Australian Market Roundup (Issue 459) – July 28th, 2017

28th July 2017, 1pm

Indiscriminate. Random.

These are two words that come to mind when I think of Australia’s share-market this past 2 months.

In that time we have traded within a ~2% range, with more fits and starts than you could imagine and more random +/- 1% moves than you would come to expect given the lack of volatility seen in global share indices.

But today we are again down over -1.5% for little reason. And on big volume.

These movements are all the hallmarks of a market lacking in buyers, and further evidence of an ‘over-ownership’ of Australian growth assets in investor portfolios.

AUSTRALIAN BLUE-CHIPS REMAIN OVER-OWNED.

Simply put, the incremental investor in Australian blue-chip shares is a seller.

As at December 2016 the ATO reports that Australian SMSF’s own $200bn in direct Australian shares out of $653bn invested.

That is 30% of all assets, and swamps the holdings in international shares ($3.9bn) and other managed investments ($35.5bn) in which international shares (amongst other things) can be held.

Australian shares comprise only 1.5% of world share-market value.

I will shout until I am blue in the face that investors need to raise their exposure to international growth assets at the expense of Australia’s slow-growing, expensive blue-chips.

This trend is like lava, and will creep up on us all slowly, but will be deadly to long-term performance if ignored.

If investors are going to assume the risk of equity assets in their portfolio, then they most certainly want the prospect of some growth.

There is still a place for franked income, and for the stocks that provide it, but we have to augment these holdings with likely capital appreciation, little of which is offered in the medium-term by Australian banks, telecoms, grocers and miners.

Please take the time to consider our thoughts on international equity exposure by way of our recommended managers (Platinum, Magellan, Orbis, MFS, Vanguard & Contango), and similarly please consider the prospect of substituting some Australian large-cap exposures for small-company holdings (OC & Vanguard).

Remember too, this is a relative argument.

In the interim, we remain cautioned towards growth assets in general.

VALUATIONS & MARKET LEVELS REMAIN HIGH EVERYWHERE YOU LOOK

On the whole, we continue to see the coming months as a trickier period for share-markets given the pending Federal Reserve decision to reduce its balance sheet.

This involves the expiry of US$10bn in bond holdings a month and the withdrawal of these funds from the global financial system.

The size of these expiries will increase every 3 months, and will continue to handbrake asset markets as the world’s biggest buyer of assets (the U.S Federal Reserve) effectively turns a net seller.

There was a terrific memo penned by one of the world’s largest and most successful hedge fund managers this week (Howard Marks from Oaktree), in which he detailed some reasons for increasing caution.

It’s a great read, provides terrific context and allows the investor to look above the day-to-day movements in asset markets.

The link is attached here: Oaktree Capital – There they Go Again

Interestingly in the article, Mr Marks talks of the ‘paucity of prospective returns’ and details the high valuations seen across most major asset markets.

Clearly from such lofty valuations, the risk-reward opportunity set is increasingly limited.

He mentions that the S&P500 is selling at 25x trailing earnings which is well above the long-term median of 15x, and that the ‘Shiller Cyclically Adjusted P/E Ratio’ stands at 30x and that this figure has only been exceeded in 1929 and 2000 share-market bubbles.

I note too, the highly-respected asset management group GMO this month published their regular update on expected returns for asset classes, and in it they forecast an ‘annual real return over 7 years’ of -3.9% per annum for U.S large-cap stocks.

Think that over.

The only international asset class in which they forecast any growth in that 7-year window was in emerging market shares and debt.

Pretty sobering stuff, and again good reason for us to be all the more particular in what we own and where we own it.

In concluding, where valuations are high everywhere, at least internationally you have the prospect for growth that you don’t have amongst Australian blue-chips.

On that front, we have a new issue that we think is worth your attention.

VGI Partners Global Investment LIC – new issue

VGI Partners are listing their Global Investment fund by way of a listed-investment-company on the ASX in September, and we think this is worth your attention.

We will send a proper note out on this on Monday seeking expressions of interest, but this fund is of an interest for several reasons.

The fund manager VGI currently runs $1bn+ as an international equity fund manager, and its strategy is to be highly forensic in its analysis of companies and then to hold large, concentrated positions in each investment.

It is a long-term investor in growth industries and company management are already significantly invested in the fund and will again contribute much of their remuneration back into the fund for future gains.

The fund is run like a typical long/short hedge fund, so it differs from traditional long-only fund managers who do not short-sell, but importantly the fund has delivered a compound return of +14.6% per annum since inception in January 2009 whilst retaining an average cash balance of 28% in that period.

