The month that was…

July 2020

What started as a positive month for markets and people around the world, ended up where it all began; with a substantial spike in COVID-19 cases and looming extension of stay-at-home restrictions. In Victoria, this is already the case with a ‘State of Disaster’ declared and sweeping curfews employed, ultimately putting great pressure on the entire country’s recovery. Similarly, the south of the US, particularly Florida and California have seen spikes of their own, along with France, Spain and England, suggesting there may be sometime before we are anywhere near through this. Despite growing concerns, markets have reacted passively, delivering a fourth straight month of positive returns, the ASX 200 up 0.51% and the tech-driven S&P 500 up 5.51%. Markets remain supported by sweeping monetary and fiscal policy, but without another round being announced in the coming weeks, markets may turn once again.

July saw the release of June quarter GDP growth rates and not unexpectedly, the results were grim. Records were broken across the board, the US shrinking at an annual pace of 32.9%, France -13.8%, Germany -10.1% and Australian expected to contract by at least 8.0%. On the positive side, the authoritarian regime is China is showing its powerful benefits, effectively cutting off the virus and reporting 11.5% growth in the June quarter. With Chinese exports from Australia growing 8% in May and steel production catching up to pre-crisis highs, is it possible China can save us again? Investors in BHP Group Ltd (ASX:BHP) and Fortescue Mining Group Ltd (ASX:FMG) definitely think so with the latter hitting all-time highs and increasing its dividend during the month.   

There is, however, a great deal of change ahead. The rhetoric against Chinese businesses following years of apparent technology theft, is forcing a reshaping of the global supply chain at a time of great uncertainty. Huawei and more recently social media platform, Tik Tok, have been caught in the centre of this particularly following the ramping up of administrative pressure in China. In fact the Japanese Government is now supporting businesses to the tune of $500 million in their efforts to re-shore their operations; expect periphery Asian nations like Vietnam to benefit.  

The apparent existential war on superannuation stepped up another gear during the month, with well-paid industry super board executives chiding the Government’s decision to allow members access to their own money. Industry super are highlighting the apparent risk of losing compounding returns for those who access their super now and suggesting the Super Guarantee rate should be increased to 12% to offset the now $42 billion reduction from the sector. Given some 11% of mortgages have been deferred and unemployment now sits at close to 11% in real terms, the Government seems to be allowing the population to share the load rather than running even larger deficits. Given many of those withdrawing cash may have another 30 years to wait before getting access to their super, there is every chance it may be re-nationalized by then. It seems the tightknit cohort are a little concerned about their gravy train slowing.

Outside of technology stocks, gold bullion was the standout investment of the month. The precious metal has passed all-time highs in US dollars, closing in on USD$2,000 per ounce, with the AUD still hovering around $2,700. It seems the asset class is finally moving into the mainstream as interest rates fall to zero and concerns about market valuations continue to increase. Whilst the asset is becoming more common in private portfolios, it remains non-existent in most industry and pension funds, which means it may have some more room to run. Gold remains misunderstood by traditional investors and advisers, who remain unable to price it without ‘cash flow’ or an intrinsic value or assuming it only protects against inflation. Interestingly, it has protected portfolios better in deflationary environments with the worst-case scenario being solid and consistent economic growth; something we are unlikely to see soon. 

The active vs. passive debate was activated once again, albeit with outdated figures, with Standard & Poor’s announcing 80% of Australian equity funds underperformed in the five years to 31 December. As we have covered in the past, the assessment includes some 600 funds many of which would not be considered of investment quality. For those who follow our model portfolio, the 2020 volatility has, in our view, truly reflected the benefit of active managers. Six of the eight core managers we recommend, but particularly the global equity funds, outperformed their benchmark to 30 June, some by as much as 15-20% in absolute terms.

