Australian Market Summary | 11 May 2018

We spoke last week of the surprising outperformance of Australian equities relative to the rest of the world in early May, and our expectation that it would unwind soon enough, and this week the market duly obliged.

Australian shares in constant currency terms gave back all of the +4% outperformance it enjoyed last week, and the long-running trend of underperformance resumed.

Australia’s Share-market Underperformance to ACCELERATE

In fact, I actually think the pace of Australia’s underperformance is set to accelerate for the remainder of the year, and if you aren’t already adequately exposed to international shares right now, you need to make adjustments or risk missing out.

To be really clear, in the 12 months to the end of April, our international equity model rose by about 13%, bettering our Australian equity model which rose by about 8% which in turn beat the ASX200 Accumulation index gain of 6%.

And I am telling you straight up, that I think this underperformance is going to accelerate in the year ahead, and it doesn’t matter that the economy is improving and the Federal Government have done a terrific job in their economic management.

The reason is simple, and I have rabbited on about it for well over 3 years now - Australian share-markets remain dominated by expensive, old-world, ‘old-business model’ businesses such as the banks, the outlooks of which are entirely dicey in the wake of ongoing credit rationing and an inflated housing market.

Australia’s money supply growth has already contracted to ‘recession’ type levels (true), growing at +3.7% in the year to the end of March – the lowest rate (excluding the GFC) since the recession of 1992 – and this is BEFORE the impact of tighter lending standards emerge post the Royal Commission.

In March, Australian home lending volumes fell by -4.3% YoY, owner occupier volumes fell by -3.5% annually and the value of investment loans made dropped to a 2-year low. This trend will continue through the balance of 2018, sucking the oxygen from Australian eastern seaboard home prices

I’m not being alarmist, it’s happening already and it will continue into the main Spring selling season.

The big 4 banks are still 22-23% of the ASX200, but even beyond that there isn’t a huge amount to get excited by elsewhere in the top-20 Aussie shares. In fact, because of the banking sector woes, investors have bid up the likes of CSL (CSL) and Cochlear (COH) to their highest forward valuations, Woolworths (WOW) back to their highest multiple in over a decade, and small-caps too are now back to just short of a peak valuation at around 20x.

Australian banks will continue lower in the coming year, and the broader market, precisely on account of the banks problems, is increasingly looking a little peaky. Gravity will prevent the ASX200 from going much higher.

Meanwhile offshore (particularly in the US and China) growth is strong and big businesses there continue to innovate in a way that is driving incredibly strong earnings growth.

Even with my wider concerns on the global tightening in liquidity, and our avowed conservative portfolio weightings at present, I feel very strongly that foreign share-markets and the funds invested in them, will significantly outperform Australian share portfolios in the coming year, and that the degree of outperformance will only escalate in the year ahead.

I would encourage you to look into the international equity exposures that we have long advocated for.

As a recap for you, our recommended Balanced portfolio would be conservatively positioned with 70% only in growth assets (equity and property), and of that 70% only about 26% in Australian shares – less than our allocation to international shares.

That number might surprise a lot of you, but it’s the right call and will continue to be the right call in the coming year.

Remember, we want a total portfolio return, and you can spend your capital gains just as willingly as you do your dividends.

Please talk to your advisor further on this.

Federal Budget – good vibes

I won’t repeat myself too much here, other than to say the Government have done an exceptional job on the economy in the last 18 months. The infrastructure boom has been and will continue to be a tremendous jobs success, and this has flooded government coffers with more tax on which to reduce debt and taxes in the years ahead.

Hats off to them on this front. The domestic economy is kicking into gear very well, jobs growth is excellent, corporate profitability is sound, and these factors are an excellent foil for the softening housing market currently underway.

Market Remarks – oil ripping higher, AMCOR CEO buying stock, more bank results and Afterpay (APT) management meeting

Confirmation that the US were pulling out of the Iran nuclear deal saw oil scoot to a 4-year high, lighting the blue touch paper under Aussie oil shares. Oil Search (OSH) is now pushing $8.50 and Origin Energy (ORG) too is at $10, meaning we will have to make some hard decisions on the latter soon enough.

The AMC CEO purchased 25,000 shares this week in the low $13’s, spending over $320,000 in the process and giving some confidence to investors that the stock was approaching good value. I happen to agree, and think we will be looking to add to AMC positions too near $13, particularly with our expectation for a weaker AUD.

The results out of Westpac (WBC) and Commonwealth bank (CBA) were mixed. CBA’s results were burdened by compliance costs associated with their many recent missteps, and underlying revenue growth at both WBC and CBA remains flat at best.

Each of ANZ, Macquarie (MQG), WBC and NAB will go ex-dividend next week, and I would think this kicks off a further fall lower as retail investors look to sell more banks having pocketed their franking credits.

Lastly on APT. We met with senior management this week, and feel really good about the stock and our recommendation. This company is a genuinely compelling growth prospect, having emerged in the space of 3 years to fund over 20% of all Australian online fashion retail sales. The next moves are likely to come in the United States, where the company have partnered up with renowned venture capital firm Matrix Partners on a rollout strategy, on which we will learn more in the coming 3 weeks.

I would really suggest all to take a look. We have a 3% weighting in our Australian equity model portfolio.

Thanks for reading.

Friday 10am values

 

 

Index

Change

%

All Ordinaries

6216

+29

+0.5%

S&P / ASX 200

6119

+21

+0.3%

Property Trust Index

1384

-

-

Utilities Index

7816

-95

-1.2%

Financials Index

6209

-33

-0.5%

Materials Index

12253

+220

+1.8%

Energy Index

11555

+281

+2.5%

 

Thursday Closing Values

 

 

Index

Change

%

U.S. S&P 500

2723

+93

+3.5%

London’s FTSE

7701

+198

+2.6%

Japan’s Nikkei

22497

+24

+0.1%

Hang Seng

30809

+496

+1.6%

China’s Shanghai

3174

+73

+2.4%

 

Key Dates: Australian Companies

 

Mon 14th May

Div Ex-Date – ANZ (ANZ), Macquarie Bank (MQG)

Tue 15th May

Div Ex Date – National Australia Bank (NAB)

Wed 16th May

N/A

Thu 17th May

Div Ex-Date – Westpac (WBC)

Fri 18th May

N/A

 

For more information on the above please contact your Partners Wealth Group advisor directly or on 1800 333 143.

This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.