All Ords Report 01 February 2018

When you travel, you may consider one or two airlines that you'd prefer to travel with. For many Australian’s, Qantas (QAN) is likely to be one of the preferred. That said, QAN may not be who you end up travelling with, given that in the past Australian’s were more brand loyal, but now we tend to buy more based on price. So, why is that?

Quite simply, companies have become more focussed on driving shareholder value and rising share prices than they are on driving customer value, and some struggle with being good corporate citizens. So in short, if we don’t feel loved by the brand, then we are happy to buy on price.

Don’t get me wrong, QAN is a great airline and while it is not at the top of the list of the world's best airlines for 2018, as Air New Zealand took out that honour, QAN was second. Further, Jetstar landed in the top 10 of the world’s safest low cost carriers.

Here is where things get interesting.

In 2016, QAN CEO, Alan Joyce was ranked number six in the ten highest paid CEO’s in Australia, with $14.34 m, which was below Macquarie’s CEO at $25.7 m. However, in 2017, Alan cruised towards the top with $25 m. This was due to a significant increase in the QAN share price, which came on the back of rising profits over approximately four years. However, all this good news does not mean his pay or the QAN share price will continue to rise.

Remember, whilst these profits were being created, the QAN workforce was being culled dramatically and jobs were being sent offshore. This caused concerns about safety and maintenance among other things.

Globally, the story is the same, especially in the US, as history demonstrates a definite corporate culture of ‘doing whatever it takes’ to boost company share prices and high corporate salaries. Here is where I have issues: companies who strive for constant double digit growth are widening the gap between the haves and the have nots.

Companies that provide essential services, such as banks, telecommunications, energy and the-like must place more emphasis on remuneration linked to responsibility for the community as we can’t live without these services. Now, we can all get by without flying on a QAN plane, but most can’t survive in the world without a bank or energy provider.

Costs in both industries have increased sharply since they were fully privatised, and the consumer is paying for this corporate culture of driving shareholder value.

Eventually, failing to act responsibly punishes the share price as customer loyalty goes out the window. We have seen this shift in the financial services industry with the growing number of self-managed superannuation funds since the GFC, and with bank share prices languishing in the past few years.

Some years back, QAN was number one on my list of ‘dog stocks’ with its share price at all-time lows. Anyone who knows me will recall that I don’t really like to buy airlines as they can be very volatile; many things can affect the share price, including plane crashes, fuel price increases and the Australian dollar, to name a few.

However, the strong rise in QAN’s share price since 2013 has demonstrated that ‘every dog has its day’. While there is the potential for further upside, there is only so much cost cutting you can do; eventually you run out of costs to eliminate or reduce. For profits to be maintained, revenues need to rise, so it remains to be seen whether QAN can do this on a consistent basis.

In my opinion, QAN is not a stock that investors should simply buy and hold, as you could have bought this stock in 1999 at a similar price to what it is trading at today. QAN is a stock that needs to be traded, which means having solid rules around when you buy and sell. It is also a stock I would recommend using a solid trailing stop loss on, as it can be volatile.

If you would like to learn more its time to do some research the Investment Pack is a good way to get started.

What do we expect in the market?

Last week the All Ordinaries Index rebounded strongly off Monday’s low at 6,106 points and continued up to a weekly high of 6,179 points before softening a little on Thursday, and closing slightly lower on Friday. This price movement was anticipated and now it remains to be seen whether this short term move up will be sustained over the coming weeks or whether there is further downside. Volatility increased this week with a move down on Tuesday and on Wednesday it was interesting to see the market dip and then close right back up on the daily today. While our market really needs to take a breather, the buyers appear to be coming back in.

Previously, my analysis indicated that the market would move down to between 6,000 and 6,100 points, as short term profit takers close positions. Given that our market hit 6,106 points last week, it did get very close to the upper level of the short term target. That said, it may take a couple of weeks for the market to confirm where it will find support, and so we need to be prepared to see further downside. From here, our market will either largely rise up to between 6,370 and 6,450 points until around mid-March or possibly April/May, or it will fall around this time. The direction it takes this week and next will dictate which is correct. Remember, future downward moves will provide opportunity.

Global news

US reporting season has been largely positive and Asian markets have been rising strongly. So far, there has been no major tremor across global markets this year that could see volatility significantly increase above what is considered ‘normal’. If current conditions are maintained around the world, then this will provide confidence for the market to grow, or at least support stable market activity locally.

You may want to stay abreast of the US Federal Reserve’s stance on interest rate rises for 2018. Multiple rate increases are likely for this year; the market anticipates three, possibly four, which will dampen the current rise on the Dow Jones. That said, the Dow rarely turns down immediately after a steep rise; it can take many months. Consider what occurred in late 2014 when successive rate hikes were announced. The best strategy is not to second guess the market, but rather to wait for confirmation, as there is still potential for further upside. But remember, it is often the inexperienced who invest just prior to a peak.

In the past few weeks we’ve been producing the weekly share market reports on our YouTube channel, so we encourage you to watch them to stay up to date. Janine Cox, Senior Analyst, and I have also recorded a two-part recap of what happened in the share market in 2017 and our predictions for 2018. So click the link below to watch the videos!

You can also subscribe to be notified when we upload the weekly recordings!

So welcome to the Wealth Within YouTube channel!

Dale Gillham is Chief Analyst at Wealth Within