With the new financial year starting on positive footing, it’s worth taking stock of what has just passed. If there is one lesson to take away from the COVID-19 crisis and incredible recovery, it’s that you can’t pick the top or bottom of the market and trying to can be incredibly costly. For instance, those investors who capitulated in March and missed just the five best trading days since, would be close to 40% behind the benchmark. Importantly, you don’t need to time the market to boost your returns, you simply need capital available to deploy when everyone else is selling. 

August stands out as an incredibly important month for investors and Australian’s in general, with the way Victorian’s deal with the escalating virus cases key to the medium-term future of the economy. The month will also see the all—important full year reporting season for most ASX-listed companies, with a particular focus on the dividends previously deferred by a swatch of banks, insurance, retail and infrastructure companies. With end of financial year reporting being delivered the time may have finally come for investors to focus on total returns rather than income alone.

The month that was…

UWJ Monthly Edition – June 2020

What a month, markets rallying again capping off the strongest quarter for the ASX in over 20 years. The technology focused Nasdaq reached all-time highs and the S&P500 had the best quarter since 1938. The month continued the ‘changing of the guard’ trend, with the old-fashioned, capital intensive sectors, like property, energy and utilities, underperforming as e-commerce, consumer and IT focused companies came to the fore. The market has come a long way since the depths of the COVID-19 crisis, yet with escalating COVID-19 cases in the US and Victoria, there is a growing feeling that valuations may be overdone.

There are two key takeaways from the June quarter; relying solely on the benchmark is high risk and timing the market is a dangerous game. Bloomberg reported this month that those who tried to time the market and sell out in March, would have suffered 30% falls if they missed just the five most positive days since. It’s clear that the key to successful investing is to establish and maintain an appropriate asset allocation, but also have the flexibility to deploy capital when markets fall and not capitulate. There are a number of papers written about why un-advised investors underperform the very funds they invest in, as they tend to sell when markets are down and buy when markets are high.  

The worst kept secret in financial markets appears to have been exposed this month with Mayfair Platinum and IPO Wealth’s flagship fund facing the Supreme Court and entering administration after it failed to make a loan repayment. Management continue to blame ASIC’s targeting of their strategy and stress that it isn’t a ‘Ponzi’ scheme; yet there are reports that new investors funds were being used to pay out existing investors and a series of unaccounted for transfers within the complex structure. We also saw the collapse and potential resurgence of Virgin Australia in a few short months, with unsecured bond holders, many of which were retail investors with bond specialist FIIG, likely to see nothing on their returns. Despite increasing regulation these and many other investments seem to be slip through to the detriment of un-advised investors, once again reiterating the value of financial advisers in their ability to be a ‘bullshit’ filter.

June saw the release of a combination of outdated GDP results for the March quarter, and the all-important PMI’s for most major economies. On the growth front, Australia lead the developed world shrinking just 0.3% in the March quarter, with exports supported by huge growth in iron ore and coal sent to China. The Chinese economy contracted 9.8% with the Communist Government conceding their growth target of 6.5% was no longer relevant. The US shrank 5%, France and Italy 9.2% and the UK 2.2%, with the latter’s April figures showing a massive contraction of 20%. On the positive side On the positive side PMI’s which are leading indicators of improving economic performance were universally improved; Australia almost doubling to 52.7, China back at recent highs of 55.7, Japan improving from 27.8 to 40.8 and the US 46.8 from 37. Anything over 50 signals a growing services and manufacturing sector.

Looking forward, the IMF continues to adjust their expectations and forecasts for 2020, predicting a 4.5% contraction in Australia, 8% in the US and 10% in the UK. If we have learned anything from this incredible period in the history financial markets, it’s that economic forecasts should never be relied upon. There is growing pressure on the sector in general to include more realistic and dynamic assumptions in light of glaring misses. One example was the US employment figures in May, where most predictions were for 7.5 million more job losses, but the actual result was 2.5 million new jobs being created.

