Australian Market Summary (Issue 360) – 17 July 2015


Well another Greek deal was fudged, and the markets took heart.

As those who have been reading these thoughts recently are well aware, I have had concerns that the Greek debt situation would unwind in an ugly manner.

The eleventh hour deal to salvage Greece’s continued spot in the Euro saw markets rally across the board, as once again the debt ‘can’ got kicked down the road.

There was an excellent description of the politics behind the Greek agreement this week by one of the world’s leading hedge fund managers, David Einhorn from Greenlight Capital.

The nub of the negotiations in his opinion is the idea that Greece should continue to pretend that the debt will be repaid, irrespective of the incredulity of the maths behind this assertion. In his opinion, the EU simply need the Greek’s to play along with the game, since it allows other much larger countries with equally troubling debt profiles to continue to play along.

Had the EU kowtowed to Greek demands (and more recently IMF suggestions) of debt relief, it would have given a green light to other populist parties across the Eurozone to campaign their way to power on the basis of debt relief. Obviously, a rash of debt forgiveness and debt writedowns would decimate the Eurozone financial system and global asset markets.

Hence, the importance of ensuring Greece continued to toe the party line.

In Einhorn’s remarks he made reference to a comment from the Bank of Japan Governor Haruhiko Kuroda who said:

“I trust many of you are familiar with the story of Peter Pan, in which it says ‘the moment you doubt whether you can fly, you cease forever to be able to do it’.

That this statement came from the Governor of the Japan is all the more interesting since Japan themselves carry nearly 150% net debt to GDP (note Greece themselves were 175% before the recent collapse, but with an infinitely smaller gross debt than Japan).

Confidence, even if artifice, is vital to the functioning of global finance.

I have to say, I still have enormous reservations over the ability to shoehorn this deal through the EU, the IMF and various national parliaments.

To my mind, it is still far from over.

For those of you fascinated (and arguably dismayed) by the whole political element to this crisis, you would note that social media has lit up along national sides.

Sadly the damage done to relations between the Greeks and their larger, northern neighbours will take generations to mend. Further, the fabric of relations within the broader EU seems set to fray all the more as the perceptions of ‘haves’ and ‘have nots’ emerge.

The acclaimed British historian Simon Schama was quoted as saying of the Greek situation that ‘the bitter fruit of this kind of subjection (in reference to forced austerity on the Greeks) is usually fascism’.

I’ll leave you with that sobering thought. Students of Early 20th century European history can see the parallels between now and then.

Anyways, enough about Greece for now.


Like most equity markets this week, there was a relief rally in Australian shares after resolution to the Greek negotiations. The ASX200 rose just over 3% like most global indices.

I still feel a little non-plussed by Australian shares right now simply because I can’t see much prospect for earnings growth.

This is a problem since the whole reason we take the risk of owning equities as an asset class is for the reward of a growing return.

Mining shares, Telstra, the banks and the grocers all have minimal prospect of earnings growth this year ahead – the miners are going backwards at a rate of knots.

Without earnings growth or further falls in interest rates, it is difficult to see share price upside in many names.

Telstra (TLS).

To that end we have to say, we are getting increasingly twitchy about the valuation of one of our favourite names, Telstra (TLS). TLS has been a stalwart for us and for our portfolios for several years now, but without earnings growth (beyond the NBN cash payments) it is hard to envisage TLS trading much above the high $6 range.

The dividend yield on TLS, much like Commonwealth Bank (CBA), is now under 5% fully-franked, and more importantly its earnings multiple is now well over 17x. For a dull utility business, this is hardly cheap.

Whilst we aren’t rushing to jettison TLS, it is important you hear our emerging thoughts and reservations.

Watch this space.

The hardest thing for us right now is identifying those shares that offer some sense of value and quality to replace potential sales of stocks like Telstra or AGL Energy (AGL) as they become more fully-priced.


The pool of opportunity is actually very shallow locally, and speaks to the need for client portfolios to continue to consider increased exposure to offshore equity markets like the US and Asia.


I thought it appropriate to quickly make a point on IFL after the rugged time the company and share price have had in the wake of reports surrounding its poor compliance culture.

To be clear, the reports are disappointing and a black mark on an otherwise exemplary track record of senior management within IFL.

However, we feel very strongly that the fallout on the business will be minimal and that the 20% fall in IFL’s share price back to levels where we first recommended it is great buying.

IFL trades 13x and offers a genuine 7% dividend yield. Whilst many of you own the share, for those with room to add to positions, we would very happily encourage you to do so.


Of concern to me this past month has been the sharp deterioration again in domestic consumer confidence.

As the chart below shows, the deterioration has been quick and sharp, and would be of concern to the RBA and in fact to the government after the initially positive response to the Budget handouts in May.


This ongoing sogginess in demand means we find it difficult to have any confidence in pursuing opportunities in the domestic industrial and consumer space, for fear of continued earnings deterioration.


With markets better across the board, there were many highlights. Perhaps most notable was the snap-back in the likes of G8 Education (GEM), Greencross (GXL) & Slater & Gordon (SGH), all of which rose over 10%. These former market darlings have de-rated significantly in 2015, and are now back at more sustainable valuation levels.

On the downside, Primary Healthcare (PRY) fell 6% after it reduced market earnings expectations.

Key Dates: Australian Companies

Mon 20th July

Tue 21st July
Wed 22nd July
Thu 23th July
Quarterly Report: Newcrest (NCM)
Fri 24th July

If you would like to discuss any matters with me:


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