Good morning,

The ASX200 has a pretty decent close to the end of financial year, rallying c.200 points since 1 January on the back of a rapidly declining Australian Dollar.

As discussed last week, I see this largely as a result of differentials that have developed in the market for government bonds as well as the ‘return structure’ of the Australian stock market (highest dividend yield in developed world).  It’s important investors remain cognisant of these exogenous drivers as some are reasonably fickle and may slow or reverse quite quickly.  Others, are probably more “structural”.  I believe sustainable and meaningful gains from here will be reliant on determining what these structural changes are, how they likely play out and what companies stand to benefit or suffer from their impact.

Apologies for the late note this week.  I was supposed to fly back from Perth on Sunday afternoon but my flight on the illustrious Tiger Airways got cancelled so ended up flying on Monday and didn’t get a chance to knock this out.   Subsquently, I’ve got tonnes to do today and will make this very short and sweet.  I’ve actually got lots to talk about but it’ll have to wait for next week.

Anyway, markets down a frack last week, large caps outperformed small caps (again).. it remains all about liquidity and that AUD/USD exchange rate in my not-so-humble opinion.

Out of cycle interest rate hikes

Whilst not the most avid reader of the newspapers and I can’t remember the last time I sat through 30 minutes of 6 o’clock news, there semed to be little coverage of what I consider to be a key marker in the financial health and economic prospects of Australia last week.

On 25 June, at 4.48pm, Bank of Queensland (BOQ, $10.29 close yesterday) announced they were increasing their variable home loan rate as a result of rising short term funding costs.

I expect this trend to permeate the sector and continue.  We’ve talked a lot about rising bond yields, low loan growth and margin pressure in the banks, the only thing they can do to protect their profits is to raise the price of their product, regardless of what the RBA is doing.

This is important as I believe this will start to impact home-owners and consumption. Mortgage payments go up for homeowners already under pressure from 5 years of no real wage growth and a reasonably soft employment conditions (particularly in the full-time, non-government sector).   Renters are in the same boat and with ample supply of new housing in the capital cities, it seems this increase cost of funds is going to be hard to pass on for those property investors.

The worst bit, in my view, is there is little likelihood of the funding costs pressure subsiding.  Global rates are moving higher, its going to be harder and harder for Aussie banks, at low RBA rates to attract credit.  The cost of debt is going up just when volume growth is slowing.   Very concerning.

Stocks that went up

A few recent battlers clawed back some of their losses whilst NRW won a decent contract extension.

Stocks that went down

Sigma (SIG) lost their contract with Chemist Warehouse to NZ-listed EBOS (EBO), whilst Pacific Smiles (PSQ) provided a weak trading update.  Ord Minnett questioned Hub24’s (HUB) margins, showing it doesn’t take much to blow these very expensive stocks off course.  In fact, eyeballing this list I’d say there’s been a 5% de-rate across stocks with a PE above 25x.

Have a good week,

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