Monthly Investment News
1 December 2015
Preparing for Lift Off in the US
Equity markets were mixed in November, with the US broadly flat while European markets rallied along
with the New Zealand market which reached a new all-time high. Australian stocks lagged as miners and
the major banks continue to come under pressure, although the news is not all bad with bright spots in
retail and healthcare. Given the policy divergence of central banks across the world, particularly with the
US Federal Reserve set to hike rates for the first time in 9 years in December, we believe this market
divergence is set to continue as we head into the end of the year.
Since the initial sell-off in August and subsequent Chart of the Month
rally, the US Federal Reserve (Fed) has driven market
sentiment, and will continue to do so in our view as
we head into the end of 2015.
We believe there is a high probability that the US
Federal Reserve will raise rates in December, given a
recent string of solid US economic data releases
including jobless claims, inflation figures, and
measures of manufacturing.
Aside from the Fed moves, global markets have
largely brushed off the recent terrorism driven
nervousness. However, volatility may heighten once
again as the major global central banks, the Fed and This month’s US Federal Reserve meeting is ear
the ECB continue to follow divergent paths. Namely, marked as one of the most significant interest rate
the Fed is on the verge of raising interest rates, while meetings ever. On the 15th & 16th of December the
the ECB is very much committed to further easing Federal Reserve will decide whether to raise
measures to support the European region.
interest rates for the first time in 9 years.
This divergence is likely to remain a key theme for believe that an increase of 0.25% is the most likely
the near future, and we may already be beginning to outcome.
see outperformance of European equities over US The Federal Reserve’s Chairman Janet Yellen has
stocks (as easier monetary conditions from central reiterated on serval occasions that they anticipate to
banks supports business and stock prices of the rise interest rates in 2015.
region). This outperformance is likely set to
continue, and we also forecast further weakness in The chart above illustrates just how low current US
the Euro, while the US dollar strengthen across the government bond yields currently are compared to
board (including against the AUD and NZD.
the past 15 years. At 2.22% the US 10 year rate still
remains towards its lowest level ever. believes
We have also seen improvements in global growth, that once the Federal Reserve begins the slow
and a stabilisation in Chinese economic data, which process of increasing interest rates, over time bond
should drive positive returns for equities. However yields will also go materially higher to reflect this
given the recent recovery rally we are not outright change. As bond yields go higher the price value of
bullish on market equity returns. Overall, global the bond falls because investors sell their bond
markets appear to be comfortable with the fact holdings as the value of bonds drop.
interest rates will slowly begin to raise as the Federal
Reserve begins to increase interest rates. As a result Accordingly, has short US government 10 year
we remain positioned as we normally would towards bonds as a top trade. The trade was initiated on the
equities, and we are not expecting any significant 27th October 2015 2.028%.
downside risks next month.
1 December 2015
Stock Market News
CSL was an impressive Healthcare performer in the
Market
Month % Change
Year to Date %
AU portfolio, adding almost 7% for the month
Equity Markets
of November.
US (S&P 500)
-0.4%
1.0%
There are some initial signs that the retail sector
UK (FTSE 100)
-0.6%
-3.2%
maybe in for a decent Christmas period. David Jones
sales figures have indicated solid grow in the retail
Europe (STOXX 50)
2.7%
11.8%
space recently, and as a result this has led to a strong
Australia (ASX)
-1.4%
-2.6%
performance from Myer. has been a vocal
NZ (NZX 50)
1.9%
10.1%
supporter of the Myer turnaround story with
interest rate cuts made by the RBA over the past 2
Equity markets were mixed in November, with the years finally feeding into consumer spending. This
US broadly flat while European markets rallied along. along with a fall in the AUD has made AU retail a
Given the policy divergence of central banks across better performer of late. has had over 20% of
the world, particularly with the US Federal Reserve capital gains so far from Myer.
set to hike rates for the first time in 9 years in With the end of the year fast approaching,
December, we believe this market divergence is set believes the Australian equity market will continue
to continue as we head into the end of the year.
to muddle into 2016. We still believe that there are
We have also seen improvements in global growth, key themes at play and therefore selecting the right
and a stabilisation in Chinese economic data, which sector and stocks can yield investors significance
should drive positive returns for equities.
performance in our opinion. continues to have
a heavy preference for agriculture and healthcare
Australian Equity Market
stocks, which we believe are set to benefit from core
The Australian equity market (ASX 200) was largely underlying themes.
flat for the month of November, down 1.4%.