This fund has delivered very strong risk adjusted returns historically, and we think this is important with markets at record highs.

Previously this fund has required a minimum investment of $1m, so with this IPO, investors will be able to gain access to the fund with a minimum investment of $5,000.

Please take a look at our note on Monday for further details, or call your advisor to learn more.

U.S Reporting Season

The main focus of markets this week came from offshore earnings, with several of the FANG’s (Facebook, Amazon, Netflix & Google) reporting.

It was a mixed bag on the whole with Alphabet (GOOG) earning 23% less per click in revenue terms, but still managing to report a total revenue rise of 21%.

Facebook (FB) were strong with revenue growth of +47% annually, and growth in mobile advertising revenues of a staggering +53%. Mobile is now 87% of all FB advertising revenues, but importantly though FB warned that the volume of advertisements in its news feeds was reaching a finite limit, it was achieving significantly higher revenue per ad than it did only a year ago.

Moreover FB seem to have further opportunity from advertising within its Instagram and Whatsapp messaging platforms.

Amazon (AMZN) were modestly disappointing, particularly since the company guided toward a further potential quarterly loss in the 3-months to come as the group upped its investment in new staff and logistics assets.

When you have a market cap of US$500bn and trade on 90x current year earnings, it’s hard to convince investors that a pending quarterly loss is a good thing, and so the stock ended up down -3% after results late on Thursday night U.S time.

All the same, AMZN continue to drive spectacular revenue growth and continue to embed them deeper in their clients consumption patterns.

Amazon’s PRIME product (a full-scale product and delivery offering) now has 85m users, and is 35% higher than it was a year ago.

Note that there are only 323m people in the United States and only 125m households.

That is a staggering statistic.

Beyond the results from the global technology players, delivery and logistics player UPS (UPS) reported a disappointing set of results and fell -4% Thursday night.

Ironically UPS highlighted the closure of many retail shopfronts as a reason for its disappointing business-to-business revenues, a directly impacting factor from the online shopping boom that is in fact driving their consumer parcel business.

Reporting Season in Australia

Kicks off next week with Navitas (NVT), Rio Tinto (RIO), Suncorp (SUN) & Crown Resorts (CWN) all due to report.

The following week of Monday the 7th August sees reporting really gain pace with each of James Hardie (JHX), Transurban (TCL), Carsales (CAR), Commonwealth Bank (CBA), AGLE Energy (AGL), AMP (AMP), REA Group (REA) & National Australia Bank (NAB) all due.

A final remark on BREXIT

I couldn’t help but notice Boris Johnson this week, when speaking in Australia, suggest that BREXIT was much like the millennium bug – much ado about nothing.

It seems a rather casual remark to have made, particularly in the week when it was widely rumoured that Deutsche Bank (DBK), one of the City of London’s biggest employers, was considering moving some $350bn in assets from London to Frankfurt, and with that significant numbers of staff.

The impact on the UK and City of London in particular from the uncertainty relating to so-called ‘financial-passporting’ is likely to be significant, and will see major shifts in banking from London to European capitals.

British property prices have already taken an impact, but will likely see further downside as BREXIT terms firm.

Regards,

Jono & Guy

Financial Services Guide Update

Our Financial Services Guide has been updated, please click here to download the most recent version.

28th July 2017, 1pm

 IndexChange%
All Ordinaries 5761 -9 -0.2
S&P / ASX 200 5709 +47 +0.8
Property Trust Index 1312 +8 +0.6
Utilities Index 8206 -178 -2.1
Financials Index 6552 -63 -1.0
Materials Index 10006 +191 +1.9
Energy Index 8667 -83 -0.9

Key Dates: Australian Companies

Mon 31st July N/A
Tue 1st August Earnings – NAVITAS (NVT)
Wed 2nd August Earnings – Rio Tinto (RIO)
Thu 3rd August Earnings – Suncorp (SUN), TabCorp (TAH)
Fri 4th August Earnings – Crown Resorts (CWN)
Div Pay-Date – James Hardie (JHX)
Div Ex-Date – Djerriwarrh (DJW)

21st July 2017, 3pm

Disclaimer:

 IndexChange%
U.S. S&P 500 5761 -9 –
London’s FTSE 5709 +47 -0.6%
Japan Nikkie 1312 +8 -0.3
Hang Seng 8206 -178 +1.5%
China Shanghai 6552 -63 –
    

 

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.

SPEAK WITH US TODAY

A unique and personal service approach and support for all your business advisory and personal wealth management needs

Request a free consultation

A unique and personal service approach to support all your business advisory and personal wealth management needs.

Request a free consultation