Australian Market Summary (Issue 349) – 1 May 2015

I hope you all get through this quick summary this week as I feel there is a lot to avail you of.

In fact, who am I kidding? I hope you get to the end of this note EVERY WEEK as I feel it’s my one chance to download some context and perspective on markets to each of you in a simple, digestible fashion.

This week I want to cover:

a) Bond yields & market weakness

b) Next week’s bank earnings results & the RBA Meeting

c) Australian shares in a global context

d) RBA Governor’s comments on investment returns

e) Greece update, China monetary easing, US reporting season & the FOMC Meeting

f) Australian share news – Seven West Media (SWM), Origin (ORG), Banks, USD-earners

At the time of writing this Friday morning, the ASX200 is down 2.4% on the week, and fell 1.7% over the month of April.

That doesn’t seem so bad, but it seemed to feel a lot worse this week and this month for the simple fact that a lot of the positions and trades we, our clients, and the broader ‘investment community’ had in place, seemed to go awry in April.

Our flagship PRIME Australian Equity Growth portfolio had its worst month of relative performance since I joined PRIME, lagging the ASX200 Accumulation index by 1.78%. We are disappointed by this outcome, but reconciled to the fact that often there are periods when market trends take a hiatus.

Moreover, when the going gets tough, the tough get going. The falling performance in April for our core views only makes us doubly determined to recoup this and to again put in place a strong period of performance.

On the positive front, our PRIME Australian Equity Growth portfolio was the BEST PERFORMING LARGE-CAP AUSTRALIAN EQUITY PORTFOLIO for the 12-months to March 2015 out of over 130 accounts/funds we track. The fund rose 27.44%.

We are extremely pleased by this and would encourage those of you willing to relinquish the reins of day-to-day portfolio management to us, to please touch base with your advisor as to how this service works and how portfolios are constructed.

So why were things bad this week, you ask?

Well, some reasons were local and some reasons were global.

At the core of the weakness this week was the sell-off in global bond markets. There was really no one obvious catalyst for the sell-off in bond markets, other than that perhaps yields had gone so low that they had to de-pressurise to some extent.

Europe was the epicentre of the bond selling. German 10-year bund yields fell from only 0.06% (yes, that’s correct) to 0.36%. US treasuries also sold off and 10-year yields are now north of 2% from their low of 1.64% in February.

Australian 10-year yields also rose to 2.65%, a full 0.40% above their lows earlier in April.

The selling in bonds matters for equities since without such low bond yields, the case for equity valuations would be a lot less sound. Let’s not forget, equity valuations are at such lofty absolute levels because of their ‘relative’ attraction to such low bond yields.

Moreover, since Australia is such a ‘yield’ focused market, when interest rates rise (or fall), we are arguably more levered to it than other countries.

So with bonds rising, Australian bank shares, Telstra, and the property sector all copped a beating. This is why it felt so bad for portfolios I guess – banks are over 30% of the ASX200 index and Telstra another 5%.

Banks fell 3.3% on the week as at the time of writing, and when banks ‘sneeze’, the majority of Australian portfolios catch a cold. It’s for this reason that we have spent more time than I care to remember, warning that portfolios don’t become overly reliant on the banking sector for returns.

There is nothing wrong with the banks, but if push comes to shove, there is no doubt the momentum in their share prices is on the wane. The dividend income is sound and carries significant merit, but to rely predominantly on this sector for capital gains at the expense of other ideas would be folly.

Next week we get the Westpac (WBC), National Australia Bank (NAB) and ANZ half-yearly profit results. These results will be of some significance since all eyes have turned towards the sectors ability to achieve profit growth in the face of increased competition and rising regulatory and capital costs.

We think the figures will show a continuation of recent trends – modest margin attrition, slow business lending & negligible credit loss (but would be interesting to see any one-off losses in the mining & engineering sectors).

In the context of the ASX, the banks have actually underperformed the next biggest sector, the miners, by over 10% in the space of a fortnight.

