Monthly Investment News
6 July 2016
Brexit Shocks Markets in June
Following a relatively calm few months, global markets fell sharply towards the end of June in the wake of the shock result that the UK had voted to leave the European Union. The initial reaction of markets was one of panic and chaos, and it is certainly set to be a period of
uncertainty for the UK. However, anxiety diminished over the global impact of the UK Brexit. The market is coming to terms with the fact that it will be a long drawn-out process and period of uncertainty for the
UK. The main casualty of the Brexit has been the British Pound, which has hit a 31-year low It seems markets are recovering from what was an initial overreaction. Investor sentiment has also The RBA left rates on hold at 1.75% as widely been soothed by the expectation that policy makers expected, and while the statement did not adopt a around the world will act to counter the effects of specific easing bias, the Board did commit to ‘refine Brexit.
its assessment of the outlook for growth and inflation and to make any adjustment to the stance
In terms of the local markets, the Australian market of policy that may be appropriate’.
(measured by the ASX200 market index) lost -2.7%
for the month, while the NZ market (NZX 50 index) We think the flow down effects from the Brexit and
fell -2.0%. Given the Brexit shock towards the end the potential for a minority government and
of the month the rally experienced in previous fragmented Senate are likely to see growth revised
months we see this as a relatively positive result, down and therefore increase the chance of an
and highlights how the local markets are largely August cut from the RBA.
insulated from Brexit uncertainty.
Given it was also the end of the Australia financial Accordingly, most factors point to the cash rate
year, there was likely some window dressing by fund falling to 1.5% in August and it would appear that
managers. The big winners for the ASX for the only a surprisingly strong inflation print at the end of
financial year have been healthcare, internet the month could materially alter the course of
commerce, infrastructure, food, and smaller cap interest rates.
stocks, as the banks and resources sectors have
come under pressure. Our portfolio holdings have Next week sees the RBNZ hold is policy update. The
reflected many of these sector tilts, and in terms of bank faces a similar scenario to the RBA with
mining stocks we remain focussed on the majors moderate domestic data, relatively weak global
(BHP), and we continue to avoid the big 4 Australian commodity prices and an overvalued currency
Banks.
against the back dropped of a vigorously bubbling property market. The bank left its policy rate
At the current juncture we also hold some cash unchanged last meeting at 2.25%, seeking to access
(around 9%) as political risks remain elevated. the outcome of further domestic data points.
Australia’s political parties remain in a deadlock
after the weekends election failed to produce a clear We think that the RBNZ’s decision is largely
winner, raising the prospect of prolonged political dependent upon its domestic inflation reading. A
and economic instability. As discussed previously the weak reading would all but seal a rate cut at the
other major risk on the horizon is the US elections, next meeting.
given the extreme policies of Donald Trump.
Australian Model Portfolio
New Zealand Model Portfolio
The Australian portfolio underperformed the The NZ Model Portfolio was down -2.9% in
general index (ASX200) by 2%, falling 4.7% for the June, behind the market NZX 50 index which fell –
month. Since inception, the AU portfolio has 2.0%. Since inception, the NZ portfolio has
outperformed the general Australian market by now outperformed the general NZ market by 4.7%
10.1% and is up 10.6% in absolute terms.
and is up +26.7% in absolute terms.
The Brexit debacle was not conducive for the As with the AU portfolio, the Brexit debacle was not
performance of the Australian portfolio in June. The conducive for the performance of the NZ portfolio in
portfolio had been performing strongly up until the June. ’s NZ portfolio was particularly exposed
shock vote derailed global markets. ’s AU given its weighting towards the tourism thematic.
portfolio was particularly exposed given its tourism Tourism Holdings (THL) was the main drag on
thematic and heavy exposure to offshore revenue performance (-9.0%) as it gave back recent gains.
earners. Both are reasonably central themes in the According to the latest statistics, the UK and Europe
portfolios construction. Investor questioned the make up 15% of the total visitor arrivals to NZ in the
impact UK tourists and companies with high revenue last 12 months to May 2016 (as shown by the chart
exposure in Australia, leading to a material below).Recent trends in tourism have shown
underperformance from the respective sectors. encouraging signs, in particular tourism growth from
However, since the start of July markets have China continues to boom, up 27% versus last year,
proceeded to recover and are some are now trading while other areas of Asia also go from strength to
higher than before the Brexit event. For this reason, strength. This growth should somewhat buffer a
we maintain the overall portfolio themes and downturn from Europe. Further, it should be pointed
structure.
out that almost half of the visitors from the UK over
Stocks of note include QBE, Ardent Leisure (AAD), the last 12 months (101,600) came to visit friends
and Treasury Wines (TWE). All three feel sharply as and relatives, and that market is relatively resilient
a result of the Brexit. QBE sources an estimated 14% to any change in economic conditions. THL shares
of its revenues the UK and 12% from wider Europe. have recovered somewhat at the start of July.
Consequently, the stock fell 16% over the course of
the month. AAD was down 14% give its heavy Air New Zealand (AIR.NZ) continued to come under
exospore to tourism and reliance on overseas pressure (-6.7%). According to some preliminary
visitors. Meanwhile, TWE retraced 11% given its estimates, Airlines could suffer a drop-off in British
considerable wine presence in the UK.
travellers of up to 5 per cent following the Brexit. The International Air Transport Association says the full
On the positive side, Crown Casino’s had a strong impact will not be clear for some time. However, as
month, ending up 5% as the company announced its highlighted above there are many factors discussed
plans to unlock shareholder value. Crown will be above in relation to NZ which could continue to
split into 3 separate entities all holding different support tourism and passengers travelling to NZ. We
assets in order to increase company transparency will be watching developments closely.
and improve shareholder returns.