Continuing on the topic of unemployment, it’s clear that global government policies, but particularly those in Australia, the UK and Europe, are having a huge impact on job losses. Australia’s unemployment rate of just 7.1% is a testament to the Job Keeper package as is the UK, which is paying around 80% of workers’ wages, with unemployment still just 3.9%. What happens when the tap is turned off by Government’s must be the greatest concerns to all Australian’s today, with many companies already cutting thousands of staff and many employers keeping employees solely for the government payments. This will be a real test of political leadership with politicians required to forget about the debt and focus on the welfare of their people.

With deficits in mind, the new economic concept of Modern Monetary Theory has been a major talking point with Alan Kohler the latest proponent of its potential benefits. He was immediately attacked by many other finance journalists, who seem to have limited knowledge of the underlying workings of the economy or the monetary system in general. The concept that money printing creates inflation has cleared been debunked after seeing the Japanese, European’s and US extend monetary policy with no such results. Nathan Tankus, an unknown US student, has grown a substantial following via his simple explanation of this and many other concepts. If there is only one takeaway from the discussion it is that austerity economics simply does not work and the repayment of Government debt should not be a priority, particularly in the current ‘wartime’ footing. With interest rates so low, debt can be utilized and doesn’t require higher tax rates to repay it more quickly.   

How did your  portfolio perform this year? If you are sitting on a large negative return for the financial year, then you clearly didn’t have enough exposure to the companies of the future or were among the many relying on dividends for the bulk of their returns. With the likes of ANZ and Westpac deferring but really cutting dividends, they lead the worst performance for the financial year, down 34% and 26% respectively. This compares to the ‘overvalued’ CSL which delivered a 33% return in the worst market in history. The dispersion occurring in share prices has been substantial with a laundry list of technology companies leading the way: Afterpay (ASX:APT) +143%, Fisher and Paykel (ASX:FPH) +123%, Megaport (ASX:MP1) +85%, and gold miner Silverlake (ASX:SLR) +69% up strongly.  Global performances were even more stark, Tesla (NYSE:TSLA) leading the way up 106%, Apple, 43%, Microsoft 29% and Nvidia 44% as the world goes digital at a breakneck pace. Unfortunately, for those with a preference for domestic shares or who are not comfortable with investing in managed funds, these incredible returns would have been sorely missed.

What to expect from here? We expect a great deal of volatility ahead and huge dispersion in those companies that are able to weather both the second wave of infections and the huge changes to the economy as we know it. We expect a lot more retail pain, substantial write-downs across the oil and gas sector and the potential for devaluations in both commercial property and residential investment property values. Many of these trends are already underway, with tenants exiting retail leases, spiking vacancies in offices and apartments, and a substantial rise in off the plan purchase cancellations.

The month that was…

UWJ Monthly Edition – May 2020

The disturbing events happening in the US as this newsletter goes to print pale in comparison to what has occurred in asset markets over the month. Looting, shooting and protests have led to widespread curfews in many states, just as COVID-19 restrictions are eased. We can only hope an appropriate solution is found and concerns of the population are addressed. It seems we make the comment ‘it was a busy month’ almost every month in 2020, from bush fires to COVID-19 and a worsening trade war, there are plenty of reasons for investors to be concerned.

Despite the real economic impact yet to be completely understood global sharemarkets continued to rally in May, for the second straight month. The S&P 500 increased 4.5% for the month and is down just 6% thus far in 2020, with the ASX 200 improving 4.2% but still down 14% for the year. The result has been many ‘experts’ suggesting that market has recovered too quickly and other suggesting that the worst is over. AMP’s Shane Oliver has interestingly suggest that consumer retail businesses will only recover from here. Many commentators are comparing the COVID-19 market correction to the GFC, suggesting this is just a dead cat bounce, despite this clearly being a very different, one-off shock to the entire world economy. In our view, there are simply too few participants that have experience across multiple crises to understand what is really going on.
The first signs of how poorly the global economy fared in the first quarter are coming through on a weekly basis. Some high(low)lights were the Chinese economy contracting -9.8% (and subsequently abandoning their 6.5% growth target, the German economy entering a recession falling 2.2%, the US economy contracting 5% and the UE -3.5%. Unfortunately, the worst is yet to come. The US unemployment rates increased to 14.7% from as low as 4% pre-crisis with 40 million people filing for unemployment benefits. Australia fared markedly better ballooning from 5.2% to 6.2%, with the Job Keeper stimulus likely delaying the inevitable spike to around 10% unemployment. Australia’s world leading stimulus package (as a percentage of GDP) is being offset by continued state restriction putting the hand brake on a real recovery. 

