Monthly Investment News
3 August 2016
Markets Surge in July, What’s Next?
July proved to be a very fruitful month for equity The argument is that globalization has failed to
market investors. Markets quickly recovered from adequately reward the middle class in advanced
the initial fear and panic following the shock to economies, and decreased the ability of these
markets at the end of June when Britain voted to groups to raise their standard of living via housing
leave the European Union (Brexit vote). The back wealth and cheap credit. In the US the remarkable
half of July also saw global macroeconomic events rise of Donald Trump could cause more market
take a back seat, as investors assessed US/European jitters, given his extreme policy comments over
corporate earnings. In particular, US corporate issues such as immigration, national security, and
profits have been stronger than the market was fiscal policy. Given Hillary Clintons more mainstream
expecting, and it seems analyst expectations so far policies, she would be the best outcome for markets,
have been overly pessimistic.
in our view. These political trends are likely to
continue in 2016 creating uncertainty and we will be
Locally the Australasian markets were certainly not watching developments for their implications on
left behind, as the Australian market (ASX 200 markets.
Index) was up +6.3% and touched a high for 2016,
while the NZ market (NZX 50 Index) rallied +6.5% The Reserve Bank of Australia cut its benchmark
and hit a new all-time high.
interest rate by 25bps to a new all-time low of
1.50%. Weak domestic inflation was highlighted as
Given the rally in both markets, as we head into the the key factor in reducing the cash rate. The RBA
local earnings season this week, AU/NZ corporate appears to remain cautious over the developments
profits will be as important as ever, as investors will in the economy noting that growth continued "at a
look for higher earnings to justify share price moves moderate pace”. However, further cuts are likely to
and valuations. ’s AU & NZ model portfolios require a reasonably high hurdle in our opinion and
have manged to keep ahead of both market indices, we think the RBA will instead be in a wait and see
and since inception (September last year) are up mode.
+18.0% and +33.6% respectively (details below).
The RBNZ meets later this week on its key OCR
After what was one of the worst starts to a calendar decision. believes that the RBNZ will cut the
year in terms of share market performance, cash rate 25bps to 2.00% and are likely to remain
markets have bounced back and shown quite very accommodative leaving the door open to
amazing resilience, and the question remains what further cuts throughout the year. Weak domestic
is the outlook for the rest of the 2016? There is inflation is also the key driver to a reduction in the
always a chance that a left tail risk may appear over cash rate.
the course of 2016 which was unexpected, and
derail the course of markets. However, the key
foreseeable risk, which we have noted in the past, is
US political risk, as there will be a new President of
the United States in November this year.
One of the arguments used to explain why Britain
decided to leave the European Union is that it
represents a tipping point towards populism in the
Western world, and also explains the rise of Trump
in the US. As we have discussed previously, around
the globe issues such as wage growth, income
equality, and the shrinking middle class have fuelled
populist political movements based on hopes and
fears.
3 August 2016
Australian Model Portfolio
New Zealand Model Portfolio
The
Australian
portfolio
marginally The NZ Model Portfolio was up 5.4% in July,
outperformed the general index (ASX200) by 0.1%, slightly lagging the market NZX 50 index which
rallying 6.4% for the month. Since inception, the AU gained 6.5%. Since inception, the NZ portfolio
portfolio has outperformed the general has now outperformed the general NZ market by
Australian market by 11.1% and is up 18% in 3.7% and is up +33.6% in absolute terms.
absolute terms.
The larger companies in the portfolio led returns,
A number of ’s key holdings bounced back this with SkyCity (SKC), Spark (SPK), and Fletcher Building
month following the short-lived turmoil created by (FBU) all positing gains of over 10% for July.
the Brexit. Our higher risk stocks such as Macquarie Tourism Holdings (THL) also rebounded as initial
Bank (+8%), Ardent leisure (+12.8%) and Select fears around Brexit on NZ tourism were quelled.
Harvest (+12.9%) benefited from the ‘risk on’ trading New Zealand tourism chief Chris Roberts has stated
environment this month.
that "Tourism NZ don’t expect the outcome of the
However, the standout performer for the month Brexit vote to have a significant impact on New
was retailer Myer, which manged a 19.2% rallied for Zealand tourism". It should be pointed out that
the period and is now up over 55% since we added almost half of the visitors from the UK over the last
the stock to our portfolio in October last year. Myer 12 months (101,600) came to visit friends and
benefited from better than expected retail sales relatives, and that market is relatively resilient to any
figures in the industry and short sellers exiting their change in economic conditions or confidence.
open position. With interest rates set to remain low Further, expects continued growth from Asian
for some time, we expect the consumer sector to markets to provide some offset from any British and
benefit from increased discretionary income over European declines.
the medium term.
Technology company Xero (XRO) also rallied 8.7% as
also took the opportunity to add Generation its AGM was well received by shareholders. Chief
Healthcare REIT, following a sharp selloff in the executive Rod Drury told investors it will start
stock. GHC is Australia’s only ASX-listed real estate offering new services as it seeks to transform the
investment trust that invests exclusively in platform founded on accounting software into the
healthcare property. We see this is a relatively low online portal of choice for small businesses. This is a
risk stock with strong long-term thematics.
strong step forward to encompass the entire value
chain for small business financial transactions, in our
During the month, also reduced its exposure to view. Given the NZX is near an all-time high, in New
Bank of Queensland and QBE insurance. Both stocks Zealand we are very selective with our portfolio
have struggled with economic headwinds and have investments. We remain focussed on NZ stocks
underperformed the general market. We took the which fit our investment themes as well as focussing
opportunity to reduce our exposures to the stocks. on high quality dividend paying stocks.
3 August 2016
Stock ratings
Given the dynamic nature of share prices ’s rating can become out of sync with the projected total return as the share price moves. The rating
must only be viewed as valid with respect to projected total return at the time of rating or target price changes.
Individual stock ratings are determined by the projected total return on a stock. ’s analysts project a 6 to 12-month target share price for each
stock. The capital gain or loss implied by the 6 or 12-month target share price, along with the analyst’s projected prospective dividend yield,
generates the analyst’s projected total return for a given stock.
Based on a current 6 to 12- month view of total share-holder return (percentage change in share price from current price to projected target price
plus projected dividend yield), we recommend the following:
BUY: Based on a current 6 to 12-month view of total share-holder return, we recommend that investors buy the stock
SELL: Based on a current 6 to 12-month view of total share-holder return, we recommend that investors sell the stock
HOLD: We take a neutral view on the stock 6 to 12-months out and, based on this time horizon, do not recommend either a Buy or Sell
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3 August 2016