• The Australian reporting season was disappointing but given the context of slowing domestic and global growth and increasing geopolitical risks a positive result was about the best investors could expect. AMP Capital summarised it neatly with their research indicating only 36% of results were above expectations, well below the average of 44% and only 58% of companies have seen their earnings rise (compared to 77%) in FY19. The result was that earnings growth for the market was just 1.5%, below expectations of 2.0%, and some 28% of companies cut their dividends as a result. Once again it was the resources/mining sector that drove the market earnings improvement (up 13%) with the rest of the market combined falling 2%, particularly financials which are struggling amid a property slowdown and remediation cost blowouts.
  • Markets around the world struggled as the US-China trade war took another turn, with US markets falling around 2% and bond yields collapsing once again. The All Ordinaries and ASX 200 both fell around 3%, struggling through reporting season as the key mining and energy companies saw falling commodity prices. The Asian markets were hardest hit with the Hang Seng off 8% in August suggesting the Chinese economy is taking the brunt of the trade war. The traditional hedges once again came to the fore with highly rated Government (including negatively yielding German bonds moving further into negative territory) debt adding positive returns and gold rallying another 10%.
  • Strong performing property trust, Rural Funds Group, came under pressure following a short selling attack by Bonitas Research which was founded by a member of Glaucus responsible for the pressure on Blue Sky and Quintis among others in recent years. The group accused management of fraudulent activities, undisclosed payments and inflated rental figures which were flatly denied. The share price immediately fell 40% but has since recovered to make up the majority of the loss ground. We are always interested to understand where these groups obtain the shares to then short-sell on the market, interestingly Vanguard is the largest and most passive shareholder at 9%.
  • The outlook for Australian economic growth continued to weaken during the month after building approvals fell a further 9.7% in July. Economists had been predicting a flat result. It was the apartment developments driving the fall, which were down an incredible 18% taking the 12 month fall to 28.5%. This came shortly after weaker than expected business investment data was released showing a contraction of 0.5% in the quarter. Once again, economists were expecting growth of 0.4% suggesting they are disconnected from what is happening in the real world. The result has been a reduction in Q4 GDP growth expectations from 0.5% to just 0.3%, and we wouldn’t be surprised if it’s even weaker than that.
  • In a sign of the increasing power being wielded by the union fund sector, IFM Investors, who own Australia’s largest energy network, Ausgrid, announced an ambitious policy to begin cutting carbon emissions by up to 100%. The Coalition Government responded by suggesting the asset owners should not be passing these costs onto consumers, who are also members of many of their super funds.
  • The Australian economy delivered a second successive record trade surplus seling $8bn more than we exported in June, some $1.8bn higher than in May. The country is now poised for our first current account surplus since 1975! The primary drivers were continued growth in iron ore and coal prices and weaker imports of motor vehicles and aircraft.
  • The Trump Administration’s tot-for-tat with China continued unabated, but as usual showed signs of improvement whenever the S&P 500 began to fall. President Trump declared the Chinese ‘currency manipulators’ following the devaluation of the Yuan, and continues to call on the Federal Reserve to support his ‘negotiation’ via even lower interest rates. Throughout the month the rhetoric fluctuated between an interest in restarting negotiations, to a further escalation of tariff introductions. As we write, a further $300bn in imports are expected to be hit by 15% tariffs on the 1st of September unless the White House puts these on hold once again.
  • ASIC’s case against Westpac, but effectively the entire banking sector, was thrown out of court during the month. ASIC had been pursuing Westpac under the new Responsible Lending legislation, questioning whether Westpac’s use of spending benchmarks was sufficient to justify higher loan limits being offered. The judge now famously said ‘I may eat wagyu beef everyday washed down with the finest shiraz, but if I really want my new home, I can make do on much more modest fare’. This is one of few too many realistic court results which suggests individuals can take personal responsibility over their spending and adjust their expenses after taking out a loan. It may be a turning point for the sector that have been pushing away prospective borrowers for several months now.
  • The NBN reduced their forecast sign-ups for 2020 from 7.5m to 7.0m as the pressure of improving 4G and 5G networks continues to grow. The announcement is likely to be a positive for Telstra with most NBN sign ups effectively being a lost customer of the group. Management are expected to update guidance accordingly.
  • Growth in Chinese industrial output fell to a 17 year low in July in a sign that the trade war and US tariffs are hitting the economy harder than expected. This is not good news for Australia. The broad Industrial Output measure was up just 4.8% for the month, well below forecasts of 5.8%. Retail sales on the other hand were more positive, increasing 7.6% but below the 8.6% expected by economists. Exports remain under pressure to both the US and Europe. On the flipside, US retail sales remained highly resilient increasing for the fifth straight month by 0.7%. It has been the lower cost, middle income focused chains like Walmart benefitting and the luxury department stores being hardest hit.
  • You will shortly be receiving our latest Unconventional Wisdom Journal, which among other topics covers the incredible search for yield that is occurring around the world and the many areas where investors appear to be taking more risk than they should. One such article focused on a listed investment trust that raised $1bn from retail investor and incredibly holds over 10% of the portfolio in CCC rated junk bonds. These carry the same rating as just defaulted Argentinian bonds. Go figure.