Monthly Investment News
5 April 2016
Global Markets Rebound, Australia Lags
March saw improving market sentiment in late February continue as markets reversed losses experienced
at the start of the year. The market reaction to any negative news has also become relatively muted as
volatility in markets has settled markedly. The New Zealand stock market has reached a new record high
while the Australian market continues to recover. The recovery has not been limited to equities, as oil and
hard commodity prices have also bounced sharply
What Sell-off?
While the last 3-year underperformance of the
Australian market versus the NZ market relates to
It’s like the first 6 weeks of the year never happened, the end of the mining boom, the Big Banks and
as the US market is now up for the year following broader financial sector have borne the brunt of the
another strong month of March. The latest leg of the sell-off in recent times.
rally has been driven by the more cautious approach
taken by the US fed as to interest rate policy, and Australian banks have been subject to a
positive economic data highlighting the strength of considerable amount of bad press over the course of
the US economy.
the last 6 months. This has ranged from trader scandals and private wealth and financial advisor
In saying that, the rebound in markets has more misconduct to housing market concerns and bad
been a reversal of panic and fear which gripped debt loans. Collectively, the bad news has seen the
markets at the start of the year. Throughout the sell- banking sector perform dismally. The largest 4
off urged members to remain calm and even companies on the ASX alone are the major for banks
look for opportunities to buy selective stocks as we and have a combined weighting of almost 27%.
believed the sell-off was driven by negative Accordingly, the ASX is not very well diversified and
sentiment and a rout across commodities. Central at the whim of the performance of banks.
bank actions around the world have also helped to calm markets, and the Chinese government in Most of the concerns about bank bad loans centre particular has reaffirmed it is willing to step in to on institutional lending. There have been a number support growth in China.
of high profile company failures recently such as Arrium, Peabody Energy, Dick Smith, and Slater &
The NZ market reached a new all-time high in March Gordon. Investors fear that there may be more to
rallying up a massive 8.4%. come, particularly from the mining and energy
Chart of the Month
sector and are concerned over the quality of the
remaining loans in the portfolio. The major influences currently plaguing the
industries performance are: 1. Increasing funding
costs leading to lower profit margins. 2. Increases in bad debts. 3. Regulators are likely imposing further capital requirements, lowering banks profitability. 4. Low interest rate environment makes banking profit
margins shrink.
Although the recent quantum of write downs and bad loans is not large, the most important point is
whether they are a canary in the mine for much larger losses. Further deterioration in mining states
However, the Australian market has been under and increases in company defaults would have far
pressure of late and significantly underperformed wider implications to the general economy than
other markets, so question is why?
currently foreseen.
Stock Market News
The US market is now up for the year following believe that Turnbull will be re-elected as
another strong month of March. Australian and New Prime Minister, especially given the lack of any real
Zealand share markets ended the month on a high opposition. A majority win by Turnbull is likely to be
note as investors jumped back into heavily sold off the most preferred outcome by equity markets,
sectors such as mining stocks.
which tend to suffer on uncertainty and hung parliaments.
The Australian market (measured by the ASX 200 Index) rebounded 4.1% in March following a tough Fresh concerns over the banking and financial sector start to the year. At the same time, the New Zealand saw a sharp correction in prices in the latter part of market (NZX 50 Gross Index) was up a massive 8.4% the month. Both ANZ and Westpac have increased for the month, as New Zealand shares have reached their bad debt provisioning in light of some high a new all-time high. Given share price moves, we profile corporate defaults and personal loan remain far more selective with investment deterioration.
opportunities in our NZ portfolio, and generally see remains warry of the banks at this stage
more value in the Australian share market at current despite their attractive dividend yields. There are
levels. To put the relative performance in context, still a number for regulatory issues that the banks
the Australian market is down -14% over the last 12 need to address along with a slowing housing
months, while the NZ market is up +15%.
market and shirking profit margins.
