We have a few things to cover off this week, so let’s dive straight in.
International assets kick into gear
What’s become very apparent in the past fortnight is just the kick in performance terms from foreign investments since the start of September.
Whilst we have acknowledged on several occasions the outperformance of foreign share-markets relative to Australia this year-to-date, we have remarked that the surprisingly strong Australian Dollar has actually held back the returns from being even greater.
Since early September however that has started to change, and in the last 6 weeks the momentum has really picked up, with foreign equity markets again pushing to new highs across the U.S, Europe and Asia, and the AUD easing back under 78c.
In January this year we came out strongly advocating for international assets to become a larger part of investor equity portfolio’s, noting the potential for significantly higher capital growth.
Most every other week we have alluded to this in one way, shape or form, so the outcome is pretty satisfying, and to our mind should continue.
And it’s important to understand why this is happening and why it will continue, and this is not another excuse for me to bash the local economy before you all roll your eyes. If anything at all, this past few months I’ve begin to get a touch more even-minded in my assessment of the local economy such has been the strength of domestic infrastructure activity year-to-date.
But I digress.
No, one of the main reasons for Australia’s share-market underperformance is its composition, and the genuine lack of earnings leverage it has to any improvement in local economic conditions.
Australia’s share-market is dominated by banks, miners and domestic defensives such as Woolworths (WOW), Transurban (TCL), Sydney Airport (SYD), and as such, it lacks any real sensitivity to economic improvement.
Put another way, the main components of Australia’s share-market are being driven by altogether different economic and investment cycles.
The banks are subject to a newly deflating housing bubble.
Retail and the like are equally exposed to the creaking household indebtedness that accompanied the blowing of that bubble.
The miners are exposed to a slowing Chinese economy now more mindful of environmental concerns than it has been historically.
And much of the rest of the ASX Top 20, such as the utility sector in particular, is actually negatively correlated to rising interest rates.
Australian shares just aren’t the type of asset that global investors are seeking to gain exposure to as economic conditions improve, particularly on the high valuations many of them are now on.
Small Cap’s Outperformance stunning
Interestingly, with large-cap Aussie shares stuck in the mud, small-caps have been on fire, and for precisely the reasons big-caps aren’t.
Unlike the large end of our share-market, Australian small-caps ARE domestically economically sensitive, and have seen the benefit in some area’s from improving business confidence.
Since the start of the year, small-caps have outperformed their larger peer group by +12%, as has our preferred small-cap fund manager OC Premium Small Companies Fund.
Australia Consumer in hibernation
This week we had a pretty disappointing retail sales number for August – the equal worst monthly figure since 2010, and demonstrative of a consumer struggling under the weight of rising living costs.
August retail sales are up only +2.1% annually, and at the lowest rate of growth since 2013.
The Commonwealth Bank also reported service sector activity had dropped back to 12-mth lows, again indicative of a slightly more cautious consumer outlook.
We have touched on the subject more often than we care to repeat, but would note that this consumer caution only reinforces our view that local interest rates are unlikely to be raised anytime in the coming 12 months, despite what the market and newspapers might tell us.
Other points …
To round out a short and sharp summary for the week, we were pleased to see Healthscope (HSO) bounce 5%+ this week on press reports of heightened takeover interest in the much-maligned stock.
It is always hard to know on these things, but we feel that the worst has now been seen in the share and that there truly is excellent medium-term value now on offer in HSO.
Next week we get the listing of the MCP Master Income Trust (MXT) which is great.
We also have the Chinese Communist Party Congress (CPC) commencing in 10 days on the 18th October, which will be hugely significant for Australia in as far as learning where the current administration’s priorities lie in the 5-years ahead.
The ongoing interplay between infrastructure development and environmental controls has huge implications for Australia’s trade, and hence for government budget predictions and ultimately the economy.
Anyways, that’s all from me this week.
Have a great weekend.
Thursday 12pm Values
|S&P / ASX 200||5652||-18||-0.3%|
|Property Trust Index||1299||-11||-0.8%|
Thursday Closing Values
|U.S. S&P 500||2552||+45||+1.8%|
Key Dates: Australian Companies
|Mon 9th October||Div Pay Date – NABPD|
|Tue 10th October||N/A|
|Wed 11th October||Div Pay Date – Cochlear (COH), Sonic Healthcare (SHL)|
|Thu 12th October||Div Pay-Date – BWX (BWX), Brambles (BXB), QUBE (QUB)|
|Fri 13th October||Div Pay Date – QANTAS (QAN), SEEK (SEK)|
For more information on the above please contact your Partners Wealth Group advisor directly or on 1800 333 143.