Weekly Market Update (Issue 498) – 11th May, 2018
11th May 2018, 2.00pm
We spoke last week of the surprising outperformance of Australian equities relative to the rest of the world in early May, and our expectation that it would unwind soon enough, and this week the market duly obliged.
Australian shares in constant currency terms gave back all of the +4% out-performance it enjoyed last week, and the long running trend of under-performance resumed.
Australia’s Share-market Under-performance to ACCELERATE
In fact, I actually think the pace of Australia’s under-performance is set to accelerate for the remainder of the year, and if you aren’t already adequately exposed to international shares right now, you need to make adjustments or risk missing out.
To be really clear, in the 12 months to the end of April PRIME’s International Equity Separately Managed Account (SMA) rose by +13%, bettering PRIME’s Australian Equity SMA which rose +8.1% which in turn beat the ASX200 Accumulation index gain of 6%.
And I am telling you straight up, that I think this under-performance is going to accelerate in the year ahead, and it doesn’t matter that the economy is improving and the Federal Government have done a terrific job in their economic management.
The reason is simple, and I have rabbited on about it for well over 3 years now – Australian share-markets remain dominated by expensive, old-world, ‘old-business model’ businesses such as the banks, the outlooks of which are entirely dicey in the wake of ongoing credit rationing and an inflated housing market.
Australia’s money supply growth has already contracted to ‘recession’ type levels (true), growing at +3.7% in the year to the end of March – the lowest rate (excluding the GFC) since the recession of 1992 – and this is BEFORE the impact of tighter lending standards emerge post the Royal Commission.
In March, Australian home lending volumes fell by -4.3% YoY, owner occupier volumes fell by -3.5% annually and the value of investment loans made dropped to a 2-year low. This trend will continue through the balance of 2018, sucking the oxygen from Australian eastern seaboard home prices
I’m not being alarmist, it’s happening already and it will continue into the main Spring selling season.
The big 4 banks are still 22-23% of the ASX200, but even beyond that there isn’t a huge amount to get excited by elsewhere in the top-20 Aussie shares. In fact, because of the banking sector woes, investors have bid up the likes of CSL (CSL) and Cochlear (COH) to their highest forward valuations, Woolworths (WOW) back to their highest multiple in over a decade, and small-caps too are now back to just short of a peak valuation at around 20x.
Australian banks will continue lower in the coming year, and the broader market, precisely on account of the banks problems, is increasingly looking a little peaky. Gravity will prevent the ASX200 from going much higher.
Meanwhile offshore (particularly in the US and China) growth is strong and big businesses there continue to innovate in a way that is driving incredibly strong earnings growth.
Even with my wider concerns on the global tightening in liquidity, and our avowed conservative portfolio weightings at present, I feel very strongly that foreign share-markets and the funds invested in them, will significantly outperform Australian share portfolios in the coming year, and that the degree of out-performance will only escalate in the year ahead.
I would encourage you to look into the Antipodes Global Fund, Magellan Global Fund, Orbis Global Equity Fund, Platinum Asia Fund, VGI Partners Global Investments and even this new environmental efficiency global fund we are looking at now called the Nanuk New World Fund (now available on Macquarie WRAP).
As a recap for you, our recommended BALANCED portfolio would be conservatively positioned with 50% only in growth assets (equity and property), and of that 50% only a shade over 21% in Australian shares – the same as we allocate to international shares.
That number might surprise a lot of you, but it’s the right call and will continue to be the right call in the coming year.
Remember, we want a total portfolio return, and you can spend your capital gains just as willingly as you do your dividends.
Please talk to your advisor further on this.
Federal Budget – good vibes
I won’t repeat myself too much here, other than to say the Government have done an exceptional job on the economy in the last 18 months. The infrastructure boom has been and will continue to be a tremendous jobs success, and this has flooded government coffers with more tax on which to reduce debt and taxes in the years ahead.
Hats off to them on this front. The domestic economy is kicking into gear very well, jobs growth is excellent, corporate profitability is sound, and these factors are an excellent foil for the softening housing market currently underway.
Market Remarks – oil ripping higher, AMCOR CEO buying stock, more bank results and Afterpay (APT) management meeting
Confirmation that the US were pulling out of the Iran nuclear deal saw oil scoot to a 4-year high, lighting the blue touch paper under Aussie oil shares. Oil Search (OSH) is now pushing $8.50 and Woodside (WPL) too is at $34, meaning we will have to make some hard decisions on the latter soon enough.
We haven’t been taken by the Scarborough LNG strategy for WPL, and in truth, I am a little uncertain how long oil will remain buoyant for given the potential for a rapid jump in US shale production in response to higher prices. For now we will let it run, but the real crunch decision might have to be made in the mid to high $30’s.
The AMC CEO purchased 25,000 shares this week in the low $13’s, spending over $320,000 in the process and giving some confidence to investors that the stock was approaching good value. I happen to agree, and think we will be looking to add to AMC positions too near $13, particularly with our expectation for a weaker AUD.
The results out of Westpac (WBC) and Commonwealth bank (CBA) were mixed. CBA’s results were burdened by compliance costs associated with their many recent missteps, and underlying revenue growth at both WBC and CBA remains flat at best.
Each of ANZ, Macquarie (MQG), WBC and NAB will go ex-dividend next week, and I would think this kicks off a further fall lower as retail investors look to sell more banks having pocketed their franking credits.
Lastly on APT. We met with senior management this week, and feel really good about the stock and our recommendation. This company is a genuinely compelling growth prospect, having emerged in the space of 3 years to fund over 20% of all Australian online fashion retail sales. The next moves are likely to come in the United States, where the company have partnered up with renowned venture capital firm Matrix Partners on a rollout strategy, on which we will learn more in the coming 3 weeks.
I would really suggest all to take a look. We have a 4% weighting to APT in PRIME’s Australian Equity SMA.
Thanks for reading.
Jono & Guy
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Australian Market Index
Friday 10am values
|S&P / ASX 200||6119||+21||+0.3%|
|Property Trust Index||1384||–||–|
Key Dates: Australian Companies
|Mon May 14th||Div Ex-Date – ANZ (ANZ), Macquarie Bank (MQG)|
|Tue May 15th||Div Ex Date – National Australia Bank (NAB)|
|Wed May 16th||N/A|
|Thu May 17th||Div Ex-Date – Westpac (WBC)|
|Fri May 18th||N/A|
International Market Index
Thursday Closing Values
|U.S. S&P 500||2723||+93||+3.5%|
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Disclaimer: This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (“Prime”). Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. Prime is bound by the Australian Privacy Principles for the handling of personal information.
This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (“Prime”). Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. Prime is bound by the Australian Privacy Principles for the handling of personal information.