David Novac – Trading Day – 11 Oct 2016

  • October 10, 2016
  • Kate Sheehan

David Novac on Sky BusinessDavid Novac, a regular Guest Host on Trading Day, Sky Business, Channel 602

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Please see clips and transcript below:

Trading Day – 11 Oct 2016

 Clip 1 of 2  Clip 2 of 2

Transcript below:

Transcript:  Clip 1: Trading Day – 11 Oct 2016

Live on Sky News Business, this is Trading Day

Ingrid: Welcome back to the program, it’s 2:00 p.m. in Sydney. This of course, is Trading Day. Let’s go straight to the boards and check on where the market is tracking. There’s a snapshot for you, we’re up 2/10th of a percent maybe coming off some of the highs of the day, it’s still sitting at 5,484.

There were some major moves in energy space today, the oil and gas space shares certainly stronger, there’s South32 up 5%, but certainly you’ve got Santos up about 4.2%. Let’s check in on the Aussie/U.S. pair of course, in the wake of Charles Evans speaking, Chicago’s Fed President, you can see there $0.756 U.S.

I’m Ingrid Willinge. Also making news this hour, business confidence holding steady in September, conditions remaining above average despite some recent signs of easing.

And, we were speaking with Emirates President, Sir Tim Clark, and he told Sky News Business the airline will weather a surge in oil prices. If, that happens of course, in November when OPEC meets, which of course, will of course, be a whole other volatile catalyst for markets.

We’ve got Martin Crabb from Shaw and Partners and David Novac from Wealthwise Education in the studio with us. We’ll get some emails you’ve been sending through, certainly in the next couple of minutes, because we have got a bit of a backlog of emails. But first up Martin, I just wanted to ask you about what we just heard from Charles over the past hour. Obviously, a bit more of a dovish Fed member, but what do you think for December? Do you think we’ll see a hike regardless of the presidential elections?

Martin: Yes. Look, I’m following the bookmakers’ odds here, I think we’re at 62% or 65% o something like that. I think most people are saying, look they’ll go in December and then obviously sort of see how many times they go next. I think the odds are two hikes. But, just to paraphrase, that sort of hour that we just listened to, the risk of not increasing rates is probably not as big as the risk of increasing rates too fast. I mean, that’s what he’s saying.

Ingrid: Really. 125 basis point cut, is that fast?

Martin: Yes. Yes. It’s like I don’t have any faith that inflation is going to get to two so why would you move? That’s the fear there is that if they do move too early, that they’ll have a Japan sort of style 30-year recession, because they move rates up and they chocked off any recovery.

Ingrid: Do you think there’s a real risk or is he too dovish?

Martin: He’s too dovish, I think, yes.

Ingrid: He is on the dovish side of the scale, I should say. David, what do you think? What do you think come December?

David: Look, very much as Martin said, the polls are pointing to a better than 60% chance of a rate rise. But my view is they’ve left it a bit late to raise rates. You’ve got this problem now in the bond market where you’re seeing bonds come off a bit and yields moving up, so that’s the market to watch as far as I’m concerned, because that could be the precedent. It is right now, that’s setting the rates. If the bond market comes off further, then I think you could see a bit of a correction in the equities market as a result.

Ingrid: We’ve also got some breaking news from the Reserve Bank of New Zealand which is somewhat relevant given the inflation talk we’re having now. They’re talking about annual CPI for September quarter going to be low. They said inflation is expected to rise though into the December quarter, further policy easing will be required. We’ll closely monitor drivers of inflation. It really is a global issue, inflation at the moment. We’re facing it in Australia as well Martin, I was asking you off air, but in terms of the RBA as well, do you see another rate cut in the works because of inflation?

Martin: No, I don’t think so. I think the motivation for cutting interest rates is just not there at the moment. There’s no pick up in unemployment. The economy has transitioned incredibly well from the resources bust. Commodity prices are now back on the way up, iron ore is certainly higher than it was a year ago, currency kind of looks maybe a little bit too strong but not runaway, so the settings are pretty good. The only thing really missing from the picture is inflation. Obviously, the RBA I’d like to see a bit more inflation, but there’s lots of deflationary pressure just from an aging population, and from food prices.

