Investment Matters

What Matters this week

The market took a breather this week after a turbulent few weeks, however investors continue to question the outlook for global growth.  The price of iron ore plummeted over the weekend by 8% with Chinese steel mills dumping their inventory on market.  This was in line with prices for iron ore, coal and oil that have all fallen since October.  Brent Crude is now $59/barrel, a far cry from its highs of $85 in early October – great news if you are filling up at the bowser (and possibly for companies in the consumer discretionary sector), not so great if you are producing the stuff (in the short term).

26.11.18

Prices for iron ore are now down by over $10 per tonne for the month.  Funnily enough, a $10 change in the iron ore price results in a $3.6 billion dollar difference to the federal budget bottom line … so it will be interesting to see how ‘conservative’ our current government’s assumptions for prices will be (vs forward prices), come April’s budget.

Shares and commodities did get a nice shot in the arm at the end of the week, however, with Federal Reserve Chairman Jerome “Jay” Powell signalling that they are towards the end of hiking rates.  Chairman Powell indicated that current rates are “just below” the neutral range (the rate at which real GDP growth is at its trend rate and inflation is stable) at a speech in New York.  This represents a significant about face, as the Chairman was remarking that rates were “a long way” from neutral as recently as early October.

Moving on, Kogan continues its push to sell consumers everything but the kitchen sink - announcing this week that it is partnering with Citibank to launch a Kogan Money Credit Card.  This comes on the back of its announcement that it was entering the superannuation industry a few weeks ago.  After a 27.4% drop in revenue from its Global Brands business in 1QFY-19 (vs pcp), it looks like the company is scrambling to diversify out of its primary business of online electronics to maintain growth.  Hopefully, the Kogan brand is up for the task.

After a shocking few weeks, Myer shareholders finally had something to be happy about, with the company announcing it has extended the maturity of its debt to 2021.  It may not save its directors at the upcoming AGM, however – shareholders have already delivered one of two strikes (which are delivered with a 25% vote against director remuneration) needed to spill the board.  The timing of the leak of their poor performance in Q1FY-19 (which two weeks ago) in retrospect seems (and I’ll use the word again) ‘fortuitous’, for certain dissident shareholders that have been looking to oust the board for some time.

Great news for lovers of all things miniature (and useless) this week.  It’s back!  Coles’ upcoming ‘Christmas’ little shop was leaked this week.  The company will look to give its shares a post-demerger kick by offering consumers more Christmas related paraphernalia (which will no doubt end up in the deep recesses of a cupboard, or in landfill), with timeless collectibles such as a mini-pavlova, mini-deep fried minced pies and mini-gingerbread.

ASIC released its report this week on buy now pay later “arrangements” (it’s technically not lending, remember!) which holders of Afterpay have been dreading.  ASIC found that these “services” do create ‘some risks’ particularly as some consumers admitted to delaying paying existing obligation to meet payments.  Worryingly only one in six “service providers” (they aren’t lenders, remember!) examined consumers financial position before providing them with credi… I mean “services”.  Despite this, it stated that it has not yet formed a view that extending responsible lending obligations to the sector is necessary.  It has instead recommended the use of proposed product intervention powers to regulate the sector (a solution that is reactive, rather than proactive … hmmm).  Unsurprisingly share prices in pay lenders were up significantly for the week (Z1P: + 7.77%, APT: +21%).

On the subject of written-down companies (see The biggest writedown in Australian corporate history?), write-down of the week (not to be confused with Wry & Dry’s Tool of the Week) goes to CSR.  The company this week announced the sale of its Viridian Glass business to private equity firm Crescent Capital Partners (Crescent).  Crescent will pay approximately $155 million for the business, while the sale of Viridian's Ingleburn property is expected to yield another $60 million.  The expected totaled proceeds of $215 million are dwarfed by the $865 million figure CSR effectively paid for the company (a product of the merger between Pilkington and DMS glass) in 2007.

Finally, like a magician’s handkerchief, the scandals keep coming for AMP.  This week chief executive Mike Wilkins revealed that an internal investigation found that corporate superannuation clients may also have been charged fees for no service.  Shares were off another 2% this week despite already being down 55% for the year.  The company now sits at a P/E ratio of 8.5x vs 14.1x for the market (prospective) – anyone want to try their luck at catching a falling knife?