficiary. The recent rally might have been
enough to break the recent downward trend, we did talk about a floor price
at around the US$1100/oz level prior to the New Year. For those that missed
this, click on the video to the left to hear our interview with Bloomberg
calling for this floor price when many were expecting gold to slip below
US$100/oz.
Our key technical levels on gold for this week are as follows:
• We could see a technical pullback to the US$1296/oz level where there will
be a test for support.
• Failure to find support here might see gold come back further and test
support at US$1274/oz which is the 38.2% Fibonacci level and also the
www.invast.com.au | 1800 468 278
level which meets the Ichimoku cloud. This is be an important test, previously
a level of resistance which could become major support.
Watch full video here: http://www.bloomberg.com/video/gold-floor-seen-at-1-000-1-100-an-ounce-esho-RR6OExvEQS2e8Qt6TJmUvg.html
www.invast.com.au | 1800 468 278
• Upside resistance from here is next at around US$1332/oz, the level hit last
week. If we see a convincing break above here then gold can continue to
rise much higher. It will be important to keep an eye on rising volatility
from emerging markets – Turkey, Ukraine etc and volatility on the S&P500.
www.invast.com.au | 1800 468 278
Image: Daily gold price chart via Invast MT4 as of 20 February 2014
www.invast.com.au | 1800 468 278
4.0 AUD/NZD the start of a major reversal?
In keeping with the bullish theme of this week’s report we thought it
worthwhile touching on the Australian dollar (Aussie) relative to the New
Zealand dollar (Kiwi) and the start of what might potentially be a very
significant reversal. The one thing we have seen in Australia over the past two
years is the impact of a high currency.
The Australian economy is still
feeling the impact of the Aussie
rising above parity against the
US dollar. The interest rate
differential has the potential to
prop up a currency in the short
term but eventually a high
currency curbs growth and then
monetary policy must step in.
We are seeing this in Australia
www.invast.com.au | 1800 468 278
and we could potentially start seeing this in New Zealand over the next few
years.
Reserve Bank of New Zealand Governor Graeme Wheeler last month said
“Most of our economic indicators are positive; with the terms of trade at a 40-
year high, business confidence is the strongest since 1993, and consumer
confidence is at a seven-year peak” “Growth has been driven by expansionary
monetary policy; high export prices for our major commodities; strong
construction investment, particularly in Canterbury; and the increase in
private consumption,” Mr Wheeler said. “The high exchange rate has been a
headwind. The Bank would like to see a lower exchange rate and does not
believe the exchange rate is sustainable in the long run.”
New Zealand’s overnight cash rate is in line with that of Australia at 2.50% but
the central bank has been hawkish as inflation starts to rise. This has seen
traders backing the Kiwi in anticipation of sooner interest rate rises relative to
the Aussie. New Zealand’s economic growth composition at the moment
www.invast.com.au | 1800 468 278
is very different to that of Australia. The devastating Christchurch earthquake
is seeing large investment into rebuilding which Australia obviously doesn’t
have. This is largely rebuilding what was lost and so the rate of growth is
purely playing catch up. Australia’s growth is undergoing a slow patch as
mining investment ramps down from record high levels. It’s not just the level
of GDP that matters, it’s the quality and composition over the long term.
For that reason, we think the Aussie dollar is destined to turn a corner against
the Kiwi as the short term market drivers phase out over the next few years.
We think the Aussie dollar is going back towards its long term average
against the Kiwi somewhere in the order of A$/NZ$1.20 range from around
A$/NZ$1.08 currently. This represents a return of about 11% when excluding
any benefits from leverage which will obviously compound the return.
In the spirit of patriotism, we recommend backing the Aussie at this crucial
period of time, particularly against our Trans-Tasman cousins and arch rivals.
Key levels are as follows:
www.invast.com.au | 1800 468 278
• There is solid support at around the A$/NZ$1.0750 on level so this is
where we would be positioning our short term stop loss level.
• Key short term targets for our long position are A$/NZ$1.1035 which is the
50% Fibonacci level from last month’s low and then A$/NZ$1.1640 which is
the 61.8% from this level.
• We see a strong potential bottom at A$/NZ$1.04912 which is a historically
very low level. If our stop loss is triggered and we so see this level being
hit again we would use it as another opportunity to re-enter the position.
www.invast.com.au | 1800 468 278
Image: AUD/NZD daily price chart via Invast MT4 platform
To read more about these topics, stop by our blog.
www.invast.com.au | 1800 468 278
7.0 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).
www.invast.com.au | 1800 468 278
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