29th June 2018 12pm
So, this week, the grind higher continued.
The ASX200 initially pulled back alongside ongoing emerging market weakness, but yet again, through the latter part of the week, buyers stepped up again to take us back to last week’s 10-year plus high.
Is today the high point? Probably
But this is as far as it goes team. In fact, today might well prove to be the high point of the year for Australian shares.
Much of the buying again this week was driven by those chasing a supposed safe-haven, as other equity indices around the region continued to fall. Further helping the local market is the ridiculous support often given at this time of year as local superannuation funds prop up their holdings into financial year end to effectively ‘pretty up’ their returns.
Global economic growth forecasts shifting lower
The main story for markets continues to be the re-pricing of future economic growth, with China leading emerging market equity performance significantly lower. For context, Chinese mainland shares are down -10% in June and off about -25% from their January highs. The wider emerging market index, which includes countries such as Brazil, Korea, Taiwan is down around -8% for the month, and on the whole, this index has underperformed the U.S S&P500 benchmark by over -16% since early April.
The Chinese market has been rattled by contracting liquidity (also a global phenomenon), and the escalating trade war rhetoric. China’s currency, the RMB, has devalued by over -5% since early April leading to renewed fear of another run of funds from the mainland and a resultant popping of the debt bubble there.
Again, that’s a worst-case scenario naturally, but to deny the sell-off is a genuine re-setting of market expectations for 2019 economic growth would be naïve.
Chinese shares have broken a 4+ year uptrend and the global Emerging Market share index (of which China is a major part) has broken a 2+ year bull-market trend too. Other proxies for global growth such as copper (down -10% this month), US government bonds (rallying) and key cyclical indices such as the European auto-manufacturers are all pointing to genuine fears insofar as the impact of a trade war on growth.
As the cracks begin to emerge in the various ‘growth proxies’ I follow, so too are cracks emerging in the nearest asset class to equities, which is corporate debt.
European and US corporate debt spreads from high yield issues through to investment grade all pushed to a 2-year high this week, indicating investors require higher promised returns to compensate for rising risks. As the closest asset class to equity, this move will continue to restrain equity markets at best, or bring about outright downward pressure at worst.
All of the above are happening as we speak, been happening for months and are totally relevant for investor portfolios.
Though the market, and some stocks within that that we have advocated selling, continues to grind a little higher, the air is getting thinner and we feel entirely comfortable with our conservative portfolio set up.
Local liquidity is drying up
A domestic side-note to highlight today too was the release of May Australian Private Credit growth which rose at +4.8%, or the slowest rate in 4 years.
The rate of growth in credit provision to the economy is only going to slow further in the coming year as the full effects of the banking Royal Commission are felt, and yet total money supply growth in Australia over the 12 months to May is already at its lowest level since the recession of 1992 (+2.5%).
Think that over guys. The lowest rate of money supply growth since the 1990’s recession.
If you want to parlay that statistic into the real-world, it means that the provision of debt, which has fueled our economy for much of the last decade is now being turned off.
This is going on everywhere around the world. I have talked about the US Federal Reserve balance sheet tightening, and the end of the European Central Bank’s bond market buying due late this year, but the issue is a global phenomenon and it is happening in Australia, China, Japan and the United Kingdom as well.
I am more than happy for us to be a little early with our creeping conservatism, because the asphyxiation of global liquidity continues apace.
Stay the course.
Some good news for income generation
I get accused, often rightly, of being a glass half-empty guy, and the spiel above is all a little more downbeat for listed equity assets than we have seen in recent months, but perhaps some good news for everyone seeking an uplift in lower-risk portfolio income is looming on the horizon.
There is the potential for two new ASX-listed investment trusts before year end, with each dedicated to the provision of alternative finance to Australian real estate borrowers. The Latrobe Financial 12-month term account is paying out +5.7% currently, and an attractive form of regular income, as is the MCP Master Income Trust (MXT) which is paying out just under 5%, but slowly ramping up to numbers that should approach an annualized return nearer 6% in the months to come.
My understanding of these potentially new issues are that they could provide annualized income returns in the order of 8-12% through commercial mortgage lending operations, but that the deals are unlikely before Q4.
Even still, a few months is not long to have to wait, and this is another step towards levelling the playing field between sophisticated investors and their retail counterparts, with the former having had access to these types of funds for decades.
More good news – Woodside (WPL), Oil Search (OSH) and Afterpay (APT)
WPL and OSH surged to 3 and 4-year highs respectively this week on news that the US had demanded all countries halt their purchases of Iranian crude by November 4th or risk being shut out of the US economy. The move is a big one given Iran is the 5th biggest supplier of oil globally, but it is hard to know just how much production will be impacted given China is the #1 buyer of Iranian crude, and unlikely to kowtow to US demands here.
Either way, we are thrilled with the move and glad we had the patience to hold WPL in particular through its share price weakness last year. If anything, WPL is now looking a fuller and fairer value at $36, and you would be forgiven for lightening holdings a touch at current prices.
Whilst we have retained positions in both WPL and OSH, we have taken the chance to sell down a part of our holdings in the PRIME Australian Equity Separately Managed Accounts (SMA’s) around current levels. That said, our dominant position and preference is for OSH of the two.
On APT, we were also thrilled to see Goldman Sachs upgrade the stock to a BUY again on Friday, citing extensive research into the opportunity for growth in the United States. Whilst there is no doubt the potential is huge, the journey to achieving that growth won’t happen overnight, and so we have actually used todays +10% price jump to again trim a little part of our holding for a +55% gain in the past 3 months.
For the record, we still love the stock and think it has all the hallmarks of a doubler, it just might be better suited to buy the stock again after its July trading update.
Lastly, all the bank dividends (excluding Commonwealth Bank) and the Pendal (PDL) dividend are paid into accounts next week.
For now, that’s it. Have a great weekend.
Jono & Guy
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|S&P / ASX 200||6215||-17||-0.3%|
|Property Trust Index||1412||-28||-1.9%|
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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.