New Zealand Equity Market
The New Zealand Equity market continues to defy gravity, with the NZX 50 Index up 8.4% for the month of February, outpacing other markets. Valuations now looks stretched in the NZ market,
and our outlook is for the market index to remain relatively flat for the rest of the year. In saying that, we still believe there are currently a
Australian Equity Market
number of high quality investment options in the NZ
market, which make up our NZ model portfolio. At The Australian equity market (ASX 200) bounced the same time, we are not negative on the NZ back from what has been a difficult start to the year. market, we simply see better value elsewhere. The main index rose 4.1% led by a sharp retracement Hence we remain close to fully invested in the NZ
in banks and miners.
portfolio.
The cyclical sectors generally outperformed defensive sectors: Mining & Metals and Banks were
the best performing sub-sectors while Health Care
was the worst performing sector.
The Australian Prime Minister Malcolm Turnbull laid
the groundwork for a possible election, announcing
he would order a ‘double dissolution’ election on July
2nd if the Senate failed to pass the government’s
industrial relations legislation. Additionally, the
Prime Minister announced the Federal Budget would
be handed down a week early, on May 3rd.
Stock in Focus – MYER (MYR.AX )
has been a vocal support of Myer. Although we
are out of consensus with the rest of the market on
our positive beliefs.
Myer posted its strongest sales growth for six years
in its earnings release in March. Store sales rose
+1.8% and positive Like For Like (LFL) sales of +3.3%
showed improved sales momentum at the 1st
quarter 2016 result. Profit (EBIT) did decline 6.5% to
A$93.8m but this was a largely a result of the new
strategy management is putting in place and
therefore can be seen as a positive in our view.
MYR has a strong brand, but has been the victim of
underinvestment in stores and a loss of focus on the
shopper. We believe management’s new strategy
makes sense and the capital allocated to turn around
the business appears appropriate. While not without
risk, the improving consumer spending backdrop
and more rational promotional environment give us
increased confidence in the pace of an earnings
recovery.
Commodity Corner
Iron Ore:
Crude Oil:
Iron ore (Australia’s largest export) has advanced in Crude oil wiped its gains for 2016 last week after
2016, surprising many forecasters who’d expected a rallying strongly since February as Saudi Arabia’s
fourth year of losses driven by a global glut and deputy crown prince said the kingdom will only
slowing demand for steel in China, the largest user. freeze production if Iran and others follow suit. In
saying that, Crude Oil still remains significantly Mid-month iron ore prices jumped a record across higher than its low in February at US$36 a barrel. Asia of a daily +19% move, and highlight to us how
negative sentiment had become. Clearly in these The latest talks between the major oil producing
situations investors making negative bets (short nations highlight how a supply response while
sellers) can be caught out. occurring, will not happen overnight. Our view
has been encouraged by the price action remains that while we have likely seen the bottom
displayed and although it is too soon to be calling a of the oil price, we are likely to see a gradual
larger upward trend, we do believe that a bottom is recovery over the course of the year.
in place. BHP Billiton and Rio Tinto are the world’s lowest cost iron ore producers. Both have purposely
increased their production to force the higher cost producers from the market. believes, that
ultimately the industry will be a lot more efficient after the miner exodus. All miners have had to
significantly cut costs given the fall in material prices. Further, the few that survive will have significantly
less competition to compete once the high cost producers have left.
Fixed Income & Currencies
believes that the RBA will maintain interest The cash rate is expected to settle some where
rates at 2.00% over the near term. Economic data, around between 2.25% to 1.75%. Inflation and the
particularly employment and growth figures, strenght of the dairy sector will be the two most
remain robust and the economy appears to be in important factor in determining this.
reasonable shape at the moment.
Currency Markets
However, two major headwinds could derail the US Fed Chair Yellen reiterated her cautious approach
economic recovery. The AUD and the housing to raising interest rates at this months US Federal
market remain two key factors to watch. Despite Reserve meeting announcement – which saw the
the AUD falling below US$0.69 cents at the Australian and New Zealand dollar immediately
beginning of the year, a recovery in commodity jump to US$0.76 and US$0.68 against the US dollar
prices coupled with the US Federal Reserve delaying respectively. We believe Yellen is trying her best not
its interest rate hikes has seen the currency push to “spook” markets by moving too quickly, which is
back towards 0.77 cents. A higher currency is seen understandable.
as a negative for economic growth as it puts a drag on exports. However, we see the rally as only However, one of the consequences of Yellen’s temporary and once the US begin their rate hike cautious approach has been US dollar weakness, and path, the AUD should revert to its longer term down the US dollar is now at a 9-month low. Against the ward trajectory.
