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Chief investment officer

Market Summary (Issue 317) – 15 August 2014

Australian equities had a good week rising 2.5%, but it was less to do with the underlying earnings figures than it was a supportive macro backdrop. A case of seeing the wood for the tree’s is a terrific way to look at our market, since many of the major companies posted only average profit figures, and still shares continued to climb as investors sought the higher yield offered by equity markets. The music continues to play. Keep dancing Maria! Simply put, the greater attraction of equity returns continues to attract investors frustrated by the low returns on cash and fixed income. Undeniably at some point we will get a wake-up call. At some point, we will be reminded that with higher equity returns comes higher risk. Perhaps the completion of QE in October will be that timing. ...

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Chief investment officer

The Ground is Beginning to Shift

As we observed in our last piece at the start of July, the stars are aligning for a likely change in market behaviour in the months and year ahead. Australian equity portfolio’s should, and will, evolve to reflect a stabilising local economy and a basing in domestic interest rates. Portfolio’s will look to shift from a reliance on ‘yield’ to one more skewed to ‘earnings growth’. We are keen to get in front of the curve for several important reasons, notably a) that recent years performance has been heavily influenced by extraordinary monetary policy soon due to end, and b) that investor positioning is exceedingly weighted to the status quo, which we think will soon change. In very simple term’s we would highlight the following views:

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Chief investment officer

Fix the Roof Whilst the Sun Shines

John Kennedy said ‘the time to mend the roof is whilst the sun is shining’. Being proactive and ahead of events is key to strong portfolio performance. For the past three months, the ASX200 has traded a narrow 4% range. Economic data has been weak, valuations in the major blue-chip names look full and fair, and there has been little cause for activity. Ugh, I’m getting sick of hearing myself say it. Interestingly in the past few weeks we have seen signs of a pending change to the status quo. This warrants attention. It’s widely expected that the Federal Reserve will end QE3 by the end of the year. The Fed Chairwoman Janet Yellen recently said she would articulate Fed plans for ‘normalisation’ of interest rates in the coming months also. As a pre-requisite for ‘nor...

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Chief investment officer

Budget Angst a Reflection of Deeper Issues

First, in light of the column inches and public rancour surrounding last week’s Federal Budget, please let me say this is not a political piece. Whatever your beliefs in the moral and economic philosophy of this new Federal government, the significance of this budget for Australia’s short and long term investment outlook is material. I’m often known to use allegories, so on this occasion I’d suggest that whilst Abbott & Hockey have the economy’s blood on their hands, in truth, I think they simply found the body. Australia’s economic hubris has been long in the making, and when the new government speaks that the ‘age of entitlement’ is over they couldn’t be more right. The trouble is that the ‘entitlement’ we all agree needs to be relinquished is invariabl...

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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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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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Email :

jonathanb@primefinancial.com.au

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