From Jonathan Bayes, Chief Investment Officer, Partners Wealth Group.
It was another mixed week, but characterized by significant volatility.
Increased Volatility, continued technology selling
As an example, the tech-heavy NASDAQ index in the U.S lost nearly -3% Friday, rallied +4% Monday, lost -3% Tuesday and then -1% on Wednesday night. Whilst things weren’t quite as bad locally, the moves in technology stocks do demonstrate an increasing uncertainty over equity markets, and seemingly the end of the unbridled optimism witnessed through much of the past year.
Whilst Facebook (FB) is down -15% on where it was a fortnight ago, it is no longer the sole whipping boy for tech investors. Amazon (AMZN) fell as much as -7% on Wednesday night, before closing down just over -4%. Its weakness was spurred by reports that the Trump Administration was set upon increasing its regulation over AMZN and its every expanding infiltration of consumer habits.
Netflix (NFLX) was also down -5% on Wednesday night, and on the whole the NYSE FANG index, which includes the likes of AMZN, FB, NFLX, Apple (AAPL), Alphabet (GOOG), Alibaba (BABA) and Baidu (BIDU) amongst others is down around -15% from its highs. What can’t be denied is that there is seemingly an increasing consumer concern and developing regulatory scrutiny of these companies and their data collection and use for commercial purposes.
Since these stocks have been such a popular ‘trade’ for investors, its little wonder that the stocks have underperformed in recent weeks.
Some positives on the local economy & market
Though we feel an overarching caution for markets in 2018, there are some small positives to come through on the local economy this week that shouldn’t be ignored.
Firstly, the Australian Dollar has fallen back under 77c and to a fresh 3-month low. Weakness in the iron ore price is undeniably the culprit, and it feels like this will be ongoing in the months ahead.
The weaker AUD is supportive of domestic economic activity.
Secondly, and in a surprising and somewhat ironic turn of events given my remarks above, the Australian Federal Government fiscal position has significantly improved during 2018, such that the last 4-months to the end of February saw the government running a fiscal surplus of $3.4bn. This puts the government on track to arguably beat the projected 2018 fiscal deficit of over $29bn by as much as $8bn at the current run rate.
The rapid repair of Federal Government finances year-to-date stems from the improving local economy, strong cost control and better than expected export revenues.
As we head into the Federal Budget on May the 8th, there are grounds to be mildly optimistic that the government are in a position to offer further economic stimulus to the local economy, with infrastructure a continued focus.
Banks – earnings pressures remain
This week, Australia’s major banks hit their lowest levels relative to the ASX200 in 6 years.
In fact, Aussie financials have performed only in line with the market since the GFC, meaning that you could have simply owned the market in that time and done just as well.
That’s 10 years.
If that statistic doesn’t dispel the myth that Australia’s banks are the foundation of every investors long term portfolio, then nothing will. Yes, these things offer a reasonably consistent income stream, and there is merit in that, but that does not for a minute justify them being 25-30% or more of Australian equity portfolios, or more in many instances.
International equity opportunities, alongside better visibility on small and mid-cap opportunities, are issuing in a new dawn for domestic portfolios and its super important to come along for the ride.
In the near term there is potentially some short-term respite to come however, with the three major banks excluding Commonwealth Bank (CBA) all due to report earnings during the first few weeks of May. The earnings numbers won’t be great, and I would expect 2019 estimates come down due to margin pressure and loss of market share to non-bank financial lenders, but, we could see ANZ launch an extended buyback following recent asset sales, and that might provide some near-term relief from which to then consider reducing positions again.
Speaking of Small-Cap shares
Next week we will send through some updates on our thinking in small-caps, and put to you a few ideas for consideration.
We have done a lot of work on small-cap fund managers in recent months, and continue to advocate for portfolio weightings at or around the market weight, which is roughly 10% of the ASX200.
We have also been doing a lot of work on companies such as Vocus Group (VOC), Afterpay (APT) and BWX (BWX), amongst others.
There are different angles on all of these companies – VOC has the potential to be a turnaround story, whilst both APT and BWX seem interesting growth plays now at more affordable multiples.
After Easter it’s my intention to scope out in greater details a few potential thoughts around the smaller and mid-cap space.
A happy Easter to all.
Thursday 10am values
|S&P / ASX 200||5790||-148||-2.5%|
|Property Trust Index||1301||-10||-0.8%|
Wednesday Closing Values
|U.S. S&P 500||2605||-40||-1.5%|
Key Dates: Australian Companies
|Mon 2nd April||
EASTER MONDAY HOLIDAY
|Tue 3rd April||
Div Pay-Date – WBCPC, WBCPG
|Wed 4th April||
Div Pay-Date – Crown Resorts (CWN), Downer (DOW)
|Thu 5th April||
Div Pay Date – Div Pay Date – QUBE (QUB), Suncorp (SUN), Wesfarmers (WES)
|Fri 6th April||N/A|
For more information on the above please contact your Partners Wealth Group advisor directly or on 1800 333 143.