New Zealand Equity Market
The materials sector was by far the worst performing The New Zealand Equity market made new record
sector down 12.6% for the month. Miners remain highs in November, with the NZX 50 Index up 1.9%
the main drag with BHP falling 21.4% driven by its for the month.
dam wall collapse at the Samarco iron ore mine in
Brazil. BHP is now at its lowest price since 2005 and Despite the market prices hit new levels, we have
has had over 22 billion wiped of its share price in a become more cautious on valuation. We still believe
month. This is considerably more than 7.5 billion US there are several solid investment cases in the New
fine that is to be split between itself and Brazilian Zealand market which still present significant upside
miner Vale. At the current share price, BHP offers an potential. An example of one of these stocks which
attractive dividend of 9.5% although there is some had a positive earnings release lately is Fisher &
pressure from market spectators that this maybe cut Paykel Healthcare (FPH), up 6.9% in November.
going forward. believes that the market has Technology stock Xero was up 19.8% for the month
overacted to the bad news and as a consequence we as it once again gained favour with investors as its
see good risk reward for BHP at the current prices expansion into the US looks to be experiencing solid
and is adding the stock to its Australian traction. We have down-weighted Xero’s portfolio
portfolio this month.
weight to 5.0% on valuation, but remain positive on
Healthcare and information technology were the the solid investment case longer term.
best performing sectors up 5.4% and 7.4% We remain positioned for growth in our NZ
respectively. Both sectors feature heavily in s portfolio, particularly towards stocks which benefit
AU and NZ portfolios.
from a weaker currency, and our holdings in the
agricultural sector.
1 December 2015
Stock in Focus – A2 Milk
A2 Milk (.NZ, A2M.AX) has had an amazing share
price run over the last 3 months, up around 76%
since it was added to the Australian Model Portfolio.
In that time A2 management has upgraded its profit
guidance for 2016. The company now believes
revenue will increase by 7% and profit from $12m to
$22m (83% increase), which is reflecting better than
expected sales of its infant formula in China. While
this is clearly positive news, everything has a fair
value or price. While we still believe in the long term
investment case, but we also believe prices may be
stretched at the current juncture, and we removed
A2 Milk from the portfolio taking healthy profits.
Longer term we continue to have large positions in
companies leveraged towards the “dining boom”
which we believe is set to be the next big multi year
investment theme for Australasia. Demand for a
higher protein diet from a growing middle class in
the developing world (in particular Asia) is set to be
a multi-year investment theme. Australasia is set to
directly benefit from this dynamic, with Australia
and New Zealand being exporting nations in close
proximity to Asia, in our view.
Source :OECD
Commodity Corner
Dairy:
Iron Ore:
The Global Dairy Trade (GDT) index remains near its The iron ore price continues to struggle, falling a
historical lows with the index falling a further 7.9% further 11.4% in the month of November. Over the
at its last trading event and over 15% for the month past year it has fallen 37.7% with the slowdown in
of November thus far. The continual fall in prices is the Chinese economy and construction highlighted
largely being driven by a material increase in supply as the major driver. , believes that iron ore is
from the EU and US. This is leading to excess supply nearing a bottom at current prices. We believe that
on the market and driving prices down. China dairy it may go through a period of consolidation over the
imports are also materially down for the year, medium term.
decreasing 15% from January to September. This
along with Russia’s ban on Dairy imports from NZ is
also hindering the performance of milk prices. On
the plus, demand from Asia (Ex China) and Latin
America are seeing good demand growth. Dairy
prices are likely to stay low up the supply side issues
are resolved.
1 December 2015
Fixed Income & Currencies
Currency Markets
The RBA holds its monthly meeting on the 1st
Market
Level
Month % Change
Year to Date
December. believes that rates will remain on
hold at 2% for the foreseale future. Rates are already
Currencies
at record lows and cutting rate further is unlikely to
AUDUSD
0.7260
2.0%
-11.4%
do much to stimulate the economy in our opinion.
NZDUSD
0.6627
-1.6%
-15.6%
There would need to be a material increase in the
AUDNZD
1.0950
3.6%
4.9%
unemployment rate for us to reconsider our outlook
at this point.
