From Jonathan Bayes, Investment Consultant, Bentleys Wealth Advisors.
Woohoo. 6000 on the ASX200.
This week marked the 5th rise in a row for the ASX200 and the highest level achieved since early 2008.
There is a lot to write. Mostly, I’m keen to offer context for why we are here, where I see opportunity, where there are reasons for caution, what stacks up and what doesn’t.
Why are we here?
So, repeating the line from recent weeks, equity markets globally have been buoyed by the oddly perfect combination of economic strength & a well-behaved bond market.
Economic growth is synchronizing well at decade-or-more highs, and as yet, global bond yields have yet to take fright from the strength in momentum.
This is basically the perfect scenario for share investors.
Though Australia’s economy lacks the economic momentum seen globally, nor does its share-market offer the breadth of opportunity, the ASX200 has not only tagged along with the global bull-market in recent weeks, it has actually OUTPERFORMED all developed markets excluding Japan.
A rising tide surely does lift all boats.
There is a lot to be cautious of locally – Australia’s economic momentum relative to expectations is actually at its lowest ebb year-to-date (last week’s September Retail Sales grew at only +1.4%, its lowest since 2013), and our share-market is far from cheap.
But what Australia surely has, is retirement savings, and lots of them.
So rightly or wrongly, when markets have either a short-term surge or a sell-off, Australia is increasingly outperforming on the surge, and underperforming on the sell-off simply due to weight of funds being jammed into an ever-decreasing opportunity set.
I would emphasize that this is a short-term phenomenon only, since in the medium term Australia is significantly less attractive as an equity investment destination than many other foreign markets as we have said for well over a year now.
But, when we do sell-off, which we inevitably will, don’t be surprised by Australia’s subsequent underperformance at that point in time.
So why the cautious tone?
There are a few reasons, most of which make reasonable sense to me.
From a local perspective, Australia’s economic momentum remains lackluster. It is improving, but far from compelling. On any measure. Just ask me for the charts, I am more than happy to send them.
Our share-market is decidedly old-economy and ripe for disruption. Given the passage of time, Australia’s banking sector will ultimately experience competition in a fashion not unlike that of Telstra (TLS).
Obviously, the housing market is peaking – last weekend saw the lowest auction clearance rate since March 2016.
Housing has warmed the cockles of many a consumer’s heart this past 2 years as wages have stagnated.
But it is no longer a source for easy household equity growth.
In fact, as a word of caution, Auckland’s rampant housing market finally posted its first annual decline in 6 years last month.
Oh, and lest anybody’s forgotten, our Federal Government is hanging together by 1 seat with more MP’s set to be referred to the High Court in the days ahead.
But the local issues are far more medium-term in focus as the +7% share-market rally since early October has proven.
From an international standpoint, and a more short-term focus, we should pause for caution given the recent sell-off in global high-yield bonds and emerging-market debt – both asset classes correlate closely with equity.
We should be wary of the Trump tax plan and the enormous resistance to many of its components from within the Republican party itself. The promise of tax-reform has pushed equity assets and business confidence higher all year, simply because the ‘corporate, asset-owning class’ will be a major beneficiary should change occur.
Tax reform is not a given, and a failure here would definitely cause the market to correct in the near term.
I’d remind all readers that the S&P trades on the highest forward valuation since 2002, and though this is actually a very poor reason to be cautious on its own, when coupled with the nearer term issues on tax and credit markets, it does offer important context.
Australian Market Observations this week
Well, we kept going. To new highs!
Small-caps and mid-caps have led the market year-to-date, and all the gains have come since July.
Mid-cap shares are +14%, small-caps are +12%, whilst the ASX Top 20 is up a measly +2% in 2017 so far.
Bank hybrid securities this week climbed higher.
Hybrid running yields have collapsed in to near their tightest levels, making the return on offer to investors the lowest in several years.
I highlighted last week that the Commonwealth Bank PERLS VII (CBAPD) deal that raised $3bn in October 2014 near the last market peak is now virtually back at issue, and only offering would-be investors a yield of 4.5% now (3.15% only before tax rebate).
Returns are getting skinnier across all asset classes.
Transurban (TCL) is back up to $12.80 again, and now offering investors a yield of 4.7% in 2019 without any franking whatsoever, and though a good asset, is far from good value.
Before today’s sell-off, Australian miners had been leading the charge, reaching their highest level since early 2014.
I have been unquestionably wrong on miners for the last 12 months, but the share price strength has these stocks entirely dependent on the sustenance of current iron ore prices, which seems highly presumptive given the ever-increasing stockpile of iron ore at Chinese ports.
I feel comfortable this will come back sooner than later.
On the positive front, oils continued to make gains this week. In the same way that miners have been catapulted higher on rising commodity prices, the potential remains the same for the likes of Oil Search (OSH) to push a further +15-20% higher should oil prices continue into the $60’s as I think they will.
Oil has bounced to 2-year highs in recent weeks following excellent demand from a surging global economy, but also from political issues arising from the emergence of Saudi Crown Prince Mohammed bin Salman as the dominant and disruptive figure seeking to re-shape his country and its place in the Middle East.
Don’t get me wrong, there are stocks to buy, and oils look good in that manner.
There are also companies like AMCOR (AMC) which we think look excellent medium-term value, and capable of overcoming the margin pressures being felt within their emerging market packaging operations.
A weaker Australian Dollar will surely help them in 2018, and I feel extremely confident that we will see that play out.
I actually have one or two other names on the horizon that look increasingly decent relative value, and my hope is we will get the chance to invest some of our high cash levels in the weeks leading up to Christmas.
Watch this space.
But if you take anything away from this week’s newsletter, it is that it feels increasingly trickier to make such obvious index gains – it may happen, but it is far from obvious or certain – and that some shares and assets are actually becoming downright expensive.
Don’t feel uncomfortable holding or raising cash up here, the opportunities for genuine return are fewer.
Have a great weekend.
Thursday Closing Values
|S&P / ASX 200||6049||+117||+2.0%|
|Property Trust Index||1399||+53||+3.9%|
Thursday Closing Values
|U.S. S&P 500||2585||+5||+0.2%|
Key Dates: Australian Companies
|Mon 13th November||AGM – Medibank (MPL)
Div Ex-Date – ANZ (ANZ), Westpac (WBC)
|Tue 14th November||AGM – Computershare (CPU), Estia (EHE)|
|Wed 15th November||Div Pay-Date – NABPA
|Thu 16th November||AGM – BHP (BHP), Commonwealth Bank (CBA), Platinum (PTM), Seven Group (SVW)
|Fri 17th November||N/A|
10th November 2017, 1030am
For more information on the above please contact, Robert Flynn, Senior Financial Advisor, 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.