• Amid high levels of uncertainty, sharemarkets around the world continued to deliver strong returns for patient investors, evidencing the importance of compounded and remaining invested throughout the cycle. The S&P 500 hit another all-time high in November, reaching 3,153 points as sentiment around the world began to improve. Closer to home monthly returns were strong at around 2.7% for the ASX 200 taking the 12 month return to over 20%. This strong performance has occurred at a time of great uncertainty around the world, but with companies in generally solid health.

 

  • The ASX has outperformed most markets over the last 12 months after trailing for many years, driven primarily by a recovery in the consumer staples (8.25% for November), healthcare (8.87%) and communications sectors (7.51%). Yet this strength is coming during a difficult period for the Australian economy with the unemployment rate ticking up to 5.3%, growth stuttering at 1.4% and the RBA threatening to enter the Quantitative Easing race to the bottom. Investors are naturally wary, evidenced throughout our recent trips around Australia to meet with clients and potential clients. However, with potential positive outcomes for both Brexit and the US-China Trade War on the cards in December markets may have another leg up before Christmas.

 

  • The outlook for the Australian economy remains mixed, on one hand private sector wage growth weakened to 2.2% for the year, whilst retail sales showed signs of improvement returning to positive territory in August and September; retailers remain hopeful Black Friday sales will stimulate pre-Christmas spending. Public sector wage growth continues to improve faster than the public sector at 2.5%. Tween fashion retailer Bardot was the latest to enter administration as sales weakened and retail rents put pressure on management with more job losses.

 

  • The union-fund sector experienced a busy month with several major acquisitions and the announced merger of MTAA and Tas Plan Super to create a $23bn fund. Industry Funds Management, the investment management are owned by the major funds announced the purchase of a US oil pipeline for c$15bn; an interesting decision in the light of the sectors push towards more sustainable and environmentally conscious investing. Unisuper and Macquarie Bank teamed up to bid for illion, in what experts are describing as a new type of infrastructure asset. The company is a data registry, not unlike Link Administration Services.

 

  • Australian financial services regulators continue to push forward with a more aggressive approach. Following the introduction of the Banking Executive Accountability Regime, which includes supervision of executive pay, APRA released a paper addressing the potential for its team to attend and ‘observe’ company board meetings. The introduction of the financial services ethics legislation, FASEA, continues to confuse both the regulators and professional bodies.

 

  • As highlighted in our previous issue, the flow of junk bond listed investment companies continued in November, with private equity firm KKR raising $925m for their Credit Income Fund, which invests in unrated high yield debt and illiquid debt like leveraged loans and targets an income of 4.-6% per year. This followed a similar issue by Partners Group, of $550m. Credit has been a happy stomping ground for family offices, pension funds and other sophisticated investors, but questions remain over its appropriateness as a fixed income alternative.

 

  • One of the biggest stories of the month was Westpac’s seeming capitulation to the anti-money laundering authority AUSTRAC. On the face of it, and as captured by both political parties, Westpac appeared negligent in not identifying or reporting an extraordinary number of questionable transactions. Yet as Chris Joye from Coolabah Capital and Paul Bassat explained, the issue may be more nuanced than that and fall back on the legacy technology systems of our major banks. Their inability to implement sweeping changes due to the intricacies of systems built decades ago means technology issues like those experienced by Westpac and CBA will not go away anytime soon.

 

  • The $3,500 per ticket Sohn Hearts & Minds Conference was run and done during November, with the top picks from Australia top managers discussed later in this report. The charitable institution was able to put together an enviable selection of thought leaders including Ray Dalio of Bridgewater Associates and Howard Marks of Oaktree Capital, two experts we respect highly. Two interesting takeaways were Dalio’s apparent recommendation that gold bullion would become an increasingly important hedge in a period of political instability and lower liquidity in markets. Marks on the other hand touched the concept of Modern Monetary Theory that is receiving support in the US. He struggled to understand how it does not lead to inflation and volatility noting: “it doesn’t seem to me that you can really run deficits of any size for any period of time … without having some effect on the desirability of your currency,” the fund manager remarked. “To me, that doesn’t make sense.”

 

  • In what we at Wattle Partners are taking as a sign that the oil market may be hitting its peak, Saudi Aramco, the oil producing nations key oil production business, looks to have successfully gotten its float away. The nation is floating 1.5% of the business valuing the shares at US$25bn and the company as a whole at around $1.6 trillion. It is one of the most profitable companies in the world and is expected to pay out dividends of $75bn in 2020 yet it comes at a time when OPEC’s forecasts for demand growth in the decades ahead continue to slow.

 

  • There were suggestions that liquidity issues may be building up in both industry pension funds and unlisted property trusts when Lend Lease put the Westfield Marion Mall in SA up for sale. The property was sold at a discount to Westfield’s Scentre Group’s valuation by around 9% and above the 5.13% discount or capitalisation rate applied by the managers, selling at 5.6% suggesting values may be falling in the face of substantial retail pressure. That said, it was the largest retail sale of the year.