That’s a huge move, born of sentiment swings in both sectors.

As above, the banks have taken a knock due to rising bond yields and a heightened sense of investor awareness relating to increased capital requirements. The miners have bounced courtesy of a sharp and recent jump in iron-ore prices, an observation we alluded to a few weeks ago, but one which we were reluctant to trade on since we felt it didn’t represent a change in the long-term trend.

We still feel this way inclined.

Next week we have the RBA’s monthly meeting and the Tuesday after that the Federal Budget. It is a big fortnight for Australia’s economy unquestionably.

I have said in recent weeks that I felt a little piqued that the RBA chose to hold off on last month’s rate cut as I felt they might be walking a fine line in the message they were hoping to send the economy. I still feel that way, and do fear that the opportunity to light a spark in our economy is increasingly being facilitated by a wet match.

At risk of sounding like the boy who cried wolf, we WILL get a rate cut next Tuesday. If we don’t, then frankly we will likely revisit a few assumptions we have set our plans for 2015 for – and not for the better.

I was joking internally this week that it felt like it was actually dawning on the majority that Australia’s market and economy was indeed a very narrow one. The analogy I used was that it was like that seminal moment when you realized your children had gotten better at something you had prided yourself on. That realization of the past when ‘you were good’, and the dawning of acceptance that that time had indeed passed.

I feel in many respects, a lot of us are coming to the conclusion that in order to ensure our investments prosper, we must surely seek out themes and opportunities beyond our increasingly concentrated economy.

PRIME has significant internal experience to help clients on this journey and will be more than willing to walk side by side with you on this in terms of education and rationalisation of some new thoughts and ideas.

On one final theme this week, I couldn’t help but reference an extremely poignant remark made by the RBA Governor Glenn Stevens in reference to falling investment returns.

It is both obvious and prescient at the same time, but Mr Stevens was keen to address the point that with low interest rates, investors should duly begin to accept the idea of lower investment returns in the medium term. The ASX200 is up 4 years in a row, but this won’t go on forever. At the heart of investment returns is the cost of capital, and ultimately this will be reflected.

Mr Stevens said: ‘just about everywhere in the world, the price of buying a given annual flow of future income has gone up a lot. Those seeking to make that purchase now – that is, those that are on the brink of leaving the workforce – are in a much worse position than those who made it a decade ago. They have to accept a lot more risk to generate the expected flow of future income they want’.


On the markets this week the main movers, as above, were to the downside. Banks and ‘foreign earners’ like Brambles (BXB), Ansell (ANN), Computershare (CPU), RESMED (RMD) James Hardie (JHX) all came asunder. The rise in the AUD through 80c was the catalyst for the selling in Australia’s internationally exposed names. Again, the rising AUD, alongside rising bond yields, the rebound in commodity prices etc. are all connected to what was a frustrating reversion of previously prevailing trends and themes.

We believe this is short term, and that the longer term trend for a lower AUD remains in place, meaning the opportunity to buy the likes of CPU, RMD and CWN is a good one.

Seven West Media (SWM) announced a much-needed rights issue this week that will put the company in an infinitely sounder balance sheet position. I think the deal will be well supported, and will surely be the first of several capital raisings in the media sector.

The oil sector too is surely likely to witness some substantial raisings. Origin (ORG) and SANTOS (STO) must be thinking long and hard about restoring some stability to their balance sheets, and raising equity. I would be if I was them. I would think an equity raising in both stocks is nigh on a certainty and the key reason why I would avoid both stocks here.

I’ll leave it at that for now. Check the international commentary for a wrap up on the many comings and goings overseas this week.

I say this every other week, but again I would urge you all to reach out for a chat at any point. That’s what we are here for.

Have a great weekend.

Key Dates: Australian Companies

Mon 4th May 
Earnings: WESTPAC
Tue 5th May 
Earnings: ANZ, Next Greek IMF interest payment
Wed 6th May 
Thu 7th May 
Fri 8th May


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