From Jonathan Bayes, consultant Chief Investment Officer, Partners Wealth Group.
A flattish week, but impressive all the same. I say impressive, because good markets rotate well, and this market continues to do just that, allowing the laggards to play catch up.
Rotation of this kind indicates a willingness for investors to keep their money in the wider market, and not just sell their winners for cash.
Telstra (TLS) a beneficiary of investor rotation
The prime example of rotation this week was Telstra (TLS), which is up +8% this week after Macquarie analysts chose to upgrade the stock to BUY.
We wrote last week that TLS was trading on near-enough to 10x core cash earnings and with a sustainable 6.5% dividend yield, meaning that inevitably it would finally see a bounce.
Turns out we finally got it right, having persisted for some time with what has undeniably been a portfolio disappointment this year.
I think TLS is very capable of reaching the high $3 range, or even $4.00 before we might finally look to trim some holdings down.
Touch wood the bounce continues to run.
Investors also buying banks
The banks also saw some reasonable buying
which was unsurprising given their collective underperformance year-to-date.
The Royal Commission isn’t helpful, but nor is it particularly concerning in the very short-term for bank investors, and with much of the broader market looking rather full, the big-4 banks are probably due for some share price respite.
China starting to slow – relevant for Australia and for miners
Chinese and Asian equity markets had a pretty rocky week, falling several percent. It seems investors are beginning to acknowledge the impact of tighter policy on the economy and on investment markets.
Last week I wrote of the slowdown seen in residential property markets in recent months after the central Government introduced stricter terms on both residential property purchases and lending abilities of the banks.
Sale proceeds of residential property to the end of October are now down -3.5% year-on-year (YOY). And market research firm Nielsen confirms this: they report interest in buying property had fallen to an 18-month low.
Alongside property curbs, the Chinese government have sought to introduce new regulations on ‘wealth management products’ (WMP’s) which have been both a substantial provider of liquidity to the economy and a vehicle for high-return savings for the public.
Issuance of WMP’s in China exploded in the past decade, with banks offering rates of return well in excess of the domestic cash rate by investing (in some cases) in higher risk and often questionable investments.
Many assets held in these WMP’s have not made the returns promised by their issuers (in most cases banks and other financial institutions), but investors still perceive these returns to be ‘guaranteed’ since the banks would not want to lose reputational risk by disappointing holders.
The government is trying to break this common perception that the products are in-fact ‘guaranteed’, and by tightening up regulations is both aiming to improve the quality of future WMP’s, but also forcing some pain/losses on the economy in the near term so as to avoid an even bigger blow-up in the future.
Either way, this is yet another tightening of liquidity.
Ultimately Australia will feel the impact from slowing Chinese demand since 40% of our exports end up in China (half of which is iron ore).
Iron ore prices collapsed -10% this week, so maybe the tide here is finally turning.
Australian Dollar back at 75c
The AUD is at its lowest level since June, and seems destined for lower levels still.
A falling AUD will ultimately be a great thing for our economy, but we still have a ways to fall.
Our recommended exposures to international managed funds have paid dividends this year, and will benefit even more from the currency fall, but we would particularly direct you to Australian shares such as AMCOR (AMC) and SEEK (SEK) as big-cap equity bets we like with AUD exposure.
In truth, the weaker AUD is more likely in time to be better for domestic Australian industrials since it would underpin a resurgence in domestic volume, and we have exposure to Aurizon (AZJ) in this regard, but we do have an eye on several new portfolio additions in the future, depending of course on price.
Australian Economic Momentum improving
The run of better-than-expected economic data continued this week with retail sales and service sector activity both showing some stronger figures.
When you add this to the bounce back in construction and the steady improvement in employment growth, I have to say, there is absolutely tangible evidence that our economy is turning for the better.
The household debt issue remains the sword of Damocles for achieving Australia’s long-term economic potential, but in the here and now, I am more optimistic than I have been in a year.
Should we finally get the AUD into the low 70’s I would happily hit the new year with a sense of optimism locally that I haven’t had in some time.
Defensive Assets – more opportunity knocking, which means Hybrids may have reached a peak
The La Trobe Australian Credit Fund -12-month term account has been an interesting fund that is worth a look with a more than decent return for what we deem to be rather low risk investment in Australian first-mortgages.
In adding the La Trobe fund, and indeed in considering the increasing number of new funds being made available to retail investors in the fixed income space (Metrics as an example), it makes me begin to think that this wider choice will ultimately lead investors to having less reliance on Australian bank hybrids.
Returns on hybrids have tightened right in alongside the rising equity market, and now new investors would be lucky to receive a 5.5% post-tax return on a major bank hybrid, which increasingly compares less favourably to 5.7% on a mortgage fund such as La Trobe, or even 5% on a corporate lending fund such as Metrics (MXT).
I am not saying hybrids are in for a tough time by any stretch, but I do think we are hitting a turning point in the hybrid market and that banks will be forced to reward investors with higher rates of return in the year or so to come, since those investors are increasingly able to invest in an increasingly wider selection of fixed income products.
That’s it! Good luck with the Christmas shopping.
Thursday Closing Values
|S&P / ASX 200||5978||+8||+0.1%|
|Property Trust Index||1427||+4||+0.3%|
Thursday Closing Values
|U.S. S&P 500||2637||-11||-0.4%|
For more information on the above please contact your Partners Wealth Group advisor directly or on 1800 333 143.