Like so many investors, Argo Investments (ARG), the country’s second biggest listed investment company (LIC) got caught out by the surge in commodity prices – led by coal and iron ore – in late 2016.
Despite that there’s some caution about the outlook, but the big investors remains wary of just what will happen with President Trump and his policies in the US, while Europe remains a concern, and locally valuations and the resources rebound may be over priced.
Certainly Argo (like some of its peers, such as Australian Foundation) plan to remain on the sidelines and husband their cash for a while as they watch the current reporting season and the way valuations here and offshore go.
Argo also experienced the fall off in dividend growth from companies in its portfolio in the six months and year to June 30, 2016. As well option trading income fell (which showed up in the results of other LICs).
As a result Argo saw a near 9% drop in half-year profit of $104.1 million. Despite that the company will pay shareholders a steady interim dividend of 15 cents a share fully franked.
Argo CEO, Jason Beddow, said the lower first half profit was primarily due to a reduction in dividends received from a number of the larger companies held in the investment portfolio, as foreshadowed by at the time of Argo’s previous results announcement last August 2016.
In addition, income from option writing and trading activities declined from the high levels achieved in last year’s first half.
Argo’s net tangible asset backing performance returned +9.6% after all costs and tax over the six months to December 31,2016, slightly underperforming the ASX200 Accumulation Index which returned +10.6% without any allowance for costs or tax. The share price performance was +3.4%, with Argo shares now trading at a slight discount to NTA.
"At a sector level, Argo’s underweight position in the Materials sector was the main contributor to relative underperformance, as resource stocks performed very strongly on rebounding commodity prices and better than expected economic activity in China, capped off by expectations of expansionist policy making in the US,” directors said. Overall, the number of stocks held in the portfolio decreased slightly over the half-year to 99. The cash balance at 31 December was $209 million, or 3.9% of the Company’s total assets of $5.3 billion.
During the six months to 31 December 2016, Argo purchased $89 million of long-term investments. Proceeds of $98 million were received from long-term investment sales, including $55 million due to the takeover of Asciano.
The larger movements in the portfolio during the half-year included: purchases, Estia Health, Vocus Communications, QANTM Intellectual Property, Boral, Rural Funds Group and oOh!media The sales included Asciano (takeover) Milton Corporation, ASX, Scentre Group, Coca-Cola Amatil and Fletcher Building. Atgonsold out of Asciano completely because of the takeover and quit its all its stae in ASX. Other stocks exited during the half-year were Sims Metal Management and Reliance Worldwide Corporation.
The company said that the "majority of its recent purchases have focused on smaller and mid-sized company opportunities. New investments were made in QANTM Intellectual Property, oOh!media, Speedcast International and Murray River Organics Group.”
Mr Beddow said “the very positive reaction of equity markets to Donald Trump’s victory in the US election was widely unexpected. Cyclical stocks in the US responded strongly, and this optimistic view spread globally and extended the Australian market’s strong performance in the second half of the calendar year.”
For the rest of the year Mr Beddow remains confident, but also cautious about whether markets have gone to far on hopes of the so-called Trump growth dividend;
“Global stock markets appear to have priced in plenty of good news on pro-growth policies following the US election, which in our mind leaves room for some disappointment in the future” said Mr Beddow.
“The policies laid out during Trump’s election campaign suggest higher US growth, most likely accompanied by higher interest rates and a stronger US dollar. Confidence levels have improved on the hope of increased investment and wage growth. However, many of these policies will require Congressional approval,” he said.
"Political risks will remain a focus for markets in the year ahead, with significantly increased uncertainty and a number of potential sources of market volatility. We remain cautious as to the flow-on implications of forthcoming European elections this year in the Netherlands, France and Germany, as well as the ongoing steps that Britain needs to undertake to complete its withdrawal from the European Union. "
"(A)lthough resource stocks have seen significant upgrades to earnings expectations in recent months, increasing the overall earnings for the Australian market, it is prudent to remember that less than 12 months ago, the same resource companies were slashing dividends and aggressively cutting costs just to remain profitable.”
“Argo remains cautious on the market at these high levels, as broader company earnings will need to improve in order to justify current stock valuations,” he said.
“In this volatile environment, we are likely to be patient with further meaningful investments, unless the market weakens or opportunities arise through the upcoming corporate results reporting season,” he said.
