Recent changes to the Blended Australian Equities Portfolio & Australian Equities Income Portfolio
Increased BHP Group (BHP)
Since we reduced the holding in BHP back in March the stock has underperformed the market, returning +6.6% versus the ASX200 +11.8%. Meanwhile consensus expectations for BHP's FY20 earnings have increased by 10.2% (in AUD) compared to a decline of 3.1% in the ASX200's forecast earnings growth.
Iron ore prices have declined from the mid-2019 peak levels of ~US$126/tonne associated with supply outages in Brazil, trading recently at a more sustainable ~US$85/tonne. Notwithstanding the associated decline in earnings expectations from their August peak, we find the combination of BHP's relatively attractive valuation compared to the industrials, the nascent recovery in forward looking economic indicators in Western economies and the improvement in Chinese steel producer margins sufficient to add to the holding of BHP.
Increased Northern Star Resources (NST)
We added to the existing position in NST following a two month period where the gold sector declined by c.14% against a gold price which traded flat in both AUD and USD. The derating of gold companies relative to the gold price is best explained by rising yields in global bond markets associated with growing optimism, built on expectations of a "Phase-one" US-China trade deal and a bottoming in forward looking economic indicators in major Western economies. This has made the portfolio "insurance" offered by gold companies, as an uncorrelated asset, relatively less expensive while NST is also un-geared, so ongoing pressure on sub-investment grade (junk) bond markets could eventually make strong balance sheets relatively more attractive.
We favour gold miners with diversified operations, low sovereign risk, strong free cashflow generation, low gearing and organic growth prospects. We try to minimise sovereign, financial and operational risk for an exposure which should offer uncorrelated risk diversification for the portfolios. NST’s balance sheet is net cash and it has operations in Australia (WA) and the US (Alaska), with considerable exploration potential and production growth through relatively modest capital expenditure. Its dividend yield is just 1.8% but the payout ratio is only c.25%, so there is capacity to grow dividends at a faster rate than earnings in the future.