Dispersion remains the name of the game in global sharemarkets. Dispersion refers to the diverging performance of companies within the same index; think CSL vs. Westpac on the ASX. Case in point is the S&P500 strong performance since bottoming in March, but with relatively few companies, including Microsoft, Amazon, Netflix, Alphabet and Facebook moving the market higher. In Australia it has been the likes of CSL (ASX:CSL) and Afterpay (ASX:APT). Also known as attribution dispersion simply means that less companies are seeing share price increases and the ‘big are getting bigger’. Dispersion has historically been a fertile hunting ground for active investors as whilst markets overall appear overvalued individual companies are anything but.
The US-China trade war escalated once again following the forceful passing of a ‘Security Law’ in Hong Kong, bringing the population under Chinese laws and subject to charges for the likes of treason. Australia entered the fray as the Chinese finished a multi-year investigation by applying an 80% tariff to Australian barley and subsequently changed the import process for Australian iron ore. It is clear a renegotiation is occurring that may have long-standing impacts on Australia’s export-driven economy. The education and travel sectors are among the hardest hit.
The industry super sector is under increasing pressure from the Coalition Government with ASIC highlighting discrepancies in Industry Super Australia’s (ISA) highly questionable modelling on the negative impact of withdrawing capital. Clearly, they were seeking to scare members out of withdrawing at a time where liquidity and cash is key.

Research house Lonsec also made a well-publicized downgrade of Australian Super following its first negative performance in a decade. Lonsec cited concerns about transparency in terms of Australian Super not disclosing staff movements nor providing enough supporting information as to whether the internalization of their equity investments is both sustainable or delivering the performance expected of members. This came as industry fund owned ME Bank removed redraw account balances from struggling accountholders amid the worst of the COVID-19 shutdown without any disclosure.
It’s pretty clear that Modern Monetary Theory is in action across the developed world. The concept, rather than ‘belief’, being that Government balances sheets need not be run like a household budget on the simple basis they are able to print their own currency as required. This has been evidenced by the creation of billions of dollars by central banks around the world in order to get the economy through this difficult period. MMT seeks full employment via budget deficits with signs of inflation resulting in a reduction in spending, which seems to have worked in Japan; only time will tell the results in Australia and the US. The issue in our view has always been those entrusted with the levers or money printing and fiscal spending and ensuring it reaches the right parts of the economy. Some suggest this will support markets reaching new highs. 

There were two key themes in April and May, capital raisings and bankruptcies. In the US high profile companies like Hertz, JC Penney and J. Crew entered bankruptcy whilst in Australia the list of retailers and travel businesses in trouble continues to grow. On the other hand, some $20bn has been raised thus far by ASX listed companies attempting to make it to the other side of this issue. As highlighted in my article with Morningstar there is a big difference between companies using capital to repay debt and those seeking opportunities.
Our latest bug bear in this crisis has been the seeming procession of investment managers prognosticating on investment returns and the outlook for markets. This despite many claiming outperformance by falling 17% when markets fell 20% or underperforming even more heavily. We believe there is great value in outsourcing to professional managers but are clear they need to be assessed like any other investment, regularly and with complete transparency. As always, we suggest looking more closely at those managers making the news and comparing to the long-term performance of their funds, many of which are clearly lacking. 

