From Jonathan Bayes, consultant Chief Investment Officer, Bentleys Wealth Advisors
Winter is coming, both seasonally and in the market, and we are now loaded up on CASH in our recommended portfolios.
This doesn’t mean we only hold cash, far from it.
But it does mean, our allocation to cash is now near its peak because we believe opportunities to deploy this cash in the months to come will be far more attractive than they are today and we wish to be well positioned for this outcome.
The trade discussions further deteriorated last week, with no outcome, no immediate talks scheduled and markets awaiting China’s retaliatory response to the U.S which we ought to get early this week.
Meanwhile commentators continue to talk about what ‘could happen IF the trade war escalates’.
It’s happening now!
Last week the talks ended without agreement or plans for the next discussion, and some suggestion President’s Xi and Trump might speak on the sidelines of the G-20 in Japan on the 28th and 29th June.
That is 6 weeks away, and in that time we will have seen tariff’s on US$200bn+ of Chinese good to the U.S raised from 10% to 25%, a guaranteed escalation of tariffs from the Chinese side, and if Trump is to stick to his word, the prospect of the U.S applying to tariff ALL US$525bn+ of Chinese imports into the U.S.
If that isn’t an escalation, then I’m unsure what is.
There is also a creeping belief in my head that an early ‘trade war’ is a good thing for Trump’s re-election prospects, since by bringing forward the economic pain to 2019, he stands well positioned to ‘negotiate an outcome’ late in 2019 that sets in place an inventory re-stock and rebounding economic environment into the U.S Presidential election in November 2020.
So for now, we remain particularly cautious and conservative.
Federal Election in a week
Curiously, the Australian market is outperforming the weakness being felt across the Asian region and in the United States, under the slightly misguided view of it being more defensively positioned against the rise of tariffs.
In one sense this is true, but the argument fails to acknowledge the likelihood of a Federal Labor Government this time next week, and the likely diminution of value that will ensure for owners of Australian equity and property values.
It was suggested that by well-regarded fixed-income managed Realm last week, that SMSF’s and households together owned a shade over $450bn of Australian shares as at the end of last year or just under 30% of the ASX by value.
The split was broadly 50:50 meaning SMSF’s held a shade over $230bn in Australian shares, and according to the report which cited APRA research from 2016, approximately half of all SMSF’s are in pension phase and able to take full advantage of franking credit rebates.
Simply put, there will be significant leakage of Australian blue-chip shares in the weeks and months following this weekends election, should Labor win power, that will overhang the Australian equity market.
The lack of selling this week is the calm before the storm.
RBA didn’t cut rates, but soon will
Last week the RBA unsurprisingly left rates on HOLD but did downgrade their forecast for financial year 2019 GDP growth to 1.75% – a number that would be the lowest annual growth in a decade.
We will get April employment figures this Thursday and it is quite possible we see a significant deterioration in the employment climate in these figures, or at worst, the May release next month.
Either way, the RBA will be cutting rates at some point in the coming few months in response to the slowing economy, and it is my expectation that they move in July and by 0.50% so as to make as significant an impact into future expectations as possible.
Whatever the outcome, the rate cut is unlikely to do much other than stabilize the recent weakness, and we should be expectant of a soft end to 2019 before recovery in 2020.
Profit Warnings beginning – Reliance Worldwide (RWC) and Adelaide Brighton (ABC) notable
We are starting to see companies warn on the slowing Australian residential construction market, including much loved mid-cap stock Reliance (RWC), which today is down -15% after lowering 2019 profit forecasts by around -10%.
ABC warned the previous week and is also -20% on where it was a fortnight ago.
We think there will be more to come, but we hold out high hopes and expectations that the coming shake-out to markets and the local economy provides us with excellent opportunity to snap up some great quality businesses at more attractive multiples.
RWC would be on such business, but at todays level of $4.00 we still feel like there is significant further downside to come before value emerges.
There are at least 3-4 other names we have high hopes to be buying during the middle of 2019, and feel very excited by the prospect of snagging a few bargains with our extensive cash holdings.
Telstra (TLS) outperforming as mobile competition subsides
We are thrilled to see TLS now back at $3.45 with investors encouraged by the likely absence of competitive pressures in the domestic mobile market so long as Vodafone and TPG (TPM) are occupied by their fight to see their merger approved by the ACCC.
We think TLS is in a great position to continue outperforming, assisted by the initial ACCC judgement to block the merger and the prospect of falling NBN connection fees under a Labor Government.
Friday 5pm values
|S&P / ASX 200||6311||-25||-0.4%|
|Property Trust Index||1521||+10||+0.7%|
Friday Closing Values
|U.S. S&P 500||2881||-65||-2.2%|
Key Dates: Australian Companies
|Mon 13th May 2019||Results – ANZ (ANZ), Macquarie (MQG)
Div Pay Date – AMCOR (AMC)
|Tue 14th May 2019||Div Ex Date – National Australia (NAB)|
|Wed 15th May 2019||N/A|
|Thu 16th May 2019||Div Ex Date – Westpac (WBC)|
|Fri 17th May 2019||N/A|
Monday 13 May 2019, 12.30pm
For more information on the above please contact Bentleys Wealth Advisors directly or on +61 2 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.