Weekly Market Update (Issue 522) – 26th October 2018

Ok.

Things got a little serious this week.

At least that’s the sense I get from talking to the advisors and to investors.

So, in the interests of being serious, I am going to do something I rarely do, and I am going to implore you, PRIME’s  clients, to all have a conversation with your PRIME advisor and ask them what you need to know about PRIME’s Separately Managed Account (SMA) offering.

We talk about the SMA platform regularly in these posts, but I have never chosen to rattle your cage on it and insist you consider it until now.

And I do so today because you really should consider the difference in outcomes you will get by handing over the day-to-day management to us, PRIME’s investment committee, because this is precisely what we do each day.

Why you must consider Prime’s Separately Managed Account (SMA) offering

Now I know that when you write something as overt and opinionated as this, I am a going to cop some commentary. But I am doing it for a reason.

I also know there will be some of you that no matter how you hard you look at it, it just won’t be right for you.

But I expect that to be the minority.

Even if you choose not to take it up, please at least have the conversation.

Firstly, I can say hand on heart, that precious few of you will end up paying more to PRIME for this service. This is not a premium priced product, it is simply a manner in which we run the money on your behalf based upon your personal situation and financial needs and aspirations.

Because the SMA platform is administered by Macquarie Bank, there is indeed an administration fee, but that is the only difference.

The SMA platform attracts no brokerage.

But these incidental costs, in my humble opinion, are not the main consideration, because simply put, we think we will do a better job of running the portfolio for you without having to discuss with you every new recommendation and its nuance.

We run the funds dispassionately, without overt bias and we are desperately trying to do so in a manner that optimizes the returns for risk taken.

You might ask how this differs from how your portfolios are managed under our client instructed method, in which we contact you on each recommendation, and you would be right to ask this question.

In principle, there shouldn’t be a difference, but in reality there almost always is, and that’s because more often than not life gets in the way of pure fund management.

Often clients are away and not picking up the phone, or they call back a few days later, or they have a bias against a particular stock or company, or they might choose to give greater or lesser weight to a recommendation than they and their advisor should.

I call this ‘advice dilution’, and it happens every day because of a person’s schedule, biases, hang-ups, preferences or whatever else.

When we run the money with discretion, we remove the potential for advice dilution.

It doesn’t mean we don’t make mistakes, we do, but on the whole, when combined together in a comprehensive and closely observed asset allocation framework, we almost always find our portfolios outcomes surpass those of the self-directed investor.

And the reason why I flag it today is simple.

With the ASX200 now at a 2-year low and down -7% on the year, investment returns are getting tougher, and we think we are better placed to navigate these trickier times on your behalf than you might be in needing to approve of all our individual investment suggestions.

This isn’t a sales pitch, nor is it a cocky statement, it is simply a commentary urging you to ask your advisor about how it works and what it might mean for you.

Heck, our Australian equity portfolio has actually marginally underperformed the ASX200 in October despite our best efforts, but our wider portfolio recommendations relating to EXCESS CASH and INTERNATIONAL EQUITY exposures have ensured that our portfolios ON THE WHOLE have managed to navigate the recent equity market sell-off in a fashion we remain comfortable with.

For the record however, our Australian Equity Separately Managed Account (SMA) has outperformed the ASX200 Accumulation index by +1.90% per annum over the past 5 years, delivering an annualized return of +10.10% to the end of September as compared to an +8.19% gain for the wider Australian market.

With things getting more serious, now is precisely the time to ask whether relinquishing portfolio control can be a good thing for you and your investments.

Now, what’s going on!

Now that I’m done with the lecture, where are we with markets?

You will all have seen yesterday’s note highlighting our belief that the ASX200 was within sight of its lows. The ASX200 is now at its lowest level since late 2016 and as the chart below demonstrates, the forward valuation of Australian shares is now at a 5-year low point (P/E 14.3x)

A picture tells a thousand words – chart below shows the ASX200 forward P/E reverting back to a 5-year low point of approximately 14.3x.

We think there is good buying to be had in several Australian shares, the names of which I outlined in yesterday’s note, but that doesn’t mean we are bullish on the market in general, it simply means that the market shakeout has provided some interesting opportunities for contrarian investors to take advantage of.

There remains reason for caution what with the Italian Budget situation, concerns on a peaking in US growth, waning Chinese economic momentum and local to Australia, long term issues around household debt and housing, and the uncertainty related to next year’s Federal Election.

But if you have cash on hand as we have long advocated for, then as the opportunities arise, you can deploy some of those funds on select opportunities.

This week in the midst of heavy selling across the board, we were blessed with the revised takeover bid for Healthscope (HSO) at $2.36. This time we think the deal is a serious one and stands a strong chance of going through.

With increased confidence in the HSO takeover, we were able to be more confident in the idea of buying some dips in other selected recommendations.

There are swings and roundabouts.

To confirm the thoughts we left in yesterday’s note, and the others written in the past 10 days – we remain of the view that share-markets have likely peaked, that U.S wage inflation is a real risk and that Australia’s economy is surely set to slow over the next 6 months.

This is precisely why we have been and continue to be over-weight of cash amongst several other portfolio nuances.

But, the ASX200 in particular is now back at a 5-year valuation low, and many companies now look excellent value. Housing is a problem, and household debt here will be a major drag on consumption for the next 12 months, but we also have a heavy infrastructure spending commitment from both sides of politics, and if Labor do happen to triumph next May you should expect to see the combined impact of wage growth and government spending lead to a more optimistic outlook for 2020.

In very small quantities locally, and perhaps in Asia too, this long suffering ‘Chicken Little’ is prepared to see the glass as half empty after this fall.

Jono, Guy and Jordan

PS Australian major banks all report next week and the week after. It won’t be great, and I can’t say we are fans, but it would take a lot to see these shares lower in the very near term.

 

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Australian Market Index

Thursday 5pm Values

 IndexChange%
All Ordinaries5760-290-4.8%
S&P / ASX 2005664-278-4.7%
Property Trust Index1377-13-0.9%
Utilities Index7298-277-3.7%
Financials Index5534-252-4.4%
Materials Index10977-609-5.3%
Energy Index10814-984-8.3%

 

Key Dates: Australian Companies

 

Mon 29th OctoberN/A
Tue 30th OctoberAGM – Vocus (VOC), Reliance (RWC)
Wed 31st OctoberResults – ANZ Bank (ANZ) 

AGM – BWX (BWX), Healthscope (HSO)

 

Thu 1st NovemberResults – National Australia Bank (NAB) 

AGM – Crown (CWN)

 

Fri 2nd NovemberN/A

 

International Market Index

Thursday Closing Values

 

 IndexChange%
U.S. S&P 5002706-63-2.3%
London’s FTSE7004-23-0.3%
Japan’s Nikkei21269-1389-6.1%
Hang Seng24994-461-1.8%
China’s Shanghai2604+118+4.7%


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