In one of the more unsurprising events of recent months, the widely advertised Mayfair Platinum Group appears to be capitulating. The trustee of the IPO Wealth Fund, Vasco Trustees, has appointed receivers after the company failed to make a repayment of c$3 million. The convoluted structure of the business involves investors lending money to a separate company, which then invests these funds into a range of venture capital and other private companies. Some examples include yacht rentals and accounting IT platforms. The strategy being to use investors’ money to make higher returns than term deposits; the issue being they were marketed as low risk products to investors, something ASIC wasn’t too happy about. The group was heavily promoted by Switzer Media with some staff holding positions on the companies unofficial advisory board. This is a disappointing but not surprising result for all involved.

The month that was…

Wow. That’s about the only way to summarise the events of March 2020. It will be remembered as the most volatile month in sharemarket history. Here are some simple numbers: Marsh saw 12 of the largest 20 points falls in the Dow Jones, the largest single day fall in history (-12%) and the largest intraday point swing of 1,904 points on Friday the 13th. In fact, the Dow experienced both a bear market, again the fastest in history falling 20% in just 22 days, and a bull market, increasing 21% in just three days. Closer to home, the ASX experienced its biggest one day fall since 1987, off 9.5%, the fastest 30% fall and an intra-day swing of 14%. Honestly, even working through the GFC we had never seen this before, waking up and heading into work was an unnatural feeling as COVID-19’s impact expanding globally.

It’s clear that the virus was under-appreciated until the market peak on 20 February and now we must question whether it has truly been priced into markets given the volatility experienced and likely set to stay with us for some time. How long will shutdowns apply? How long will quarantining be in place? How long will social distancing measures be required? These are all important questions both as humans exposed to this virus but also as investors attempting to negotiate our way through a true unknown, unknown, as Donald Rumsfeld would have put it.

March saw some incredible things occur as markets reacted to the threat of a global recession, or at least recession across the major developed and developing economies who appeared woefully underprepared. There was the 2-day breakdown in bond markets that occurred in the middle March, during which the yield on US Government Bond’s spiked as much as 30% in a single day, more volatile than equity markets. One of the more interesting flow on effects, was Vanguard’s announcement that they had increased the buy-sell spread on their bond funds from 0.15% to 1.79%, that’s almost a 2% fee to redeem your investment! Not what you would expect from a low cost manager.

Leading on from this, which is highlighted more later, March saw the return of the active manager with most tending to outperform amid precipitous falls in global sharemarkets. It was clear amid the ‘carnage, that a number of issues were exacerbating the sell down, low volatility index strategies, algorithmic trading, huge selling from pension funds and simply investors taking on too much risk for too long. When times are good, like the last 10 years, active managers will naturally underperform their benchmark, but it is when times get tough that they tend to pay off protecting your capital when most needed. There is an old saying about ‘getting what you pay for’ Our view is that a dollar saved is more valuable than a dollar gained.

After somehow avoiding the worst of the Royal Commission spotlight, the industry super fund sector has seen a blowtorch applied to their business model. The issues were twofold in March, the first being the huge number of members seeking to switch investment options as market volatility increase. The issue? Most of these funds hold allocations of up to 30% in unlisted, illiquid assets that are rarely revalued, meaning the only way to fund investment switches was by selling down their most liquid assets; equities. The second, was the announcement of the loosening of the $10,000 early access to superannuation rules, which placed further pressure on these illiquid structures. In some cases, these funds hold as little as 2% cash in their ‘balanced options’. The result? An overnight revaluation of said unlisted assets by 7.5%; that’s right overnight. The concern was so high that the chief lobbying group for the sector ask the RBA for a loan to bailout the impacted funds. Some of our views were published in the IFA during the month. All said and done, Australian Super fell over 11% for the quarter, and 15% from the high. We haven’t read about any pay cuts or job losses in this sector yet.

