The month that was…

  • Sharemarkets around the world closed the month delivering the highest 6 month returns in several decades. The ASX was up 3.19% for the month taking the 6 month return to 17.22%, whilst the S&P 500 was up 6.89% for June and 17.35% for the 6 months, making it the best half year since 1997. The Australian market was once again driven by the banking and financial sector (+3.49%) with materials and mining (6.28%) and industrials (4.47%) where most of our technology facing companies operate.

 

  • Looking around the world, most of Europe gained at least 5%, lead by the French CAC 40, which was up 6.36% for the month. The Chinese sharemarket began bucking the trade war trend, the Hang Seng was up 5.4% and the CSI 30, 6.1%. June saw a number of highly successful IPO’s and the return to favor of the all-important semi-conductor industry on both sides of the world. In a sign that the rally may continue into the second half unabated, President Trump conceded ground with China at the G20 meeting, relenting on the US ban on sales to Huawei and reopening trade discussions as anticipated.

 

  • Gold bullion reach an all-time high in June, hitting over $2,000 per once in Australian Dollar terms. This oft understood investments works as both an alternative currency and a hedge against volatility. It underperformed in the previous period of expansion as the central banks embarked on unconventional monetary policy. But the threat of falling rates around the world at a time of slower global growth has seen central banks and investors rush back into the commodity. That and the falling AUD have supported the price and made it one of the best performing assets in 2019.

 

  • The US trade re-negotiation continued in June, with India and Mexico brought into focus. The US removed India’s preferential trade status and their exemption from steel and aluminum imports, with India retaliating by imposing tariffs of up to 70% on 28 US products including almonds and apples. The US and Mexico came to an agreement to avoid the commencement of tariffs, with Mexico agreeing to do more in an effort to slow the flow of immigrants moving through its country.

 

  • After some 3,156 days of planning and assessments the Adani coalmine finally received environmental approvals with construction to commence as soon as possible. Interestingly, it came in the same week that AGL Energy announced it’s partnering with Santos to more efficiently extract oil and gas from the ground.

 

  • Evans Dixon was in the news for all the wrong reasons during the month after a claim to the Financial Ombudsman Service was shared with the Australian Financial Review. The complaint was focused around Dixon’s strategy of recommending their own in-house products to their clients, in some cases over 60% of their portfolio, and charging exorbitant fees. The focus was around the US Masters Residential Property Fund, which has reaped fees of over $200m from its investors, in addition to those paid to other Dixon subsidiaries for undertaking renovations on the fund’s properties. The firm which heavily advertises its low up-front cost service in the press, appears to be pushing the same vertical integration story that caused the banks and customers so much pain in the Royal Commission. With a potential class action on the cards we haven’t heard the last of this affair.

 

  • The Australian Dollar reached a 10 year low against the US dollar in June hitting as low as 67 cents in intraday trade. The downward pressure was due to a combination of factors, the first being the RBA’s first rate cut but the 13th in the current period of monetary loosening. This saw the 10-year Government bond rate fall to all-time lows under 1.3%. This suggests all is not well for the Australian economy as exports to China slow and we become more reliant on Government spending.

 

  • The weakness was evidenced by the GDP result for the first quarter, which came in at just 1.8%. this is a decade low and well below the 3.5% long-term average. Most weakness came from the private investment and consumption sector as property valuations, particularly on the fringes of our major cities remain under pressure and many developments are not securing enough presales to proceed. The highlight remains government spending and investment (read infrastructure) which is one of the few positives on the horizon and an area of interest for our clients.

 

  • In the worst kept secret in finance, Facebook announced it would be launching its own cryptocurrency with the support of a long line of financial and technology giants, including Visa, Mastercard, Ebay and Uber. It comes at an interesting time for the company following a number of data and privacy issues, and of course the opinions on the launch are mixed. There has been talk for many years that someone would challenge the world banking order and Facebook seemingly has the network, data and partners to make this a success.

 

  • We were exacerbated to hear the goings on at market darling Afterpay (APT). For those not aware, the company offers a lay-by service for online purchases and has been growing exponentially but is yet to deliver a profit. The company has been forced by ASIC to appoint an external auditor and are being investigated by AUSTRAC for their adherence with anti-money laundering laws. ASIC is concerned that the company is not suitably identifying it’s clients nor is it performing credit checks before lending, requiring as little as a prepaid Visa Card to purchase goods. Interestingly, the founders sold down $104m of shares before the announcement and the companies broker appears to be pressuring shareholders not to sell their own shares. On the final day of the year Visa announced the launch of its own copycat product sending shares down 10%.

 

  • The US and China agreed to resume trade talks ahead of the G20 meeting at the end of the financial year. This comes at an important time after the US began public hearings to discuss further tariffs on up to $300bn in additional exports. It’s estimated that consumer technology products would make up over half the additional amount slowing down the US’ innovation engine. This comes after the Chinese applied tariffs of between 10-25% on any $60bn worth of US exports and the US Government banned its own companies from selling to networking giant Huawei.

 

  • Looking globally, both the Japanese and European economies have shown signs of improvement, with Japanese GDP growing by 2.2% in the March quarter, as the consumer came back to the fore. European unemployment fell to a 10-and-a-half-year low of 7.6% in April as the German economy recovered and Italy moved out of another recession. This came at the same time as Theresa May stepped down as Prime Minister in the UK and more moderate parties gained traction in the EU election.

