From Jonathan Bayes, Investment Consultant, Bentleys Wealth Advisors.
These are two words that come to mind when I think of Australia’s share-market this past 2 months.
In that time we have traded within a ~2% range, with more fits and starts than you could imagine and more random +/- 1% moves than you would come to expect given the lack of volatility seen in global share indices.
But today we are again down over -1.5% for little reason. And on big volume.
These movements are all the hallmarks of a market lacking in buyers, and further evidence of an ‘over-ownership’ of Australian growth assets in investor portfolios.
AUSTRALIAN BLUE-CHIPS REMAIN OVER-OWNED.
Simply put, the incremental investor in Australian blue-chip shares is a seller.
As at December 2016 the ATO reports that Australian SMSF’s own $200bn in direct Australian shares out of $653bn invested.
That is 30% of all assets, and swamps the holdings in international shares ($3.9bn) and other managed investments ($35.5bn) in which international shares (amongst other things) can be held.
Australian shares comprise only 1.5% of world share-market value.
I will shout until I am blue in the face that investors need to raise their exposure to international growth assets at the expense of Australia’s slow-growing, expensive blue-chips.
This trend is like lava, and will creep up on us all slowly, but will be deadly to long-term performance if ignored.
If investors are going to assume the risk of equity assets in their portfolio, then they most certainly want the prospect of some growth.
There is still a place for franked income, and for the stocks that provide it, but we have to augment these holdings with likely capital appreciation, little of which is offered in the medium-term by Australian banks, telecoms, grocers and miners.
Please take the time to consider our thoughts on international equity exposure by way of our recommended managers (Platinum, Magellan, Orbis & Vanguard), and similarly please consider the prospect of substituting some Australian large-cap exposures for small-company holdings.
Remember too, this is a relative argument.
In the interim, we remain cautioned towards growth assets in general.
VALUATIONS & MARKET LEVELS REMAIN HIGH EVERYWHERE YOU LOOK
On the whole, we continue to see the coming months as a trickier period for share-markets given the pending Federal Reserve decision to reduce its balance sheet.
This involves the expiry of US$10bn in bond holdings a month and the withdrawal of these funds from the global financial system.
The size of these expiries will increase every 3 months, and will continue to handbrake asset markets as the world’s biggest buyer of assets (the U.S Federal Reserve) effectively turns a net seller.
There was a terrific memo penned by one of the world’s largest and most successful hedge fund managers this week (Howard Marks from Oaktree), in which he detailed some reasons for increasing caution.
It’s a great read, provides terrific context and allows the investor to look above the day-to-day movements in asset markets.
Interestingly in the article, Mr Marks talks of the ‘paucity of prospective returns’ and details the high valuations seen across most major asset markets.
Clearly from such lofty valuations, the risk-reward opportunity set is increasingly limited.
He mentions that the S&P500 is selling at 25x trailing earnings which is well above the long-term median of 15x, and that the ‘Shiller Cyclically Adjusted P/E Ratio’ stands at 30x and that this figure has only been exceeded in 1929 and 2000 share-market bubbles.
I note too, the highly-respected asset management group GMO this month published their regular update on expected returns for asset classes, and in it they forecast an ‘annual real return over 7 years’ of -3.9% per annum for U.S large-cap stocks.
Think that over.
The only international asset class in which they forecast any growth in that 7-year window was in emerging market shares and debt.
Pretty sobering stuff, and again good reason for us to be all the more particular in what we own and where we own it.
In concluding, where valuations are high everywhere, at least internationally you have the prospect for growth that you don’t have amongst Australian blue-chips.
U.S Reporting Season
The main focus of markets this week came from offshore earnings, with several of the FANG’s (Facebook, Amazon, Netflix & Google) reporting.
It was a mixed bag on the whole with Alphabet (GOOG) earning 23% less per click in revenue terms, but still managing to report a total revenue rise of 21%.
Facebook (FB) were strong with revenue growth of +47% annually, and growth in mobile advertising revenues of a staggering +53%. Mobile is now 87% of all FB advertising revenues, but importantly though FB warned that the volume of advertisements in its news feeds was reaching a finite limit, it was achieving significantly higher revenue per ad than it did only a year ago.
Moreover FB seem to have further opportunity from advertising within its Instagram and Whatsapp messaging platforms.
Amazon (AMZN) were modestly disappointing, particularly since the company guided toward a further potential quarterly loss in the 3-months to come as the group upped its investment in new staff and logistics assets.
When you have a market cap of US$500bn and trade on 90x current year earnings, it’s hard to convince investors that a pending quarterly loss is a good thing, and so the stock ended up down -3% after results late on Thursday night U.S time.
All the same, AMZN continue to drive spectacular revenue growth and continue to embed them deeper in their clients consumption patterns.
Amazon’s PRIME product (a full-scale product and delivery offering) now has 85m users, and is 35% higher than it was a year ago.
Note that there are only 323m people in the United States and only 125m households.
That is a staggering statistic.
Beyond the results from the global technology players, delivery and logistics player UPS (UPS) reported a disappointing set of results and fell -4% Thursday night.
Ironically UPS highlighted the closure of many retail shopfronts as a reason for its disappointing business-to-business revenues, a directly impacting factor from the online shopping boom that is in fact driving their consumer parcel business.
Reporting Season in Australia
Kicks off next week with Navitas (NVT), Rio Tinto (RIO), Suncorp (SUN) & Crown Resorts (CWN) all due to report.
The following week of Monday the 7th August sees reporting really gain pace with each of James Hardie (JHX), Transurban (TCL), Carsales (CAR), Commonwealth Bank (CBA), AGLE Energy (AGL), AMP (AMP), REA Group (REA) & National Australia Bank (NAB) all due.
A final remark on BREXIT
I couldn’t help but notice Boris Johnson this week, when speaking in Australia, suggest that BREXIT was much like the millennium bug – much ado about nothing.
It seems a rather casual remark to have made, particularly in the week when it was widely rumoured that Deutsche Bank (DBK), one of the City of London’s biggest employers, was considering moving some $350bn in assets from London to Frankfurt, and with that significant numbers of staff.
The impact on the UK and City of London in particular from the uncertainty relating to so-called ‘financial-passporting’ is likely to be significant, and will see major shifts in banking from London to European capitals.
British property prices have already taken an impact, but will likely see further downside as BREXIT terms firm.
Friday 1pm Values
|S&P / ASX 200||5709||+47||+0.8%|
|Property Trust Index||1312||+8||+0.6%|
Thursday Closing Values
|U.S. S&P 500||2475||1||–|
Key Dates: Australian Companies
|Mon 31st July||N/A
|Tue 1st August||Earnings – NAVITAS (NVT)
|Wed 2nd August||Earnings – Rio Tinto (RIO)
|Thu 3rd August||Earnings – Suncorp (SUN), TabCorp (TAH)
|Fri 28th July
|Earnings – Crown Resorts (CWN)
Div Pay-Date – James Hardie (JHX)
Div Ex-Date – Djerriwarrh (DJW)
28th July 2017, 330pm
For more information on the above please contact Bentleys Wealth Advisors directly or on 02 9220 0700.
This information is general in nature and is provided by Bentleys Wealth Advisors. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.