Miners drag ASX down; CBA’s horror week

Hello and welcome to the On the Money podcast. It's Friday, the 25th of July. I'm Stephanie Yousaf filling in for Ricardo Goncalves. The Australian share market has finished the week in the red. The ASX 200 shaving 0.5% to end at 8,666 points as mining and gold stocks dragged the index down. For more, I spoke with Michael Wayne, who's the managing director of Medallion Financial Group.

Michael Wayne

To a degree, it was expected in that the futures this morning were pointing to a weaker open. Um, the fact that the iron ore price had come down a little bit after a steady run over recent times meant that the miners were always facing an uphill battle. Um, so, yeah, to a degree, that was expected. So, yeah, driving the market today, we saw retracement in the likes of BHP down approximately 2%.

Michael Wayne

Uh, and given the size of that weighting in the market, um, the market was always going to be on the back foot, and then you throw in the fact that the Commonwealth Bank was also lower again today, um, so the two biggest names in the index were lower, um, putting a lot of pressure on the rest of the market.

Stephanie Yousaf

You mentioned CBA. It's been a horror week for the big banks. Um, CBA especially, which for weeks had been doing so well, peaking at $191 a share late last month. Um, some say it's an overvalued stock. Do you think the gloss is finally coming off, or is there something else to explain this?

Michael Wayne

Look, I've called the end of the CBA rally a lot over the last sort of 1218 months, and I've been consistently proven wrong.

Michael Wayne

But there's no doubt that looking at CBA from a fundamental perspective, it is extremely expensive, not only relative to other banks domestically and globally, um, but also relative to its own history. So the price to earnings ratio of CBA is pushing that 30 times earnings level, which is very extreme. So in many ways it's priced as a growth stock, yet you look at the earnings growth forecasts and the outlook is pretty anaemic when it comes to earnings growth, so.

Michael Wayne

Considering the multiple it's trading on, the fact that the dividend yields only about 2.7%, um, we feel as though CBA is definitely expensive, and we would expect that market leadership when it came to, when it comes to driving the market higher from here to fall to other names that have been less loved and and other sectors and parts of the market which have been less loved, starting to come back to the fore, um, and take that.

Michael Wayne

Sort of take the reins and drive the market higher from here because yeah, no doubt in in our view that CBA remains very expensive and hard to justify at these

Stephanie Yousaf

levels.

Stephanie Yousaf

It's shaping up to be the worst week since April for the markets. Um, that's despite some positive news this week around trade deals, like in Japan, Australia's beef deal, UK, um, deal with India today, um, the RBA minutes and the ECB, um, decision overnight. Why aren't these factors boosting, um, investor confidence?

Michael Wayne

It's been interesting because we've seen a bit of dichotomy play out within the ASX this week. We've seen,

Michael Wayne

The ASX 200 lower, as you point out. However, if you sort of go down to the smaller end of the market and looking at the ASX small caps and ASX emerging companies, those two indices are actually higher for the week. So you are getting some rotation out of the larger names into some of the smaller names. Um, but we are also in the midst of the the US earnings season that just kicked off this week.

Michael Wayne

And then of course, around the corner, you know, throughout August you'll have the annual reporting season for the ASX as well. So, after a very strong couple of months from the April or the early April lows, really the market's been onwards and upwards, and nothing could set it back, but valuations are undoubtedly extreme for the ASX looking back through history. But in saying that, there are definitely pockets of the market that are looking more attractive than the broader market itself.

Stephanie Yousaf

What company news is catching your attention today?

Michael Wayne

Look, I must admit there's been a pretty quiet day today. Um, you have to also understand that we are in the ASX blackout period, so the period where companies have obviously finished off their financial year, they're preparing their books or prepared their books for the financial year, but they haven't yet announced those results to the market, so.

Michael Wayne

Unless there was a really extreme news event that needed to be disclosed to the market, most businesses would know by now how they've performed last financial year, and if a company was expected to miss earnings expectations significantly or exceed earnings expectations significantly, the chances are they would have updated the market before today.

Michael Wayne

In saying that, there are snippets of news for a few smaller businesses, companies like Steadfast had a bit of an update where the CFO is moving on. You also had Regal Partners as well, a fund manager provide funds under management update, and then K&D Brands announced that a former Qantas executive.

Michael Wayne

Um, is taking over the CEO reins for that business and the market responded kindly to that news.

Stephanie Yousaf

And finally, what are you telling your clients right now and where are the opportunities for investors?

Michael Wayne

There are areas which are starting to look more and more attractive, um, if you look at large healthcare names, for instance, companies like CSL, companies like ResMed.

Michael Wayne

These businesses are multi-billion dollar ASX top 20 or top 50 businesses, and they're trading on the lowest multiples or close to the lowest multiples they've traded on in 5, 10 years. So, those are businesses that are trading on lower multiples than CBA, yet their earnings growth.

Michael Wayne

Um, whereas in the case of CBAs around sort of low single digits, in the case of CSL and ResMed, we're talking double digit, mid-teens EPS growth. So that's a part of the market that we quite like. Um, but also for those investors who are comfortable in looking at the smaller part of the market, there's no doubt that small caps, globally, as well as in Australia, are trading on relatively attractive valuations compared to the larger end of the market.

Michael Wayne

And in some cases, the biggest relative evaluation discount in over 20 years. So small caps domestically and globally seem to be set to play a bit of catch-up on the larger caps as well. And then finally, we think that the materials market, or so the miners if you like, um, they too haven't participated in the the rallies um that we've seen over the last 12,18 months as we've seen in the banks, for instance, so.

Michael Wayne

There is an argument to suggest that commodity-based companies are the cheapest they've been relative to the rest of the market in a long time, so hopefully investors can find some happy hunting ground within those three areas of the market.

v Stephanie Yousaf> That was Michael Wayne from Medallion Financial Group.

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