NZD the USD is now trading at 69 cents and 76 cents against the AUD and we believe this USD weakness
Secondly, it appears that the housing market may will be short lived.
have reached its peak in 2015. Rental yields in all capital cities have declined over the past 12 months. In our view a moderately growing economy, This is generally a catalyst for lower house prices. combined with a strong jobs market and firming Australia’s housing price growth has slumped to its inflation, is likely to keep the US Federal Reserve on slowest pace in nearly three years, with capital city a path to gradually raising interest rates this year. prices rising 6.4% over the past 12 months. Although Given the US economy is in good shape, Yellen could we don’t see a full blown crash in house market in be proven to be overly cautious over the course of the near term, we do expect to see the sector as an this year. Higher US interest rates should see the US investment class, lag that of equities. Further cooling dollar strengthen. for housing demand should delay any need for
immediate rate hikes.
The RBNZ meets at the end of April to discuss cash
rate decsion. At the previous meeting, the cash rate
was unxpectedly cut to 2.25% as the RBNZ
anticpipated ecomonic weakness lead by the dairy
sector.
It appears that further cuts may be need over the
course of the year in order to prop up confidence
and support economic growth. Low inflation still
remains a major concern that the Bank is trying to
address.
Further strenght in the NZD from delayed US interest
rate hikes will not please the RBNZ. However, these
affect are seen as more temporay and should revert
back to its long term downword trend in the near
term.
Model Portfolio Performance
Australian Model Portfolio
New Zealand Model Portfolio
The Australian once again outperformed the The NZ Model Portfolio had another strong
general index (ASX200). The AU portfolio was month in March, up 7.9%, slightly behind the market
up an impressive 5.4% over the course of the month NZX 50 index which gained 8.4%. Since inception,
and beat the performance of the general market by the NZ portfolio has now outperformed the
1.2%. Since inception, the AU portfolio has general NZ market by 9.1% and is up 28.5% in
now outperformed the general Australian market absolute terms.
by 9.1% and is up 6.7% in absolute terms.
Given share price moves, we remain far more
Almost the entire portfolio managed gains in the selective with investment opportunities in our NZ
month of march, however there were a few portfolio, and generally see more value in the
standouts.
Australian share market at current levels. Returns
were led by the larger cap, blue chip names in the
Ardent Leisure shares (AAD.AX) have been out of portfolio and the fact that several of our holdings
favour with the market in recent times which has paid significant dividends in March.
seen the company’s share price retrace back to 2014
levels. However, the shares jumped over 15% over Fletcher Building rallied 13.4% for the month and has
the course of the month on news it intends to sell its rebounded 20% since a low in February. We remain
smallest business division (marinas), and invest the positive on its outlook and believe the company has
proceeds into its overseas expansion (US Main Event turned a corner. From a macroeconomic view lower
Business). While there are many variables yet to be rates on both sides of the Tasman should continue
determined as the company has only announced its to support construction activity and act as a catalyst
intention to sell, the market has viewed the to support the businesses performance.
development positively. The US Main Event business
has been seen as the jewel in the crown of AAD’s Fonterra shares were fla for the month even as it
businesses, and given our forecast or a lower AUD released impressive first half 2016 result. Profits
investment in the United States makes sense.
rose (NPAT) 123% to NZ$409m. These were
moderately better than the market had anticipated.
BHP was another outperformer contributing 10.2% The farm gate milk price that is paid to farmers for
to the portfolios performance. A sharp bounce in the the supply of milk has been dropped further to an
price of iron ore and oil, combined with a general estimated pay-out of NZ$3.90 per/kg. This down
positive sentiment saw investors improve their from $4.15 per/kg which was previously expected.
outlook on the company. BHP has come under The lowering in the milk price should assist in
pressure over the past 12 months as short sellers increasing FSF profit margins by lower the
speculate the company will struggle to perform company’s input costs. Although overall conditions
given the fall in commodity prices.
in the dairy industry remain challenging, FSF is the cheapest global dairy producer on an earnings basis.