Ingrid: Global pressure deflation.

Martin: Yes, exactly, global deflation. The Yuan is still being devalued and that’s exporting manufactured good deflation, so there’s lots of moving parts to it. But I think the RBA is comfortable sitting where they are, is my guess.

Ingrid: What do you think David?

David: Yes, the same. Look what happened after they reduced rates last time, the Aussie Dollar rallied. That just goes to show how effective the rate reduction was.

Ingrid: Yes, they’re not going to embark on currency wars, you just can’t when you’ve got the Bank of Japan, and the Fed, and even if the interest rate differential is coming off a little bit and maybe narrowing a bit, it’s nowhere near where they are.

David: Yes. Look, as we have seen around the world, all it’s had the effect of is providing cheap capital and creating, what I see, as a bubble in bonds, and equity prices being historically overvalued. There’s the old saying, there is no alternative, so everyone has been rushing into equities and where else is there to go?

Ingrid: That’s a question for U.S. kicking off of course, tonight. I think ACOLA kicks it off as always.

David: Yes.

Ingrid: Is this key for a catalyst for the U.S. Markets going forward?

Martin: I think so, yes. With quarterly reporting like they have in the U.S. you’re never really going to be too far out. You shouldn’t be that out with your quarterly numbers. But, I think it’s just the timing. The view there is analyst are currently looking for negative year-on-year EPS growth for a fifth quarter in a row and typically they get it wrong. They’re a little too pessimistic, because companies try to beat you down on your numbers and then come in over the top, right. If you add back in the historical phenomena of that, somewhere between 2% and 3%, that gets you back into the black. It will be the first time in five quarters that the U.S. company profits are actually growing and that’s what the market needs. If the market can see that growth coming through it can go high.

Ingrid: Okay. We’ll keep an eye on that obviously, as it comes through tonight. But, let’s go to some emails because we didn’t get to that earlier. We’ve got some coming in. One, from Jennifer, and Jennifer asks, “My question to the panel is regarding thoughts on Clydesdale Bank over the medium term? My entry price was $4.75. Thoughts appreciated hold, or should I buy more?” Martin what do you think, Clydesdale Bank?

Martin: There’s three things going on with this company. The major thing is the cost reduction story. The management team that’s coming to take this company over, or to run this company, ran another company called Allied Irish Bank and they did a fantastic job of cutting the cost out, and they can do that with Clydesdale and Yorkshire Bank which has a very high cost to income structure, much higher than other banks and certainly much higher than Aussie Banks. The problem in the short term and the medium term is a) the pound, so all of these earnings are in pounds and we’re now I think, 61P which is kind of a high level against the pound. As the pound weakens, your Clydesdale shares are worth less. The other thing just in the medium term, is the Brexit. If there’s a hard Brexit and the U.K. is forced out by the Europeans and there’s lots of cuts in trade, deals, etc., we could have a recession in the U.K.

You don’t want to own a U.K. bank if there’s a recession in the U.K. Look, we like it, we’ve got a buy in the stock, we think it probably could be 20% or 25% higher in the next 12 months, but it’s going to be a bumpy ride. As long as you’re happy with a bumpy ride, you don’t mind a bit of risk, and a bit of action in your portfolio, then I think it’s one that you could add to.

Ingrid: It was significantly higher before Brexit as you mentioned, $5.85. It’s now sitting at $4.26. Buying opportunity, David?

David: Not for my money, no.

Ingrid: Okay. Why is that?

David: Well for the reasons that Martin outlined, the pound, what’s going to happen with the Brexit, when that finally comes, a risk of a recession in the U.K. I don’t see a great deal of appeal to jump into the banking sector. I’d prefer some of the other majors, but not right now. In fact, right now I wouldn’t be jumping into any of the banks.

Ingrid: None of the big four?

David: Not right now, no. They’ve had a pretty good move up, so I’d wait for a bit of a pull back here.

Ingrid: That’s the big four. What’s your view on the big four when it comes to some buying opportunities?