Bond and credit markets were one of the lowlights and highlights of the period. With many industry funds relying on unlisted private credit to boost returns, it became clear the risks were higher than many appreciated. Investors in high yield or junk bonds saw losses in the realm of 20-30% in just a few days; in our view these securities now offer some value. We began to see some normalisation after the coordinated central bank policies around the world (more below) with 50 companies issuing over US$100bn in primarily BBB-rated bonds in March; another record.

As we enter what many are suggesting is the initial peak in Australian and US virus infections, the focus is increasingly moving to how we recover from this. As usual, media and economic commentators are putting forward excessive statements, with as much as 11% unemployment and full-blown depression; our view is that this simple isn’t palatable for any Western Government and we are more likely to see a relaxation of shutdown measures combined with greater public testing. The initial impacts are clear, with a recover 3.3m new jobless claims in the US in the last week of March, swamping the previous 695k weekly record.

On the positive side, it has become very clear that central banks and Governments around the world have been far more prepared for the economic impacts of this crisis than the GFC. March saw coordinated stimulus efforts ranging from US and Australian interest rate cuts to 0.25%, liquidity back-stops for the major banks in the form of low cost funding and Quantitative Easing measures implemented in Australia for the first time. The RBA and Federal Reserve will both be buying Government Bonds directly from financial institutions, along with residential mortgage-backed securities; in the case of the US, this spread into buying bonds directly from US companies. This is based solely on ensuring banks have enough capital to keep lending to business and people in need. Combined these with fiscal policy of c10% of annual GDP in the US and Australia and this is likely enough to offset at least a few months of ‘hibernation’. It’s obvious that the Australian Government understands that spending $200bn to keep people employed is better than spending 10 years trying to get them re-employed.

Market volatility tends to see markets clean out very quickly, with many of the excesses associated with a 10-year bull run quickly disappearing. We were therefore interested to see the announcements from Mayfair Platinum which sells itself as an alternative to term deposits, and which is marketed by the Switzer Group. In the same week, we received a marketing email about investing in to Cannabis, from the same group, amid the most volatile period in market history; as the millennials say WTF?

Looking forward, reports suggest some 98% of major industrial companies in China have resumed operations in March, with nearly 90% of their workers back on the job. The Wall Street Journal also reported that the US is likely to see a peak in infections in the coming week; we can only hope.

The month that was…

  • Just when we thought the global economy couldn’t get any more unpredictable, January brought the outbreak of the Coronavirus in China, a US-Iran tit-for-tat engagement, the worst Australian bushfires in recent history and the UK formally leaving the European Union. Yet as usual sharemarkets weren’t overly worried, with the ASX adding 5% (the best start to a year in a decade), and the US falling by less than 1%. This time, it was a stronger than expected US economy, which grew 3% in 2019, supporting higher valuations.

 

  • The outbreak of the Coronavirus, which by all reports has now killed over 300 people, couldn’t come at a worse time for the Australian economy. The resulting shutdown of inbound flights from China is likely to have a substantial impact on tourism and when combined with the bushfires will have a negative impact on consumer spending. This comes after a retail spending rebound of 0.9% in November but subsequent slump in December as the Black Friday sales brought spending forward.

 

  • The ASX All Ordinaries finally hit 7,000 points in January, this comes some 12 years after it was originally predicted by a number  of ‘experts’ to occur in 2008. The key drivers behind the performance were the ever-growing CSL and BHP Group. Interestingly, Australian economic data remains strong, with unemployment falling to 5.1% and inflation holding at 1.8% even as the consensus turns negative towards growth. The S&P 500 and a number of key Asian indices also hit all-time highs during January, before giving back some gains as the month came to an end.

  • It’s been a busy few months for the profit- for-member of industry super funds, after the APRA Heatmap release in December which embarrassed a number of groups, economist Warren Hogan suggested the largest funds should be forced to hold additional capital not unlike a bank. He suggests the increasing allocations to illiquid assets and market power of the largest funds may represent a systemic risk and should be regulated accordingly. At present, management relies on incoming contributions to ensure

 

  • In a sign of the times, the huge venture capital fund run by Softbank, was identified as funding all three of the largest ride sharing competitors in Latin America, Didi, Uber and Rappi, as they attempt to destroy each other and win the important Such is the size of the fund that they can bet on all three players and still expect to make a profit.