EURUSD
1.0580
-3.8%
-12.7%
The RBNZ’s final meeting for 2015 is held on
December 10th. The market is currently split 50/50 The US dollar continued to grind higher over the
on whether the OCR will be cut from 2.75% to 2.5%. month following indications by the US Federal
The economy is soft but far from capitulating at this Reserve that an interest rate hike is very much on
point. The Dairy sector remains under pressure with the cards for December. At the same time the Euro
Milk prices remaining near historic lows. In addition continues to trend lower, as the policy divide
the dry weather is another major concern for between the US Fed and European Central Bank
farmers. believes that the RBNZ will remain on (ECB) becomes larger given the ECB is very much
hold for at the December meeting and instead will committed to further easing.
remain patient and assess conditions over the In relation to both central banks there is due to be
summer period before implementing a policy significant events on the horizon which could further
change.
influence currency levels, with an ECB meeting due
The US Federal Reserve hold its final 2 day meeting this Friday, and the important US Fed meeting to be
for 2015 on the 15-16th of December. This is seen as held in the second week of September. The most
a key meeting as both and the majority of the likely outcome of these meetings is that the ECB
other market commentators believe that the continues to implement its aggressive easing
Federal Reserve will take the opportunity to increase measures, while the Fed lifts rates off zero. In our
interest rates by 0.25%. The US economic data, in view this will see further weakness in the EURUSD as
particular the unemployment rate, has remained we move into the new year.
solid and global economic conditions has remained Closer to home the NZ dollar continues its
stable since their previous meeting. We believe the downward trend relative to the AU dollar. Dairy
market is ready for rates to begin to increase at a prices have begun to fall once again which has
gradual pace over the next 2-3 years.
weighed on the NZD, and at the same time the
Australian economy is starting to show positive signs
in relation to unemployment and the retail sector,
which has taken further rate cuts by the RBA off the
cards.
1 December 2015
Model Portfolio Performance
Australian Model Portfolio
New Zealand Model Portfolio
The Australian portfolio had another excellent The NZ Model Portfolio had another strong
performance for the month over November, up month, up 3.2%, well ahead of the market NZX 50
3.1%. This was considerably better than the general index which gained 1.9%. Since inception, the NZ
Australian market (ASX 200) which fell 1.4% for the portfolio has now outperformed the general NZ
month. Since inception, the AU portfolio has market by 7.5% and is up 15.3% in absolute terms.
now outperformed the general Australian market by Technology company Xero led returns for the month,
11.8% and is up 11.1% in absolute terms.
up a massive 19.8% as its share price rebounded on
The best performing stock for the month was A2 the back of its US venture gaining momentum. We
Milk which was up 46.9% (see Stock in focus above believe further upside is likely as XRO gains market
for more detail). Myer also produced a pleasing share in the US. However, given recent price moves
result for the month, up 15.6% as retail conditions in we now believe the market has come more into line
Australia appear to be improving. A key thematic in with our valuation for Xero, and we have reducing
the AU portfolio is the benefits of a lower cash its holding from 7.5% to 5% on the portfolio.
rate in the Australian economy and as a result a We continue to see solid returns from some of key
lower AUD. Initial evidence appears to point to these thematic ideas, such as companies which benefit
benefits now beginning to feed in to the interest from a weak NZ dollar. On this front NZ Refining and
rate sensitive sectors such as retail and tourism. Fisher & Paykel Healthcare outperformed over
has a heavy weighting to these thematic November up 10.5% and 6.9% respectively.
baskets and believe there is considerable upside
from exposure to these sectors.
Fisher & Paykel Healthcare (FPH) recently reported
1st half profit for 2016 up 27% to NZ$62m. FPH has
Disappointingly, Ardent Leisure (-12.9%) and James experienced strong operational improvements from
Hardie (-10.6%) were the major drags on the new products which have been years in the making.
portfolios performance for November. Both At the same time our forecast for a lower New
reported earnings that disappointed the markets Zealand Dollar will continue to act as a tailwind to
expectations which lead to price corrections over earnings going forward. As such we maintain our
the month. The invest thesis for both these stocks favourable view of FPH’s outlook and continue to
remains very much intact. Ardent will continue to forecast double-digit EPS growth for the next few
benefit from the falling AUD and increasing tourism, years.
while James Hardie also has direct exposure to a
lower AUD. has taken the recent dip in Ardent NZ Refining looks to be heading for a record year as
Leisure share price to increase its holding to the it has experienced a perfect storm with a falling NZ
stock. We have up-weighted the portfolios holdings Dollar has been a major tailwind for the stock, while
from 4% to 6% to reflect the relative attractiveness at the same time the oil price has fallen and refining
that sees at current prices.
margins have remained solid.
1 December 2015
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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1 December 2015