The last couple of weeks I have been shorter in my commentary than I would have liked, so this week, with the benefit of more time, I figured I would offer up a little more detail on portfolios and the current investment climate.
The wider investment climate – tightening liquidity still a concern
As we have discussed of late, all major global share-markets bar the NASDAQ (only +1%) and Brazil’s BOVESPA (+14%) are DOWN on the year. China is DOWN -20%, Hong Kong -13%, Germany -14%, Italy -15%, the UK -10% and in Australia equities are -6% before dividends.
In Australia, small and mid-caps have been hardest hit, DOWN -8%, with blue-chips marginally outperforming and DOWN around -5%.
The catalyst for this pullback continues to be global liquidity, which, after a decade of abundance, is now being rationed at an ever-increasing rate by monetary authorities in the United States, Japan, China and Australia.
Australian money-supply growth is a paltry 2% and as low as its been in 30 years. This is a function of tighter bank lending on housing, something we all know about.
In the United States, we have spoken often about the shift to Quantitative Tightening (QT) and this has led U.S money supply growth to an 8-year low of only +3.7%.
Chinese money supply growth is still a reasonable +8% annualized, but half its average rate over the past decade and the lowest annual figure since modern records have been kept, which is 22 years.
When you slow the rate of money supply growth and the world is awash with debt, unsurprisingly, interest rates start to rise, and this is precisely what we are seeing.
It feels to me that the U.S bull-market is waning, if not ending, but equally that doesn’t mean we instantly shift to a bear market.
Cautious yes, outright bearish? Not just yet.
It’s not only black and white as I keep reminding everyone.
U.S economic conditions remain at 20-year highs, wage growth is creeping higher, and though we have reservations over rising protectionism and corporate profit margins, the U.S economy remains ‘red hot’.
Closer to home, the ASX200 has been in a 5-year sideways range from 5000 to 6000 (broadly), so whilst we have fallen -10% or so from the highs, we are really only back in the middle of a range in which we have been stuck since 2013.
So, whilst quite rightly we should be cautious on the outlook, its fortunate we have been.
But equally too, it’s not all doom and gloom and indeed there are some good income-generating opportunities available by way of fund managers at Latrobe, Metrics Credit Partners, Ardea (a new one) and Qualitas (this fund lists next week).
There are also some good stocks around, many of which look great value right now.
Challenger (CGF) this week has come back to terrific long-term value, but again, the likes of Afterpay (APT), Nufarm (NUF), AMCOR (AMC), Downer (DOW), IOOF (IFL), BWX (BWX) and SEEK (SEK) all provide terrific medium-term growth potential.
It’s quite possible indeed that share-markets bounce +5-7% over the summer, unwinding some of the recent losses.
A surprise détente between China and the United States at next Friday’s G20 meeting in Argentina could help, as could further stimulatory efforts in China.
I’d give this as good a chance of happening as not, and that is reflected in our Australian Equity Separately Managed Account (SMA) which is now as fully invested as it has been over the last 5 years.
Some stock updates
Healthscope (HSO) – call it unfortunate timing, but the resignation of the CEO at HSO’s newly opened Northern Beaches Hospital in Sydney is only that and shouldn’t de-rail likely takeover activity for the group.
The company and hospital have received much negative media attention this week deservedly, due to issues relating to staff and service at the newly launched hospital on Sydney’s northern beaches, but we shouldn’t expect to see a Private Equity buyer walk away on account of such short-term and to-be-expected teething problems.
We retain the view that investors will be able to exit in the coming months in the $2.40-2.50 range on delivery of a firm takeover bid by year end.
QUBE (QUB) – we haven’t spoken about this one in some time, but investors will be pleased to see it has outperformed the wider ASX200 by over 20% in the last 6 months.
The company confirmed guidance for ‘broadly similar’ profitability in 2019 at its AGM this week, and we should expect to see some more optimistic tenant news-flow for Moorebank in the coming months.
Afterpay (APT) – forget what you read in the papers about APT being the catalyst for Australia’s sky-rocketing household debt, it’s all utter nonsense.
There is something ironic about APT’s core client cohort (millennials, or people born in or around the turn of the century) being hugely distrusting of personal debt, and yet the policy-makers, media and ‘older folk’ claiming that the APT service is a path to escalating personal indebtedness.
It just comes down to ignorance.
We remain hugely optimistic of APT’s potential growth and see the stock as a standout BUY around $11.
The company holds its Annual General Meeting next Tuesday and should serve as an opportunity for the group to talk more of their ongoing success, both locally and internationally.
Woolworths (WOW) – had another good week and is now up through $29, buoyed by its recent asset sales (petrol and convenience store) and the prospect of a large capital return (off-market buyback to utilize franking credits seems a shoe-in).
That’s all well and good, but when you have BWX on 11x, NUF on 11x, AMC on 13x, IFL on 10x, DOW on 11x and CGF on 13x next year earnings forecasts, remind me why you would own WOW for the longer-term on 20x?
It makes no sense.
Medibank (MPL) – had a rough week this week falling -11% after it was confirmed that the group lost out on a bid to renew its contract with the Australian Defense Force.
The contract contributed roughly 5% to group earnings but coupled with creeping concerns in relation to a change in government, and a potential cap on health insurance premium rises, the stock has fallen twice that.
Like other stocks exposed to a change in Federal Government, it feels likely that MPL will continue to trade with a softer tone to it in the months to come as valuation even at $2.50 looks only mixed.
Enjoy your weekend.
Jono, Guy and Jordan
Interest Rate Commentary & Update
For full interest rate commentary and updates please click here
Term Deposit Rates
For to view the latest term deposit rates click here
Australian Market Index
Thursday 5pm Values
|S&P / ASX 200||5691||-45||-0.8%|
|Property Trust Index||1393||+9||+0.6%|
Key Dates: Australian Companies
|Mon 26th November||N/A|
|Tue 27th November||N/A|
|Wed 28th November||N/A|
|Thu 29th November||Div Ex-Date – AGLHA, NABPB, WBCPD|
|Fri 30th November||N/A|
International Market Index
Thursday Closing Values
|U.S. S&P 500||2650||-80||-2.9%|
Financial Services Guide
Please click here to download the most recent version of our Financial Services Guide.
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.