Executing A Trade: A Solid Pick Down Under

We executed a (mostly) across the board trade for large accounts on Thursday buying ASX Limited (ASXFF.PK), which is the stock exchange in Australia. The trade obviously increases our exposure to financial stocks and takes us back to Australia after having been out for about seven months.

First from the top down I have been concerned that Australia is at risk for some sort of housing problem although with a far less severe magnitude as occurred in the US and so I sold our holding in ANZ Bank (ANZBY.PK) for large accounts and at the same time sold our Aussie ETFs for their large exposure to the banks. ANZBY is down 13% since that sale and the ETFs are down a little more which is nice but I would not call the sale a major transaction.

Going forward I think housing can still be a drag and so I think the banks will underperform but my take overall is that things in Australia look good--drawing this conclusion means you have to believe that China will not stop buying resources and I think Yanzhou's (YZC) intended purchase of Gloucester Coal (GCRLF.PK) supports that belief.

I would also note that the SPX is right at its 200 DMA (give or take) but we have more cash raised than I think is ideal by virtue of selling American Tower (AMT). I wanted to buy something with relatively low volatility and higher yield (more on that in a moment) and actually if we have more purchases to make I think most of them, but not all, would be lower vol and higher yield like ASX.

In terms of picking an exchange stock, I think I've been telegraphing this for a while in how much I talk about this group and obviously this adds exposure in the financial sector while still keeping away from US or European banks, and Aussie banks for that matter, although I would reiterate that I do not think the Aussie banks face anywhere near the magnitude of risk that US and European banks do.

The stock itself is cheap in terms of where it has traded in the last couple of years and while it is a little cheaper valuation-wise than where it was a couple of years ago, it is not a deep value stock. It has essentially no debt, almost 2/3rds of the share price is in cash, and it yields about 6% with a pretty reasonable payout ratio.

A little while back ASX was going to merge (be taken over) by the Singapore Exchange (SPXCF) but the deal was nixed. While I think odds of a takeover are low, it would not be a black swan event either.

After lagging the US for a couple of years I think Australia can come around again and if that turns out to be correct then I would expect ASX to do a little better than the broader Aussie market.

As a small logistic item, we bought the stock directly in Australia so it was entered overnight on Wednesday US time which is Thursday in Australia. We bought in this way because it doesn't trade enough volume here for our entire client base but the name is very liquid on the home market. If we buy the name for any new clients for whom it is appropriate I am quite certain the we could get individual trades complete on the US pinks.