Martin: Look, we’ve got buyers on Westpac and NAB, and really it’s just quite a simplistic strategy to say look, “They’re all come dividend, they’re all come results.” I mean CBA’s not, because it’s a June balance so there’s no sort of dividend play or result play with CBA, but certainly the other three over the next couple of weeks will be reporting numbers. We’ve had Bank of Queensland come out so far and the story there was look, margins are under pressure but battened for debt, so it’s not an issue.

Ingrid: Right, because you’ve been speaking with management there. Are you any more confident about the business, because obviously their results recently were pretty disappointing in a lot of ways.

Martin: Look, I mean I think they’re facing margin pressures and the margin pressures they’re facing are bigger than the majors because they’re funding a lot from term deposits, and those viewers that have money in term deposits know you can get probably 1% above bank bills for term deposits. That’s a good rate, but it’s not good if you’re a shareholder in a bank. I think the issues the Bank of Queensland has is quite specific to them. I think more broadly the sort of things we saw from their results for the sector battened out and therefore not really an issue, capital is less of an issue, and they’ve all got the capacity to take out costs so I think it’s okay.

Ingrid: Alright. What do you think David, Bank of Queensland specifically after it’s net interest margins obviously weakened?

David: Look, down here it looks like it’s getting some support on the chart. It’s on a fantastic yield of course, it’s it goes to dividend on the 27th of October, I think $0.38. There’s not long to wait before you get the dividend. I don’t mind for a yield play.

Ingrid: We are going to have to take you briefly back to Charles Evans, he’s just doing a quick doorstop. No? We’re not going to take you there. We will continue on with our emails. Sorry for cutting you off there, David. We’ll go to Vivian. Vivian is asking about Altium and TPG. She says they were the darlings of the market just three weeks ago. What happens now? Do we sell or is there a light at the end of the tunnel? On TPG there’s a lot of questions about this one, because of that massive dive when it came out with its results and it was sort of a darling before that.

Martin: It was.

Ingrid: Are you seeing buying opportunities for TPG?

Martin: Well them and Vocus is the other one. We cover both those stocks and on our numbers they look really attractive. The share price targets are probably 25% to 30% above where these stocks are trading. Look, we’re nervous because of the level of transparency around the accounting and how the MBN – MBN is a turn event, so as TPG and Vocus lose customers to the MBN or sorry, connect customers to the MBN, their margins are much lower than they had at the moment. What TPG is trying to do is run around and buy Spectrum at the moment so they can get around the MBN.

TPG came out with its announcement that the impact of the MBN on their margins was much more significant than people had so everyone is just worried about it. Vocus is a merger of kind of two or three businesses, that’s really messy numbers as well. I think there’s a level of risk with the numbers with those two companies. They’re just keeping everyone on the sidelines.

Ingrid: Okay, so more of a hold for those two right now?

Martin: Yes, even though it’ll check.

Ingrid: Even though it’ll check. David, do you have a different view on TPG? Maybe after that we’ll touch on Altium.

David: Look, I don’t mind TPG, just as a bit of a nibble down here. I wouldn’t be aggressively buying, that’s for sure, but I think it certainly looks attractive on the numbers. Altium, I wouldn’t be buying. It just tells me on the chart here that there’s some further downside in this stock, so a little bit cautious on Altium. A lot more cautious actually.

Ingrid: Okay. Cautious on Altium but maybe taking a nibble at TPG.

David: Absolutely.

Ingrid: What about Vocus as Martin mentioned?

David: Look, I prefer TPG out of the two. They both look attractive, but they’ve both come down

Ingrid: Significantly.

David: Significantly, to a very good support level, so both of them, but out of the choice I’d go TPG.

Ingrid: Moving on, another email, Joe. Joe asking, “I’d like your opinions on Newcrest Mining and the direction of gold.” Now, this is a tough one and David, I’ll start with you this time, gold obviously it’s sort of anyone’s guess as to where it’s heading but what’s your view?

David: Oh, it’s heading up longer term, I’m sure about that.

Ingrid: Really?

David: Yes. I have no doubt about it.

Ingrid: Just because of the macro risk?

