The 12-month forward Price earnings Ratio (PE) for the ASX 200 is now greater than 18 times, notably 27% higher than the long-term average of 14.3 times. On a PE basis, valuations look expensive for the Australian equity market. Cognisant that calendar 2020 has been one of the strongest starts to the year in over three decades, we feel it prudent that we now raise our cash levels to ensure that when equity markets do retrace we are well positioned to re-invest at more attractive prices. We have sold Orora (ORA) in both the Blended and Income portfolios, and ANZ Bank in the Income portfolio.
Orora (ORA) delivered a disappointing 1H20 result due to softer North American performance and flat earnings in Australasia. The operating result for its North American business experienced tough trading conditions that compressed its EBIT margin to 3.5% (a yoy reduction of 110bps).
The announcement of the sale of its Australian fibre business is a positive for the return of capital, however, it does increase the exposure to US packaging where industry conditions have deteriorated due to new investment by competitors. With ORA expecting market conditions to remain challenging for the remainder of FY20, we have divested our position in the company.
The trajectory of earnings for ANZ is challenging due to weaker net interest income (softer NIM), driven by the impact of low rates and higher expenses. We expect softer underlying trends for ANZ will persist into the remainder of FY20.
Our preference in the banking sector remains weighted to Commonwealth Bank where its franchise strength and capital position is delivering more consistent returns. We also continue to hold a smaller weighting in National Australia Bank (NAB) based on attractive valuation and recent strengthening of its Board and Executive team.