US market’s strong recovery

Strong recovery for US market


Business
The US administration has signalled President Donald Trump will pay close attention to the fate of its workers left behind by globalisation, says Christopher Hindmarsh.

The US administration has signalled President Donald Trump will pay close attention to the fate of its workers left behind by globalisation, says Christopher Hindmarsh.

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The US equity market has staged a strong recovery post the volatility of recent weeks. The release of the Federal Reserve meeting minutes underscored increasing confidence in the strength of the American economy.

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The US equity market has staged a strong recovery post the volatility of recent weeks. The release of the Federal Reserve meeting minutes underscored increasing confidence in the strength of the American economy.

On the strength of these views the 10-year Treasury yield rose to 2.95 per cent, while the two-year rate hit a nine-year high. This increase in bond yields is likely to continue to influence global markets for some time

In other US economic news, the administration signalled President Donald Trump will pay close attention to the fate of US workers left behind by globalisation as a new benchmark for negotiating trade deals around the world.

While trade may be good for America, it has not necessarily helped all Americans, the White House Council of Economic Advisers noted in its annual economic report.

While trade may be good for America, it has not necessarily helped all Americans, the White House Council of Economic Advisers noted in its annual economic report. (Meanwhile) Reporting season in Australia has provided some positive results.

As an indication of optimism in the US economy more than two-thirds of business leaders from mid-size U.S. companies are optimistic about the global economy this year, up from 30 per cent in 2017, a survey by JPMorgan showed.

Almost 90 per cent were confident in the American economy's prospects, vs. 80 per cent last year. Reporting season in Australia has provided some positive results.

Wesfarmers reported during the week and the result overall was better than expected, beating concensus by around 1.5 per cent, with Coles Food Division (around 45 per cent of Group Revenue) showing early signs of stemming the decline in sales.

Other divisons were mixed but the overall result was in line. Cash generation was positive (+8 per cent) on the previous period, supporting a better than forecast dividend.While no formal guidance has been provided by management, they did indicate the outlook for Coles and Retail divisions is still tough.

This is being driven by an increase in staff cost and lower convenience profit. Other divisons appear to be tracking in line with consensus forecasts. 

I view WES at fair value at current levels trading on FY19PE 16x, with EPS growth of 3 per cent in FY19 and 6 per cent in FY20. Ongoing strong cashflow should support DPS growth of 2 per cent in FY19 and 4 per cent in FY20. WES is on a dividend yield of 5 per cent for FY19.  (Source Bloomberg)

BHP also provided their results during the week.

While the result missed expectations, the market may look through this given the higher dividend than expected and the decision to potentially exit US Onshore shale in 2H18 paving the way for further de-gearing and cash management.

We believe China’s policy on reducing pollution will ensure ongoing demand for high grade iron ore, notwithstanding the market is already anticipating a reduction in long term prices.

BHP is rapidly de-gearing (Net Debt/Net Debt+Equity) and increasing return on capital employed (ROCE) and for this reason we would encorage investors to accumulate the stock in weakness 

  • This article does not take into account the investment objectives, financial situation or particular needs of any particular person.  Accordingly, before acting on any advice contained in this article, you should assess whether it is appropriate in light of your own financial circumstances or contact your financial adviser. Christopher Hindmarsh is an adviser at JBWere Limited. JBWere Limited is owned by National Australia Bank Limited.
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