From Jonathan Bayes, Chief Investment Officer, Partners Wealth Group.
Global share-markets are racing out the gate in January, but lagging at the back of the pack is the ASX200.
No amount of optimism in US, European and Asian share-markets could get Aussie shares higher this week, and the ASX200 now sits as the worst performing major index in January, down -1% and significantly worse than the +5-7% gains in Asia and the U.S, and +3% rise in Europe.
We will again highlight our expectation that Australian shares will lag their foreign peer group in 2018 in our outlook piece provided in this month’s Monthly Perspective.
Again, it’s a function of the composition of our market, with incumbent monopolist businesses such as banks, telecoms and retail all ripe for disruption and lacking in revenue growth.
All that being said, I have entered the year in positive spirits and I do think the ASX200 will push higher in the first 6 months of the year.
The Aussie economy really kicked into gear late in 2017, and we are likely to see some really quite optimistic forward statements from senior management over the course of reporting season in February.
I think we will see net earnings upgrades, with most exposure in those industries and sectors most exposed to the uptick. Oil and metals will see upgrades, but more interestingly we should see domestic industrials pointing to a rosier outlook.
We added Downer (DOW) and APN Outdoor (APO) to our model portfolio’s in the past week, and really like where they are headed in 2018. SEEK (SEK) is just a brilliant portfolio asset right now, and we would also highlight that we expect a strong 2018 from QUBE (QUB) on several fronts.
More local economic optimism
This week the Westpac Consumer Confidence survey boomed to a 4-year high.
This is notable since Australian households continue to labour under an extreme level of indebtedness (now 200% of income).
What was great about the confidence figures was that the rising optimism was right across the board, with Western Australian’s and Queenslander’s joining the fray, and ‘over-45’s’ also feeling better about the world, no doubt encouraged by the rise in their investment portfolios.
Employment is rising and I think wage growth is now set to turn – December employment this week was good. Despite the massive debt, consumers seem heartened by the improving income picture, and to my mind will be further encouraged by likely talk of tax cuts from the Federal Liberal party in 2018.
For now, the confidence genie is out of the bottle and I think it’s time to feel good about the local economy in 2018.
We’re not flying, but the glass is now half-full.
Notable this week – bonds, oil and AUD
Bond yields continued to ratchet higher, wary of the strength in global economic momentum.
Australian 10-year bond yields are up to a 6-month high at 2.85% this week (low of 1.85% mid-2016) and U.S 10-year yields more notably at 2.65% and a 4-year high.
The tide is turning on bonds and we think this will become more of an issue for equity markets later in 2018. Nearer term though, we are staying well clear of interest-rate sensitive sectors such as utilities.
Oil is now at a 3-year high, and in some small way having its own impact on higher bond yields (inflation).
Stronger demand from a racy global economy alongside supply discipline from major producers has contributed to drag US oil inventories down significantly, and back to their lowest since February 2015.
Oil prices should remain underpinned by strong demand in 2018, however it does feel inevitable that the longer prices trade in the $60-70/barrel range the more likely we will see a supply response from US shale producers, the vast majority of whom will be making very good money at these levels.
For this reason, though comfortable with oil for now, we think there will be opportunities to take profits in Origin (ORG) if it pushes up further.
The Australian Dollar jumped back through 80c again this week, buoyed by the strong local economic data. It continues to surprise us on the upside, though we really do feel hard-pressed to call it any higher here, particularly with the ever-escalating pile of iron ore building on Chinese ports.
Fund Management equities – BT Investment Management (BTT) & IOOF (IFL)
We have long favoured this particular sector, in large part because we are drawn to the long-term secular growth from mandated superannuation.
Our recent recommendation in BTT has gotten off to a flyer.
This week we had BTT report its December funds under management and it was fine without being outstanding. BTT suffered larger net outflows at both its BTIM Australian business (legacy Westpac outflows on low margin so not a major deal at all) and within JO Hambro (lost mandate).
Performance fees however came in on the higher side, negating the outflow.
IOOF (IFL) will release their funds under management numbers in the coming 10 days.
I flag this simply because we are keen to re-add IFL to portfolio’s in time and at the right price, since we feel very good about the coming few years of earnings momentum following IFL’s acquisition of the ANZ Wealth assets late last year for a shade under $1bn.
Keep this one on the radar.
Update on some recommended Managed Fund performance
We haven’t made explicit mention of some of the performance of some of our recommended managed funds in quite some time, but pleasingly can report on some excellent figures across a variety of asset classes in recent months.
The Platinum Asia (PLA0004AU) fund which comprises over 10% of our International Equity model portfolio has been a strong outperformer, benefiting from the stronger performance of Asian markets.
Our other international fund managers are also doing well with each of the Magellan and Antipodes funds all +9-12% in the past 6 months, and the Orbis fund doing even better, +16%.
Contango Global Growth (CQG) has been a problem ever since listing, and in large part down to the nature of the listing, not the performance of the underlying fund manager.
Managers to the CQG issue had hoped to raise well over $200m for the fund, which is being managed by high-quality fund managers WCM in Laguna Beach, CA, but instead raised under half that, leaving CQG to suffer from a liquidity discount from day 1.
This is disappointing and frustrating, but I would like to encourage all holders of the stock to persist since a) the underlying assets of the fund are worth $1.09 or more currently, plus the option value granted at IPO, and b) we are in constant discussions with the fund manager as to our views over how best to narrow this current discount and achieve the prevailing asset value for unit holders.
Lastly, our preferred property investment vehicle, the AMP Capital Australian Property Fund did precisely what it set out to do, and delivered a +7% return in 2017.
Next week we will send out our update prior to the Australia Day weekend.
Friday 10am values
|S&P / ASX 200||6015||-63||-1.0%|
|Property Trust Index||1364||-5||-0.4%|
Wednesday Closing Values
|U.S. S&P 500||2798||+31||+1.1%|
Key Dates: Australian Companies
|Mon 22nd January||N/A|
|Tue 23rd January||
Div Pay Date – Ishares Asia (IAA), Vanguard ETF’s (VEU, VTS)
Reports – Oil Search (OSH) production
|Wed 24th January||
|Thu 25th January||
|Fri 26th January||N/A|
For more information on the above please contact your Partners Wealth Group advisor directly or on 1800 333 143.