From Jonathan Bayes, Chief Investment Officer, Partners Wealth Group.
Dominating headlines this week was the heightened trade tension between China and the U.S, and the data privacy issues surrounding Facebook (FB).
Perhaps a third, though less well-publicized headline that should be noted was the decision by South African media conglomerate Naspers to sell 2% of its whopping 33% stake in Chinese internet behemoth Tencent (700 HK) for over US$10bn.
Trade War Looming
On the trade front, the US announced plans to place tariffs on at least $50bn of Chinese goods imported into the US as a penalty for the alleged, but widely accepted, appropriation over several decades of US corporate intellectual property by Chinese firms. In the coming days, the US will announce a list of Chinese products on which a 25% duty will be levied, and it is likely that the list will be dominated by technology-heavy industries such as aerospace and information technology.
In response, the Chinese announced a rather restrained reciprocal tariff impost on some $3bn of US exports to China, but it is thought that this is an opening gambit, and the Chinese have many levers on which to pull should the need arise.
I don’t think anyone questions the idea that tariffs ultimately detract from global economic growth, unless of course you are still a member of Trump’s economic council, so it wasn’t surprising to see share-markets fall 2-3% over Thursday night and Friday in Asia in response to the news.
Data Privacy issues
Insofar as Facebook (FB) is concerned, the news here was also rather disappointing, and for multiple reasons.
In being so deficient in their responsibilities around the protection of user data, FB have opened up not only a regulatory can of worms across both sides of the Atlantic, but they have further cast doubts over the platform’s integrity with a user base increasingly fatigued by its intrusion into their private lives.
The regulatory repercussions will be ongoing and likely to escalate from here on, but there are good reasons to expect the pressures on FB to de-merge its various platforms could escalate. Further to that, the other large data accumulation businesses such as Alphabet (GOOG) and Amazon (AMZN) could well be ensnared in the same catch-all investigation into the use of private user data.
That FB is the 5th largest company in the US, and also one of the most well-held stocks in both Australian and international portfolio’s is also of mild concern for investors. Magellan (MFG) have long held FB in its core Global fund, so it will be of interest to hear what Hamish’s views on the current situation are in their next monthly investment report.
Massive Share Sale in Tencent (700)
Another extremely well-held stock has been Chinese internet titan, Tencent (700 HK). The decision by its major shareholder Naspers to realize $10bn worth of stock this week, in one of the largest secondary market trades that I can remember in recent memory, also puts a dampener on investor portfolios around the world.
Tencent (700) is the same size as FB with a market value of US$500bn currently, and similarly has been one of the most widely held portfolio positions by international fund managers in recent years, meaning that its 15% fall this week will ultimately be felt by many investors around the globe.
Fed Raises Rates
In other international news this week, the US Federal Reserve raised US interest rates again this week, and set out a slightly more hawkish tone towards future tightening, with more Fed members leaning towards a moderately faster pace of tightening this year and next.
Australian Portfolio News
At a local level, our market was again dominated by broader weakness amongst the traditional, old economy ‘traditional’ holdings, with major banks and miners continuing to fall relative to the small and mid-cap sectors.
In the miners, iron ore prices have finally begun to take a tumble in response to the substantial inventory accumulation, and prices there are now -20% lower than their level a month ago.
The Australian Dollar finally saw some selling pressure emerge, and on the week since last Friday it is down around 2c or so to be just a touch over 77c. The falling iron ore price is likely to blame, albeit the overarching theme of a wider US/China trade war does nothing to help Australia’s economy given its enormous reliance on exports to China.
In the banks, we have seen funding costs spike significantly in recent weeks (by around 0.30%) which in time will place greater pressure on bank profitability. Worsening the issue of profitability for the banks is the early signs of an emergent mortgage price war, with the National Australia Bank (NAB) cutting their rate by 0.50% for owner occupier principal & interest borrowers.
The banks continue to be squeezed on all accounts, and it is hard to be optimistic for 2019 profits with the backdrop of tightening profit margins.
We remain underweight the sector and with a heavy continued preference for Macquarie Bank (MQG), albeit as we mentioned last week, even MQG is starting to look a little full at $105.
Next week portfolio’s will be flush with additional cash as dividends from Telstra (TLS), BHP (BHP), AMCOR (AMC), SEEK (SEK), AMP (AMP), Medibank (MPL) and Oil Search (OSH) hit accounts.
We think the recent selling might open up the prospect of adding to holdings, but for now we continue to advocate for caution and patience.
I think I will keep it at that for now.
Enjoy the weekend.
Friday 10am values
|S&P / ASX 200||5937||+16||+0.3%|
|Property Trust Index||1310||-2||-0.2%|
Thursday Closing Values
|U.S. S&P 500||2644||-103||-3.7%|
Key Dates: Australian Companies
|Mon 26th March||
Div Ex-Date – SEEK (SEK), Seven Group (SVW)
Div Pay-Date – AGL Energy (AGL), ANZPE, ANZPF, Worley (WOR)
|Tue 27th March||
Div Pay-Date – BHP (BHP)
|Wed 28th March||
Div Ex-Date – NABPD
Div Pay-Date – AMCOR (AMC), AMP (AMP), Medibank (MPL)
|Thu 29th March||
Div Ex-Date – Adelaide Brighton (ABC)
Div Pay Date – Insurance Australia Group (IAG), Oil Search (OSH), Telstra (TLS)
|Fri 30th March||N/A|
For more information on the above please contact your Partners Wealth Group advisor directly or on 1800 333 143.