Australian Market Summary (Issue 420) – 07 October 2016
I saw a great chart this week.
Unsurprisingly it was printed in the monthly newsletter of a well-regarded and well-considered investor – in this instance, Vimal Gor who runs all of BT Investment Managements Fixed Income business.
The chart showed the change in asset-mix that has occurred to enable an investor (global in this case, but the point rings true locally) to achieve a nominal 7.5% annual return.
In 1995, an investor could have achieved the 7.5% return by investing entirely in a mix of government and corporate bonds.
In 2005, that return could be achieved but only with just under 50% of the portfolio invested in higher-risk assets such as equity, real-estate and private equity.
Circle forward to 2015 and for an investor to achieve a 7.5% return he/she must invest almost 90% of his/her assets in riskier strategies.
In fact, where a portfolio in 1995 could achieve a 7.5% return purely from bonds, in today’s environment a portfolio would only hold 10% in bonds if it aspired for that sort of return.
Investors have had to significantly up the stakes to generate sufficient returns to pay their pensions from investment portfolios.
The point I am trying to make here is that the world is infinitely riskier and less stable than it has been in the past and that with every promise of higher returns comes additional risk.
There is no such thing as a free lunch.
I have included a chart of Australian 10-year Government Bond yields as an example of the collapse in ‘risk-free’ investment returns.
In a domestic Australian sense, term deposits are 2.5%, government bonds are 1.5-2%, investment-grade corporate bonds are 2.5-3.5%, bank hybrids are ~6% (but tax-break dependent), unlisted commercial property yields 6-9% depending on its quality, scale and leverage and lastly Australian shares offer a prospective earnings-yield of about 6% also.
This is just what it is.
Ideally, through strong asset-allocation the aim is to mollify the amplitude of markets peaks and troughs and to deliver incremental wins along the way.
But times are getting tougher.
The example above strongly demonstrates this.
Last year we calculated that the typical Australian retirement investor with a balanced portfolio spread across Australian blue-chip shares, cash, fixed income & hybrids and some commercial property saw his and her investment income fall a shade over 10%.
That’s a proper hit to anyone’s income.
The trick from here is to box clever and not to succumb to desperate measures.
At this time of year annual statements are sent out and investment returns are scrutinized. Often at this time of year, new ideas are thrown around and investors undertake a portfolio ‘spring clean’.
This is a good thing.
There is a reason to talk to your advisor about your strategy, your investment composition and its ability to deliver your return goals within your specified risk parameters.
Talk to your advisor about your preferences and biases and how to manage them to ensure these very biases are not limiting your future portfolio performance.
It’s hard to get the best out of a portfolio if certain asset classes are entirely ruled out because of past experience or some perceived bias.
Remember, no asset class is perennially good nor perennially bad.
It’s horses for courses.
Many investors have bristled at the prospect of investing in international shares in recent years and yet I would argue the risk and return offered offshore is as good or better than that offered locally.
Many investors have also struggled with the idea of investing in unlisted property funds having had dreadful experiences with similar vehicles during and post the GFC.
I am acutely aware of the pain many felt in these highly geared and illiquid property ventures back in 2009-2010, but would stress that was then and this is now.
The opportunity set and investment climate is different.
Lastly, ‘alternative investments’ also bear consideration. When talking of ‘alternatives’ it sounds like we are trying to weave a bit of black-magic, but in truth we are really just talking about a certain class of hedge fund that uses statistical models to follow trends in investment markets.
The great thing about this specific class of alternative investment is that it doesn’t move in-line with equity, bond and commodity markets.
In fact, the idea of having these investments is such that in the event of the markets taking a proper 10-20% correction, its highly likely that this form of investment would provide positive returns.
Anyways, these are some simple things to consider and I would encourage you to talk to us here.
The Market this week – Signs of a change?
Most noteworthy this week was news from foreign shores, the reverberations from which will be felt locally in the months to come.
This week we had some stronger US economic data on manufacturing and services and we began to see the start of a move higher in global bonds yields and the US-dollar in response.
Further exacerbating the rise in bond yields was the continued rise in oil prices after the OPEC decision 10 days ago to curb output.
The move higher in both the US-dollar and bond yields is only nascent, but does seem to be continued.
Bond yields rising
Australia’s 10-year bond yield has poked its head back up to 2.20% and the Australian Dollar has eased back under 76c.
Australia’s ‘high-yield’ equities have all been negatively impacted by the spike higher in bond yields, but this move has been well entrenched for the better part of 6 weeks.
Australian listed property trusts have underperformed the ASX200 by 20% in the past 2 months, road-operator Transurban (TCL) has underperformed a similar amount and utility businesses such as Duet Group (DUE), APA Group (APA) and Spark Infrastructure (SKI).
Many of these companies were looking particularly stretched on valuation grounds earlier in the year, so an unwind has been a long time coming.
However, we see little reason to expect a major sell-off in Australian bonds and are inclined to think some of the aforementioned names might indeed be beginning to offer some value for investors in the weeks ahead.
A weaker Australian Dollar ahead
One of our firmest convictions is that the Australian Dollar will ease back to 70c or below during 2017 and many of our investment recommendations (Mantra Group, Sonic Healthcare, Blackmores) are in part on account of this.
Similarly, we have our eye on one particular Australian share with major currency leverage that is slowly but surely coming back to our buying target. Fingers crossed it gets there.
We are also devoid of all resource sector exposure and think the start of a US-dollar strengthening period will likely impact mining shares negatively.
This is likely to compound our expectation for weaker Chinese iron ore demand into Christmas.
Even in spite of the stronger US-dollar, oil prices continued to rise this week and are now north of US$50 a barrel.
Fortunately, this dragged Oil Search (OSH) and Woodside Petroleum (WPL) higher this week to the tune of 6% and 5% respectively.
Australian Economic Update – Retail softening
A small point from the week’s economic data releases is that the softness we saw in the August data continued into September across most industries except construction.
Of particular note to me was the rapid deceleration in retail industry momentum.
Given my comments about household leverage and poor wage growth in recent times, this is an interesting data set to watch as we lead into Christmas and that vital trading period for consumer goods companies.
We have not recommended any Australian retail shares in recent times, but for those of you owning any left-over JB Hi Fi (JBH) or Harvey Norman (HVN) I would suggest you book those profits now as the stocks look rich when compared to the market and the momentum in consumer spending is starting to wane.
|S&P / ASX 200||5468||+42||+0.8%|
|Property Trust Index||1374||-46||-3.2%|
Key Dates: Australian Companies
Mon 10th October N/A
Tue 11th October AGM: Telstra (TLS), Div Pay Date: QUBE Holdings (QUB)
Wed 12th October AGM: CSL (CSL), Div Pay Date: Adelaide Brighton (ABC), QANTAS (QAN)
Thu 13th October AGM: Magellan Financial (MFG), Transurban (TCL), Div Pay Date: Brambles (BXB), IOOF (IFL), Vanguard ETFs (VEU, VTS)
Fri 14th October Div Pay-Date: Flight Centre (FLT), SEEK (SEK)
Have a great weekend.
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