Bentleys Wealth Advisors Weekly Update - 10 September

From Jonathan Bayes, Investment Consultant, Bentleys Wealth Advisors.

bentleyswealth.com.au

Australia’s equity market unravelled a touch this week, falling -3.5% on the week and lagging a far more modest -1% fall in the U.S.

When coupled with the ongoing weakness in the Australian Dollar, which this week fell to a fresh 2 year low, Australian shares year to date are rather significantly underperforming their U.S peer group by around -15%. For a portfolio investor exposed to equities for growth, this is a major gap and renders those portfolios still solely exposed to the local market as material performance laggards.

Year to date the ASX200 Accumulation index has gained around +4.8% of which the vast majority of the return is from dividends. The U.S equity indices however have streaked these returns, with the S&P +17% in Australian Dollars and the NASDAQ +24%.

Fortunately, the increasing number of Prime clients following our models for their Australian share investments have done significantly better than the local index, with returns on this portfolio up well over +9% year to date, and now over +2% per annum ahead of the ASX200 Accumulation index, even in spite of what has been an average cash holding of some 10%.

Much of the excess return year to date has come from the performance of calls in the likes of Vocus (VOC), Magellan Financial Group (MFG), Afterpay (APT), APN Outdoor (APO), SEEK (SEK) and Downer Group (DOW), and we would expect this trend to continue.

It is vital that local portfolios are expanded to include names outside of the top-10 and even the top-50 if investors are seeking to have their local equity portfolios perform.

The banks and Telstra (TLS) and the grocers (WES and WOW) haven’t cut it for over 3 years now and won’t cut it in the years to come.

The reason I am choosing to point this out today is that fortunately those portfolios that have been built to follow our recommended asset allocations and security recommendations are now beginning to see the benefits from the decisions taken, and notably our long-held view for both a weaker Australian Dollar and for the underperformance of Australian blue-chip shares relative to their international counterparts.

I think with the Federal Election uncertainty set to persist until resolution in May 2019 this theme will continue to play out in portfolio performance, and at a headline level that means the AUD will almost surely drop well into the 60’s against the US Dollar.

This week we saw evidence of some of the local market darlings reaching valuation fatigue. Healthcare favourites such as CSL (CSL) and Cochlear (COH) are both off -10% or more from their highs, and this is despite the not inconsiderate benefit these companies gain from the weaker AUD.

Flashy growth companies such as Appen (APX), NextDC (NXT), Xero (XRO), A2 Milk (A2M) and Afterpay (APT) were all off between 5% and 15% on the week, as investors seemed to want to lock in profits after stellar runs in all of these names in recent months.

In the case of APT, the pullback is a welcome one, and I would ask all clients to be watchful for our recommendation to BUY the stock again in the weeks ahead depending upon where it gets to in the days to come.

The stock and story remains exceptional, and the US opportunity can be 10x that of Australia if successful. I think the Australian business alone justifies $8-10 of valuation, meaning that the blue sky on offer from the UK and US, both significantly bigger markets than Australia, comprises the remaining $4-6 of the share price.

Keep your eyes peeled.

With the pullback in the market, and the hefty cash holding we continue to retain across all portfolio’s, but notably within our models, we are now in a position to more actively consider adding new names to the portfolio. Right now we have 4-5 opportunities that we are keeping a watching brief on in addition to APT. In no order of preference these are as follows –

BWX (BWX) – This small cap is in the midst of a rather messy attempt by former management to take the company private, however we believe that at $4.00 the long term growth opportunity afforded by the groups collection of fast-growing health and natural beauty brands (Sukin being its flagship) is being significantly undervalued by the market.

The current $6.60 informal bid proposal will most likely be terminated, which is precisely why the shares are where they are, however at $4.00 the stock is on <14x forecast 2019 earnings which is 15% cheap to the local ASX200 valuation in spite of its excellent growth opportunity. This one could be a keeper.

Challenger (CGF) – A firm market favourite up until this year, CGF has now underperformed the ASX200 by    -30% in 2018 and is now back at a 2 year low against the market. CGF are the near monopolist annuity provider in Australia and will be extremely well placed to benefit from legislative plans to raise the importance of long term retirement income streams such as annuities from June 2019 onwards. We welcome the recent share price weakness and feel like the stock looks pretty interesting in and around $10.

Nufarm (NUF) – This stock has been busted up by the impact of Australia’s unfortunate drought, and I don’t see that situation changing anytime soon. However, NUF only earn around 15-20% of total group profits from Australia, which means many people over estimate the importance of Australia to the group, and arguably underestimate the positive impact that a weaker AUD has on group profits too. In the low $6’s I suspect NUF looks pretty interesting, and with major agrichemical manufacturer Sumitomo Chemical sitting with just under 20% of the shares on issue, you certainly wouldn’t rule out an opportunistic bid for the group if the shares remain under pressure into the back half of 2018.

Costa Group (CGC) – Last cab off the rank here, and CGC have suffered significantly in recent weeks due to a profit downgrade and the bursting of somec overly ebullient forecasts from analysts in relation to the groups significant international capacity expansion. All that being said, we really like what CGC are doing in expanding production into China and north Africa, and in the fast-growing fruit and vegetable categories such as berries and avocadoes. It’s not there yet, but the long term profit forecasts are good, and perhaps around $6.00 also, this stock could be an interesting addition to local portfolios.

I will leave it at that this week. 

bentleyswealth.com.au

For more information on the above please contact Scott Averay, Senior Financial Advisor, Bentleys Wealth Advisors directly or on 02 9220 0700.

This information is general in nature and is provided by Bentleys Wealth Advisors. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.