 

  • The Chinese economy benefitted from the actual signing of the Phase 1 Trade Deal with the US, however, many are questioning whether China can actually facilitate the purchase of an additional $200bn in US exports by 2021 as agreed. It is likely to have a negative impact on China’s other trading partners, including Australia and the US, as commodities like LNG and motor vehicles are sourced from the US. Chinese growth hit 6.1% for 2019 but many now expect it to fall below the 6% mark for the first time. Positively, industrial production is improving once again, up 5.7%, and retail sales continuing to boom, up 8%. The result was an improvement in the IMF’s global growth forecast, from 2.9% to 3.3% and Japan’s as well, from 0.5% to 0.7%.

  • It was the well-known technology stocks that lead the market higher as the decade turned into 2020, with Facebook, Apple and Google all hitting all-time highs during the month. Many are suggesting these valuations are reasonable given robust fundamentals and exceptional growth levels like Facebook’s 24% year on year revenue growth and 56% earnings margin. Amazon initially under performed but reached another high after hours following a 50% beat on its earnings per share estimate for the final quarter.

  • President Trump appears to have beaten the self-titled impeachment ‘witch-hunt’ with the Democrat’s unable to swing enough Senators to include additional witnesses in their high profile trial. The consensus appeared to be that there was little value in proceeding with the impeachment for the party given the President has just 10 months before another election.

  • After a multi-year boom in the share prices of the few Australian lithium miners, the sector has been hit with a reality check in recent months. Galaxy Resources (GXY) announced that production at their Mt Cattlin mine would be put on hold for the foreseeable future, blaming an oversupply and subsequent 50% drop in lithium prices for the closure. They joined the likes of Pilbara Minerals and Mineral Resources to reduce production.

 

  • In a year when almost every asset class delivered strong returns, the renowned Ray Dalio and his Bridgewater Associations Pure Alpha Fund suffered its first annual loss, dropping 0.5% in the year, piling more pressure on the hedge fund sector as investors find more reasons to move towards passive strategies. Another hedge fund manager, AQR Capital, stressed that future returns remain lower than ever, indicating their internal models predict annualised returns of just 4% from a traditional 60/40 balanced portfolio.

 

  • Engineering and construction specialist CIMIC Group, previously Leighton’s, unexpectedly reported a $1.8bn writedown due to unpaid debts in Dubai, exacerbated by delays and additional costs on the West Gate Tunnel project. They weren’t alone in confession season, with agricultural supplies outfit, Nufarm, forecasting a weaker second half, along with e-commerce retailer Kogan, and Treasury Wine Estates, which was once again hit by an oversupply of cheap wine in the key US

 

The month that was…

  • Whilst it was an interesting month in investment markets, our thoughts and wishes must go to those impacted by the bushfires sweeping Australia. The scale of these fires is unprecedented and this has been brought closer to home with smoke covering Melbourne’s CBD in recent weeks. In an effort to provide any help possible, we have allocated our annual Client Christmas Gift budget to a number of worthy causes related to the bushfires.

 

  • Moving to investment markets, 2019 was one of the strongest years for investment returns since the GFC and the best in a decade. The ASX 200 increased over 18% in price terms, the US S&P 500, 28%, and the Nikkei 225, 18%. This came amid what seemed to be one of the most uncertain, negative and strained economic and social background in recent memory. The key reason behind the strength? A continuation of the trend since the GFC, low interest rates, quantitative easing and money printing, forcing investors into riskier assets for any hope of returns.

