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Chief investment officer

Ensuring we walk the talk

We are long overdue a note. In scanning through the various indicators and data that we monitor, most of which continues to underwhelm, it struck me that it might be worth providing some further context behind our investment philosophy as justification for the stance we have taken, and continue to take, on equity markets and the broader Australian economic outlook. With the launch of the Protus-Prime Industrial Fund this past month, much of my time has been spent on the road presenting to our many partnered groups and clients. In discussing my view on asset markets, and the relative attractions to my mind of premium industrial property, it was vital to provide a broad, and considered view for the medium term. As an asset class beset by initial establishment costs (stamp duty notably)...

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Chief investment officer

Housing Affordability Q4 – flat-lined… home lending growth to moderate through Q2/Q3

Far be it for a muppet like me to call the top in the Aussie housing market, but certainly more evidence is emerging of a top with news today the Q4 CBA/HIA Australian Housing Affordability index had declined modestly in the December quarter.

Interestingly in Sydney (the biggest and hottest market), affordability fell ~5% and is back at the same levels as a year ago. Recall the chart I sent around a fortnight ago which got a lot of interest from people, which was the Westpac Consumer Confidence Index – Time to Buy a Dwelling Index, which I have reprinted below. It’s fallen to near 2 year lows. The chart below that is this same index overlaid against Annual Owner-Occupied Home Lending Growth YoY… you can see that housing sentiment naturally leads h...

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Chief investment officer

Fascinating chart for future reference… Housing

As we have said on a couple of occasions in notes, we wouldn’t be surprised to see Australian housing market’s cool through the Autumn. The RBA is most definitely on HOLD for now (we think all 2014), and it would seem homebuyers now know that. See the chart below of the Westpac Consumer Confidence sub index – ‘Time to Buy a Dwelling’ now back at 18mth lows.

 

The biggest issue our economy faces, as has been highlighted by PIMCO’s Rob Mead on several occasions, is that ‘we’ are asking/expecting the housing sector to do the heavy-lifting in terms of getting our economy humming again (in lieu of mining and general corporate cap-ex). The AUD strength has hollowed out all hope for productive local capital investment as we ha...

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Chief investment officer

AUD the next penny to drop

It seems that only in the last week, Australian investors have awoken to the idea that China is not only slowing, but eschewing exactly the type of growth that protected the Australian economy from the worst of the global downturn since 2008. Australian mining share prices were ravaged Monday in response to a 6% fall in Chinese iron ore futures prices, taking losses in the past fortnight to some 20-25% in the case of Fortescue (FMG) and Arrium (ARI), and 10-11% for BHP & Rio Tinto. We have spoken at length in recent months about our fears for mining equity, and the concerns we had for the billowing Chinese iron ore inventory. The 20%+ fall in 3-month forward iron ore prices YTD means much of the mining sector is due material EPS downgrades (10-20%), t...

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Chief investment officer

Thin Air, Suspended Disbelief

Patience is a virtue, but it’s awfully difficult to display in stock-markets most of the time. This past fortnight has seen US & Australian stock-markets linger at or near their highs despite a litany of data-points indicative of either softening growth or increasing financial risk. Continued low interest-rates are the single defining reason for the equity resilience, albeit Australian valuations continue to look at best fair and at worst unattractive. Justification for buying in equity assets feels ever more tenuous – investors still clearly see the glass as half full. The most obvious ‘rotation’ within the Australian equity market in recent months, has been the buying of mining stocks. Much of the thinking behind the rally and 10% outperformance to 12-mth highs in the M...

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Chief investment officer

RBA meeting today – signals no more rate cuts

RBA today seemed to signal the end of the rate-cutting cycle, at least in the market’s eyes’ for 3-6mths. I personally expect no further rate cuts, as I have mentioned time and again. Today the RBA said: - Policy is appropriately configured to foster growth - Most prudent course is period of rate stability - Sees growth strengthening beyond the short term - CPI is somewhat higher than forecast due to faster pass on of AUD weakness - Near term business investment is subdued No more rate cuts. The RBA will suffer the subdued growth near term because it does not want to inflame a domestic housing bubble (already house prices 10-11x average income), and because simply put, as the NAB IR guy said to us, ‘the cost of credit is not what is stopping people borrowing’....

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Chief investment officer

What’s Mandarin for ‘snookered’?

The release of this week’s HSBC January Chinese Purchasing Manager Index made apparent for all to see, that the Chinese economy remains in the thick of a slow-down as government official’s re-tool for a more productive, less growth-intensive, future. The data showed manufacturing activity in China fell to a 6mth low in January, and, of significance, to a figure indicative of contraction. Similarly the decision Thursday by the US Federal Reserve to taper monthly bond purchases to $65bn demonstrates further the commencement of a slow grind back to more ‘normal’ monetary conditions there. The status quo for the past 5 years is no longer. Whilst the changing dynamics for global economics and markets are entirely relevant, even more so is the new conditions in which economic po...

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Chief investment officer

2014 – The Year Ahead

Like most financial pundits at this time of year, we thought we’d take the time to articulate our thoughts and views for the 12mths ahead. We see good opportunity for those prepared to evolve with the changes in investment and economic conditions, but like for much of 2013, we remain unexcited by general stock-market valuations nor by the outlook for the local economy. Australian economic conditions have stabilised, and there are signs of improvement in the wind in sectors like construction, but the equity market has priced in a lot of this optimism. Furthermore, having seen 2 years of benign volatility in global shares, it seems a reasonable bet to assume volatility will rise in 2014 as the Federal Reserve commits to tapering of QE. In a simple sense, the Fed is fast being forced to ...

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Reality Bites…

It’s been a tricky month. Since making a high above 5400 in late October, the ASX200 has fallen 7%+ and in USD’s it is down 11%. This makes the ASX200 the second worst-performing major equity market this quarter, behind only Brazil. At first glance it might seem difficult to comprehend the trigger for this end of year softness. Sure we have had our share of high-profile disappointments this quarter, notably QANTAS and QBE Insurance in this past week, but these two stocks barely comprised 1.5% of the ASX200 before their respective 25-30% falls. In truth, the weakness has been widespread and indeed can be seen best in several of the year’s most popular and best performing names. Domestic consumer names such as JB Hi-Fi, Harvey Norman, Flight Centre & carsales.com.au have a...

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Chief investment officer

Protus Prime Property Group Pty Ltd

Following on from the recent announcement of Prime Financial Group Ltd (Prime’s) new Property Asset Management offering through ‘Protus Prime Property Group Pty Ltd (Protus Prime)’ I recently sat down with the Managing Director of Protus Prime, Paul Toussaint, to discuss his thoughts on the Australian property industry. Paul discusses where the opportunities lie and what his plans are for this new property investment offering. Protus Prime has been developed to provide Clients with access to a quality, conservative, direct-investment vehicle that will initially target the industrial property sector. This additional diversification and asset exposure provides Clients with increased flexibility in asset class selection and is the latest step in Prime Financial Group Ltd (Prime’s) ...

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About the Author

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Jonathan Bayes

Chief Investment Officer

Jonathan’s investment market experience spans 17 years. Having initially worked on the Australian institutional equities desk at Credit Suisse & HSBC, he then spent 9 years in London advising & trading European equities for Credit Suisse. Recently Jonathan has lived in Hong Kong managing Asian equity funds for Trafalgar Capital Management and then serving as an Executive Director at Nomura International providing institutional advice on Asian equities.

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No. 437046
Email :

jonathanb@primefinancial.com.au

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