David: Absolutely. I think we’ll see some interesting fireworks after December. Look, the fact of the matter is that the U.S. national debt is not going down and politicians haven’t been really addressing that problem, that issue, the deficit, the fiscal side. Monetary policy can only do so much, but that is the big elephant in the room and it’s going to catch up one day. I see more monetary policy coming out, more money printing in other words, and that’ll be very bullish for gold and it’ll be inflationary as well as they increase the money supply further. Longer term I’m bullish, short term not so bullish because the gold price has broken a trend line. However, it’s getting some support at $1250 U.S. so we’d want to see a bounce from this level, otherwise the next level is $1200 and you don’t want to see a break below $1200.

Ingrid: Martin what do you think of gold and Newcrest specifically?

Martin: They’re two different things. Newcrest we like as a company, it’s got really good management. The guys that have come in from [inaudible 0:13:31.1] they are certainly running the operations a lot better than they have. They’ve got long life world class assets and if you are going to own a gold stock longer term, that’s probably the one you want to own.

Ingrid: The top pick out of the gold space.

Martin: But, I think, as David said, it’s kind of geopolitical, it’s monetary policy, it’s what happens with the U.S. federal election, what happens with the direction of U.S. interest rates because if they go up faster than people think then gold will get knocked around, so it’s really uncertain in the longer term.

You can be constructive towards gold. I think there are a lot of reasons as to probably why you want to have gold in your portfolio just as kind of a rainy day thing and Newcrest is probably the one you want to own. But, I’m a bit like David, I wouldn’t be charging into it. In fact, I’d be taking money out of Newcrest right now. It’s had a great run.

Ingrid: Really. Okay, because it has run up very significantly, yes. We’ll take a quick break. When we return we’ll take a look at where the sterling economy is sitting but also get our panels buy, holds, and sells. Stick around.

Clip 2: Trading Day – 11 Oct 2016

Ingrid: Welcome back to the program. My next guest is saying while Australia’s economy is in bust territory for the second time in as many decades, a hard landing is not necessarily a sure thing. Paul Brennan from Citi joins us now live along with our guest host of course, in studio. Paul, good afternoon to you. Great to have you on the show. I guess just talk us through this bubble meter and why you say we’re in bust mode for the second time.

Paul: Well, what we did was we looked at this issue of a lot of investors, particularly offshore investors worry about that key indicators of the economy such as household debt, that for example, the burn in commodity prices which has now ended, the overheating housing market in Sydney and Melbourne, they all point to these things as being reasons to be concerned about the outlook for the economy. What we did was we took those key indicators and normalized them so that you could compare across them. What we found was of those five key indicators, two were still if you like, in bubbly territory, that is house prices and apartment construction and two were in bust territory and those two were the falling commodity prices from the record highs and also the fall in mining investment.

What we found was that those two that had been declining, the mining investment and in terms of trade or commodity prices, they were outweighing the positive stimulatory effect from the housing market. That’s why we sort of said that those indicators are in bust territory. But, as you point out, the work that we did also suggests that it doesn’t really necessarily mean that we’re heading for a hard landing in the economy.

Ingrid: Right. The RBA has sort of said that they think that’s even if we have a trough in terms of a bottom for mining investment. But looking at housing then, is that the key risk going forward if you’re looking towards the next six to 12 months?

Paul: That’s right. I think if we look at those that are already in bust territory which is the mining investment and in terms of trade or commodity prices, they’ve already corrected a very long way. In the case of mining investment, I think the Reserve Bank said that mining investment is about three quarters of the way through the correction, so we’re a long way through in terms of correcting. Some commodity prices have actually risen.

The issue to watch, I think, going forward is going to be what happens in the housing sector both this massive ramp up in apartment construction and this still very overheated housing market in Sydney and Melbourne. What’s unusual about the housing market at the moment is that given the strength in the housing market you would think, and certainly history would tell us, that interest rates would be rising and monetary policy would be tightening and in fact, we’re seeing the opposite. We’ve had two interest rate cuts this year. Monetary policy is still very stimulatory against the backdrop where housing is strong and so that does create the potential risk that we could see this, if you want to call it a bubble, we could see it bursting at some stage.

