What we liked

  • The economic data in Australia continues to suggest we are one of the strongest developed economies in the world. The unemployment rate remained at 5% in October whilst the participation rate continued to increase, hitting 65.6% as more people are encouraged to enter the workforce. The continued slowing of growth in the residential property market appears to have remained orderly, meaning we may just avoid a crash.
  • The US reporting season was incredibly strong, with Blackstone estimating 27% year on year earnings growth over 2017, yet investors seem to be discounting this strength. Supporting this was a 0.6% increase in consumer spending, back by a 0.5% increase in incomes in October. Interestingly, the S & P 500 now trades on a forward P/E multiple of 15x, not stretched by any measure.
  • BHP Billiton & Rio Tinto have started what appears to be a gold rush of capital returns to investors, both expected to close substantial share buybacks in December. We expect an increasing number of companies to join the party as they seek to release the excess franking credits on their balance sheets before a potential Labor Party win.
  • As expected, Xi Jinping and Donald Trump agreed to disagree on the next moves in their ‘trade war’. They agreed to hold off on the application of any further tariffs for at least 90 days and formally negotiate the terms of a new trade arrangement. Markets around the world rallied strongly as a result.
  • US Federal Reserve Chairman, Jerome Powell backtracked in November, indicating that the Fed Funds Rate is closer to the ‘neutral’ rate than expected, triggering a surge in sharemarkets around the world. In October, his comment that the neutral rate was ‘a long way off’ triggered the worst of the volatility.

We we Disliked

  • It’s been confirmed, 2018 has been the worst year ever for investors. According to Deutsche Bank, 90% of the 70 global asset classes they cover are on track to post negative returns for the 2018 calendar year. This exceeds the previous high of 84% in 1920 and is a long way from the 1% that delivered a negative return in 2017. Does this mean 2019 will be good or bad year?
  • Jack Bogle, the founder of Vanguard, has offered a dour forecast for investment returns over the next decade, suggesting shares will average 4% and bonds 3.5% per annum, both significantly lower than the 11% and 8% returns achieved over the last 30 years thanks to the benefit of falling interest rates. His solution? Low cost index funds…
  • The apparent monopolization of the superannuation industry in the hands of union-run industry funds. The combination of strong recent returns backed by falling interest rates and the negativity towards large corporates following the Royal Commission is seeing increasing flows towards the industry fund sector. Are these investors simply chasing past returns? Or is this a changing of the guard for capital markets into the hands of just a few union-controlled investment vehicles.
  • The Chinese economy has shown signs of weakening with the all-important Manufacturing PMI printing once again at just 50.2 points. With ratings above 50 suggesting expansion, the weaker than expected results suggests the US-China tariffs are impacting exports and general manufacturing activity. A weaker Chinese economy would be devastating for Australia, with any number of export sectors reliant on their demand, not to mention their interest in Australian property.
  • The collapse of engineering services business RCR Tomlinson was swift and deeply disappointing. Whilst we have never invested in RCR, the fall from grace is all too common. The company raised $100m from investors in August, with major shareholders including Allan Gray, BT (Pendal) and Perpetual, but appointed administrators in November with a market capitalisation of $231m. According to early reports, it appears the engineering company was winning competitive tenders, particularly in the growing solar sector, at profit margins that simply could not be achieved, and was unable to find sufficient skilled employees to complete them. We suggest investors avoid other engineering companies like Lend Lease and Downer EDI, at least in the short-term.