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Note from the editor - 30 November

Glenn Freeman  |  30 Nov 2019Text size  Decrease  Increase  |  
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Will Westpac's sacking of its CEO and chairman be enough to staunch the wounds inflicted by its shocking breach of trust?

Westpac's AUSTRAC scandal this week claimed two senior scalps, as Brian Hartzer quit and chairman Lindsay Maxsted's impending departure emerged. But the worst may be yet to come for the bank, Morningstar equity analyst Nathan Zaia said this week.

Some have argued Westpac's admission of guilt in working with AUSTRAC for months before it went public should count in the bank's favour when the regulator decides the final penalty. Commonwealth Bank was far slower to admit any wrongdoing before eventually accepting a $700 million fine for anti-money laundering breaches.

But the Westpac case is a far more sordid affair. News of transactions between a bank and child pornographers grabs the attention in a more visceral way and will likely last longer in the public consciousness.

Westpac's share price declines since news of the scandal broke have seen the bank's value – at least on paper – slashed by $7 billion. Even if the penalty levied by the regulator hits $2 billion, it's not make-or-break for the bank. But income investors may be underwhelmed by Westpac's dividends in the near future, Zaia says.

Moving from the financial sector to the other top Australian GDP contributor, iron ore exports, our Fund Spy this week looks at how some of the biggest managers view the likes of BHP and Rio Tinto. Morningstar analysts believe China's weaker demand for steel means the worst is yet to come for iron ore miners as the price of the steel ingredient continues to pull back from its $120 peak set in mid-2019. Portfolio tweaks over the past 18 months by Schroders, Pendal and others suggest similarly bearish views.

On a more positive note, we looked offshore at some of the compelling share prices of cruise line operators. Big names Carnival, Royal Caribbean and Norwegian Cruise Line are all trading considerably below Morningstar US's fair value estimates.

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Berkshire Hathaway's mandatory filing of its portfolio holdings with the US Securities and Exchange Commission has also unearthed a few undervalued stocks – a rarity given the hordes of investors who attempt to mirror Warren Buffett's investment picks.

Closer to home, the communications sector was one of the ASX's biggest gainers of the week, up 6 per cent. Telstra's share price ticked up by about 8 per cent following a positive market response to the telco's investor update on Wednesday. Morningstar analyst Brian Han summed up as "reassuring" and "welcome news" Telstra's re-affirmation of its guidance for fiscal 2020.

Han this week also explained his positive outlook on Nine Entertainment's streaming video on demand platform, Stan. Disney+ has now launched in Australia alongside incumbents Netflix and Stan. Other SVOD players are set to enter the fray in 2020, but Han believes Stan could be the last man standing.

Index investing featured this week too, as Morningstar US head of passive strategies Alex Bryan debunked seven of the most common arguments against index funds. And Anthony Fensom discussed the more than two-fold growth in Australian fixed income ETFs over the past five years.

Peter Warnes's Your Money Weekly this week sounds a cautionary note on a different type of listed investment vehicle, LICs and LITs, particularly given his belief the market is at or nearing its peak.

Earlier in the week, Warnes expanded on comments from an earlier edition of YMW, as we discussed Treasury's Retirement Income Review consultation paper. Warnes floated the idea of a 10 per cent tax rate for workers over age 65 as a counter to Treasurer Josh Frydenberg's warning of a Baby Boomer “time-bomb”.

Warm regards,
Glenn Freeman

is senior editor for Morningstar Australia

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