Ingrid: Then what do you see for the RBA going forward? Would they have to hold off cutting rates and would they look at housing as a pure reason to not cut rates going forward?

Paul: The Governor of the Reserve Bank said last week that while they saw some reasons why the housing market might cool, that is basically because of this big supply of apartments that’ll be coming in over the next couple of years, that at the same time they noted there had been strengthening in house prices again in some cities. It’s something that clearly they’re watching but they’ve got to weight up against that and other factors, including the broader sort of conditions in the economy and in particularly what’s happening in the labor market.

Ingrid: Alright. Paul, unfortunately, we’re out of time but I really appreciate your time on the program today.

Paul: Thanks Ingrid.

Ingrid: Paul Brennan from Citi joining us live out of Sydney. Before we head to a break we’re going to do a little buy/hold/sell segment with our guests. Kicking it off with our buys. Martin kick it off, what are you buying right now?

Martin: Yes. The big Australian BHP.

Ingrid: Okay.

Martin: Even though it’s had a fantastic run from what, lows of $13 or $14 early this year and it’s currently sort of around $23.74 as we speak, we still think it’s going higher and really that’s just on the back of the earnings upgrade we recently put through. But, I also think it’s the stock where the fund managers don’t need to think, right. If they’re not sure whether oil is going up or iron ore is going up, but they’re pretty sure something is going up, you kind of buy BHP it’s the non-thinking man’s way to play the resources really. We still think it’s got another couple of buck’s upside to go, so we’d be buying BHP.

Ingrid: It’s up another 1.5% today so it’s not doing too bad. David?

David: Well, I think one of the least liked stocks at the moment, probably Telstra.

Ingrid: You’re buying Telstra right now?

David: Yes. I think Telstra looks good to me down here. It’s come down to a big support level, it’s had a massive correction, it’s on a very fantastic yield. I think it’s a bit overdone, so for my money I think, on a yield basis and on a technical basis as well, it’s a buy for me.

Ingrid: Alright. Let’s go straight to our holds now and take a look at what our guests are holding. Kick it off David.

David: Well, I think the banks, you’d have to hold the banks for the reporting season coming up, the three biggies the ANZ, NAB, and Westpac. To me, they’re obviously a hold. Another sector I still would hold is the gold sector as well.

Ingrid: Alright, the gold sector, yes holding that because you think it’s going higher. Martin?

Martin: Holds are pretty boring, right.

Ingrid: They are boring.

Martin: Let’s take the biggest share in everyone’s portfolio, Commonwealth Bank, that’s a hold for us. As David said, we’re going into the reporting season for three of the four banks, not CBI. I don’t think CBI does much, but I think it’s supported by a nice dividend. Anything under $75, that’s in hold territory.

Ingrid: Alright. Less boring is the sales. Let’s get a look at this one. Analyst always very sort of tepid to put a sale on a stock. Martin, what are you selling?

Martin: South32. So, we’ve liked this stock for a lot of this year and we’ve been playing the riskier end of the resources market, because we saw the upside so whether it was a Luke or a Lumina, or South32 [inaudible 0:06:36.7], all those stocks. We’re moving out of them, we’re moving into the [inaudible 0:06:40.3], so the RIO, BHP. Where do you take the money off the table to buy BHP, you take it out of those. They’re up again strongly today so we’ve probably been a bit early, but I think going forward you’ll look back at selling at these levels and you’ll feel like a hero.

Ingrid: Pretty happy with what you’ve taken. Yes. Alright, David?

David: The same thing, Whitehaven Coal, this stock has rallied from just under $0.40, $0.38 in February to where it is today around $2.85. Okay, yes the coal prices have more than doubled but to warrant the price up here, not for my money, and it’s also got a bearish divergence on one of my indicators. This is telling me it’s way overbought and overvalued so time to sell.

Ingrid: Alright, there you have it. That does wrap up the program. A huge thank you to our guests host today. We had Martin Crabb from Shore and Partners and David Novac from Wealthwise Education in the hot seat. I appreciate your time. Thank you. We’ll take a break. When we return, Business IQ is up next.

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