The month that was…

  • In a positive move for investors, workers, retirees and most likely the economy, Scott Morrison won what many experts had considered the ‘unwinnable’ election. He will return to Government with a majority and a number of major personalities out of his way. Scott Morrison won on a status quo approach and by raising real concerns about the potential impact that Labor’s higher tax environment would have on a weakening economy. Now we can only hope the Coalition is able to cobble together a long-term energy policy and halt the rise in living costs.
  • The Australian Sharemarket bucked the global trend, delivering a positive performance of around 1% for May, as the rest of the world was hit by growth concerns and the escalation of the US-China trade war. The S&P 500 fell 7%, the Hang Seng 10% and the FTSE close 4%. Global growth concerns are increasingly reflected in bond rates, with the Australian 10 Year Government Bond hitting an all-time low of 1.46% after starting the month at 1.79%. The threat of a US recession increased as the bond rate fell similarly from 2.50% to 2.12%. The weaker bond rate saw Australia’s exchange rate continue to weaken, moving below 70c. US GDP growth was confirmed at 3.1% for the first quarter.
  • Microsoft reported strongly delivering 16% growth in revenue for the third quarter. The result was driven by the increased focused on cloud and business services, rather than the Office product, which actually saw the company move past a market cap of $1tn; just the third listed company to do so. Apple is coming under increasing pressure from various sources, with an anti-trust lawsuit against its dominant but restrictive App Store business, which represents some 35% of revenue. The company is also being hit heavily by the US’s tariffs announcements, as the majority of the iPhone is built in China, with the potential for an increase of $160 in the production costs. The company is down from a high of $230 to just $180 and now trades on a P/E ratio of just 15x.
  • It was a bad month for forecasters and economists in Australia, with the majority failing to predict the result of the Federal Election or the RBA’s decision to hold rates steady. Interestingly, close to half of the highly paid economists got the RBA’s call wrong and not one poll predicted the flood of votes to the Liberal National Party across the country. As always, it just reiterates the importance of not making investment decisions on expert forecasts and planning for several rather than a single outcome.
  • It is, however, becoming increasingly likely that interest rates will be cut in June, with the Governor announcing as much at a speech in Brisbane. Inflation remains under control, as does employment, however, weaker property prices have begun impacting the economy, with reports of mortgage delinquencies and cancelled settlements growing. In our view the RBA is likely moving too fast in cutting rates once again, leaving very little room to move should the economy weaken further.
  • ASIC continues to push harder with penalties for vertically integrated financial advice businesses claiming to be independent, with industry super the latest caught in the net. HOST PLUS received a $12,600 fine for claiming it’s financial advice was independent in recorded telephone calls; we ask will members be paying for this?
  • The ACCC’s decision to block the merger between TPG Telecom and Vodafone was derided by the financial sector and saw TPG’s share price fall heavily. The ACCC seems to be believe that TPG will recommence the construction of their 4G and 5G networks as a standalone entity even after this was cancelled earlier in 2019. The decision is expected to be appealed, as was that of QR National, which ensures Telstra remains in the box seat for growth as its competitors focus remains elsewhere.
  • It was reported during the month that APRA and the RBA are considering alternate strategies to revive the struggling lending market and spurring the major banks to open their wallets for borrowers once again. We understand the RBA/APRA are considering reducing the 7.25% benchmark rate which banks are required to use to determine the serviceability of the loans they provide. At this stage it is believed a 0.5% reduction to 6.75% is likely, given the muted outlook for interest rates around the world, which could potentially release 5% more capital to all borrowers.
  • The economic news around the world was mixed, with Australian unemployment increasing to 5.2%, from 5.0%; however the major drive was an increase in those looking for work by 0.2%. US Core Inflation remained steady at 2.1% whilst housing starts recovered growing 5.7% month on month suggesting consumer sentiment is improving. Neither was enough to see monetary policy move, with both the US Federal Reserve and RBA on hold. Things are also looking up in Europe, where inflation hit 1.7%, GDP growth was revised to a positive 0.4% reading as Germany and Italy returned to growth and Spain pushed ahead following their election.
  • The US-China trade war continued to escalate with the US proceeding with an increase in tariffs to 25% for some $200bn worth of imported Chinese goods. The banning of Huawei began filtering into the country’s largest Tech stocks with the likes of Google no longer willing to operate on its platform or utilise its products. As expected, the trade war is actually hurting US businesses, with farmers in particular being hit by weaker exports, resulting in a recent aid package being announced. Like most, we don’t believe the US President’s tweets are particularly helpful to markets, but agree that much needed pressure is being placed on China’s history in relation to intellectual property and foreign competitors. Tariffs and subsidies are of course not uncommon, it is when they are one sided that it becomes an issue.
  • We aren’t sure about you, but whilst we value some of the input provided by the likes of Invest Smart and Intelligent Investor, it seems the product pushing has moved to another level in the post Royal Commission world. We must have counted three invitations from Alan Kohler regarding an investment in a new ‘Ethical ETF’. Interestingly the Paul Clitheroe-backed Invest Smart recently purchased Kohler’s Constant Investor business, and are now launching any number of in-house investment opportunities. As always, we suggest proceeding with caution.
  • UK PM Theresa May stepped down, after putting years of effort into finalizing Britain’s exit from the EU. Her timing to take over the leadership couldn’t have been worse with her own party playing hard ball on any level of negotiations with the EU and basically costing her career. Boris Johnson, the likely replacement is pro-Brexit, however, it is still to be seen whether any agreement can be made before the Halloween deadline.