Alpha POWER Shares (Aegis) Portfolio - July 2008
Monthly Stock Returns (including dividends)
Aegis Market Commentary
The market continued its downward spiral in July, with the S&P/ASX 100 Accumulation Index down 4.6% for the month. Unlike recent months, where the market had been partly supported by resources stocks, in July Energy and Materials were the worst-performing sectors, down 13.7% and 10.3%, respectively. These sectors were adversely impacted by a decline in the oil price from its recent peaks, falling metal prices and a general concern that a slowing global economy would reduce the demand for resources. Property (-5%) continued to suffer, with more profit downgrades and writedowns across the sector. Telecommunications (+5.9%) was the best-performing sector, with investors seeking more defensive plays in a volatile environment. Utilities (+4.4%) and Industrials (+4%) also performed well as some of the beaten-up, high-yielding infrastructure and industrial stocks staged a rally. There were no changes in interest rates in the US or Australia. Given the solid evidence that Australian economic and business conditions have deteriorated, we expect the next move in domestic interest rates will be down. While the timing of such a move is not certain, it is likely there will be at least one downward move of 25 basis points before the end of 2008. Despite the evidence that the Australian economy is slowing, we still see the domestic economy as being in better shape than the US and Europe. However, we remain concerned about the impact of a slowdown in consumer demand, a weak domestic housing market and margin pressure in sectors exposed to rising input costs. With reporting season under way, we will be watching for those companies that are being adversely impacted by these conditions. We also remain concerned about the credit markets and expect further writedowns from the US and European banks, leading to further equity-market volatility. Although the markets have become concerned about the outlook for commodity prices due to the slowing global economy, we believe the medium-term outlook for resources and related stocks remains positive, particularly the large, diversified mining companies such as BHP. Despite the slowing global economy, we expect continued strong growth in the key Asian economies to drive demand for Australian commodities, particularly bulk metals such as coal and iron ore.
Aegis’ Comments on Portfolio Stock Performance
Main outperformers
- Westpac Banking Corporation – WBC (+7.8%). After being sold off through May and June, WBC staged a strong recovery in July. In our view, this was in part due to the fact that WBC had been oversold, as well as market recognition that WBC is better positioned than most of its peers in the current environment. In July, NAB and ANZ both announced significant increases in provisions due to exposures to overseas loans and softening credit conditions in Australia. However, WBC reaffirmed that it was reasonably well placed and did not have significant offshore exposures. In August, WBC indicated that it expected to grow earnings by 6%-8% in FY08, in sharp contrast to the outlook for NAB and ANZ, which are expected to suffer earnings declines of around 7% and 20%, respectively in FY08. WBC is our preferred banking sector exposure and we remain very comfortable with the stock.
- Telstra – TLS (+6.1%). TLS shares rose during July in the absence of any major news. The shares had been sold off rather heavily through June, which, in our view, was overdone given the underlying business performance. As recently as May TLS reaffirmed that it was on track to deliver the upgraded earnings guidance announced in February, with earnings before interest and tax expected to grow by 6%-8% in FY08. We retain our positive view of TLS’ outlook and note that the stock also offers an attractive, fully franked dividend yield.
- Woolworths – WOW (+3.1%). In July, WOW released its fourth-quarter sales numbers, which yet again provided evidence of the company’s quality business and strong position in retail. On an adjusted basis, fourth-quarter sales rose by 7.5% and full-year sales were up by 8.7%. Sales growth was driven by a combination of factors, including strong organic growth and the aggressive store rollout across the portfolio. WOW indicated it is on track to grow FY08 earnings by between 21%-25%. We continue to see WOW as a good defensive exposure in the current volatile environment.
Main underperformers
- Orica – ORI (-16.8%). ORI surprised the market with a 1-8 entitlements offer at $22.50 per share, aimed at raising around $900M to help bolster the balance sheet and provide capital for future expansion of the company’s ammonium nitrate production capacity. At the same time, the company announced the demerger of its Consumer Products division to ORI shareholders. With only 70% of institutional investors taking up their entitlement, the remaining 30% of entitlements were sold at $22.75, a large discount to the previous closing price. This dragged down the market price of ORI’s shares. In our view, the positive medium- to long-term outlook for the stock has not changed and we note that the stock has already started to recover some of its losses.
- WorleyParsons – WOR (-15.5%). WOR shares fell through July in the absence of any major news. The decline was most likely sentiment driven, given the oil price declined from recent peaks. However, while WOR derives a significant portion of its revenue from the provision of services to the oil and gas industry, earnings are not impacted by day-to-day fluctuations in the oil price. The company continues to win significant contracts and in August announced a 40% increase in earnings per share for FY08 and a similar increase in the dividend. The company indicated the outlook remains positive for all its divisions.
- BHP Billiton – BHP (-9.1%). BHP released its 4Q08 production results in July, with record production for iron ore, petroleum and copper offsetting weaker performances from aluminium, coal and nickel. Petroleum and iron ore were particularly notable, with FY08 output increasing 13% compared with FY07. Given the production records and high commodity prices, we expect BHP to report a bumper FY08 profit result in August, although we expect higher costs will partly offset some of the revenue growth. Despite the strong production results, BHP fell through July as the market became concerned that a global economic slowdown would dampen demand for resources. Our view is that the medium-term outlook for resources remains positive given the continued rapid growth in China and India. We remain comfortable with the medium-term outlook for BHP.
IMPORTANT NOTE:
Aegis Investment Partners Pty Ltd (ABN 98 096 109 125, AFSL 226 957) (“Aegis”) is the stock selector for the Alpha Model Portfolio – Aegis. The information contained in this document is prepared by Aegis for use solely by professional investment advisers and is not intended to be provided to retail clients. In preparing this information, it is not possible to take into consideration the investment objectives, financial situation or particular needs of any individual recipient. Investors should obtain individual financial advice from their investment advisor to determine whether information contained in this document is appropriate to their investment objectives, financial situation or particular needs before acting on that information. Prior to deciding whether to acquire, hold, or sell the Alpha Model Portfolio - Aegis, you should obtain and consider the Alpha Customised Portfolio Service Product Disclosure Statement dated 19 December 2006 (now closed for new investments but still actively being managed for existing investors) and the Alpha Customised Portfolio Service Product Disclosure Statement dated 3 March 2008 (to be read in conjunction with individual financial advice), available on request from Alpha Structured Investments (1300 769 694 or www.alpha-invest.com.au). While all information is provided by Aegis in good faith, Aegis makes no warranties as to its accuracy, reliability, completeness or whether it is free from error or omission. Subject to statutory limitations, Aegis, together with its directors, officers, employees and related body corporates, do not accept any responsibility or liability arising from decisions made relying upon information contained within this document. This document is only to be distributed to Australian residents. All intellectual property relating to this document vests with Aegis unless otherwise expressly agreed.