 

  • In terms of companies and sectors, it was Healthcare (43%), Information Technology (33%) and Consumer Discretionary (32%) that lead the way in Australia with two of the best performing companies, Fortescue Metals and Magellan Financial (+150% respectively). Global returns were also exceptional, with S&P 500 members, Apple (89%), NVIDIA (77%) and Mastercard (60%) among the top 50

 

  • December saw the UK’s Conservative Party take a resounding victory, re-electing Boris Johnson and his ‘Get Brexit Done’ mission and pushing back against the more extreme policies adopted by the Labour Party under Jeremy Corbyn. This effectively guarantees that Brexit will proceed, with the process of negotiating bilateral trade deals with countries including the US and Australia in full swing. The result was received positively by markets, as everything seems to be these days, removing another potential source of uncertainty and improving the hope of a global economy recovery.

 

  • In another positive sign for the global economy and sharemarkets (not to mention Trump’s re-election chances), the US and China have come to an agreement regarding a number of issues behind their trade war. The so-called ‘Phase One’ deal is expected to double US exports to China, initially from the struggling agricultural sector, and includes better intellectual property protections, curbing of technology transfer to Chinese firms and the expectation that China will further liberalize it’s financial markets. More recently, China’s central Government also released a further $115bn into the economy by once again reducing the capital ratio required of their banks.

 

  • APRA released its long-awaited super fund ‘Heat Map’ in December, attracting the ire of the strongest and weakest performers alike. On first view, it provides a useful reference tool particularly for those in super funds forced onto them by their employers. Looking more closely, however, some dangerous precedents have been set that are based around the near sole focus on historical performance and reported fees, with limited consideration given to transparency or flexibility. The worst performing included Maritime Super, BT Super for Life, and Energy Industry Super, with a number of corporate plans the worst in terms of fees, Pitcher’s, Goldman Sachs and Qantas. It was a busy month for the industry fund sector, with ASIC releasing a report on the quality of financial advice they provide, which concluded that 51% of funds provided non-compliant personal advice to members.

 

  • The Australian economy continues to struggle, with annual economic growth of just 1.7% and a quarterly increase of 0.4%. The performance was once again driven by the consumer, who is spending little on retail but more on services, dining and experiences, whilst falling Government spending was the reason behind the slowdown compared to the third quarter. Australia’s reliance on big business, including traditional banks and retailers, and our lack of innovation is becoming increasing obvious in our economic results. Interestingly, Australian tax on company income is the highest in the world as a portion of GDP. Australia is in desperate need of personal and corporate tax reform. In the US, unemployment fell to 3.5% during the quarter, the lowest level since 1969, with expectations this will have a flow on impact on wage inflation in 2020.

 

  • The Wattle Partner’s Investment Committee have for some time been undertaking due diligence on a climate change and ESG, or Environment, Social, Governance driven portfolio, which will be launched in 2020. Given our research, we were interested to hear Kenneth Hayne’s, famous for running the Financial Services Royal Commission, comments on the issue and where board and management focus should truly be.

 

  • We were intrigued to see GPIF, the Government Pension Investment Fund of Japan with over $1 trillion in assets under management, announce they would no longer be lending stock to short sellers. Lending stock is commonly used by industry funds, index funds and most large managers in order to add an additional level of return associated with the lending fee. GPIF indicated this was worth as much as $573m to them. This comes after a tumultuous year for many Australian companies from Blue Sky to Rural Funds and Wisetech Global.

 

  • “I’m no Skase” read the headline in the Australian Financial Review. The interviewee was the head of IPO Wealth and Mayfair Platinum, two investment opportunities that are being heavily (and expensively) marketed for their income offerings to yield starved Australian investors. The group’s approach appears to involve guaranteeing income returns to investors, on lending their capital to listed and unlisted companies, and hoping they perform sufficiently to be able to repay investor’s capital. In late 2019 they ran an extravagant launch after acquiring the derelict Dunk Island for $135m, of what we assumed is investors capital. If there is a sign of the market nearing high, this may be it.

The month that was…

  • 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.