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Transcript
April Issue 2016
Market Comments –
March Quarter
After a strong run in the December quarter, the Australian sharemarket lost
some of those gains in the March quarter, with the S&P/ASX 200
Accumulation Index down 2.75%. The share prices of each of the “Big 4”
banks fell, with ANZ Banking Group Limited (-16.00%), Commonwealth Bank
of Australia (-12.41%), National Australia Bank Limited (-13.11%) and
Westpac Banking Corporation (-9.56%) all suffering significant losses during
the quarter.
Adam Middlemis
Adam began working for
Strategem in 2007 within the
Investment Services area of the
firm.
As a Senior Advisor and
Associate, Adam specialises in
personal risk insurance and selfmanaged superannuation funds,
but is also involved in providing
expert advice and management
across a broad range of client
investment needs.
The 12 months to 31 March 2016 coincided with the Australian sharemarket
being at its peak (just under 6,000 points in April 2015) to close to its lowest
point for the 12 month period (4,880 points in February 2016). Many
Australian “blue chip” companies (the “Big 4” banks, mining stocks, energy
stocks) underperformed during this period, helping to drive the sharemarket
down.
Australian Real Estate Investment Trusts (AREITs) rose 6.44% in the March
quarter, and have outperformed the market by over 50% in the past 5
years, leading to concerns that a correction in the sector is not far away.
AREITs were seen as the “canary in Australia’s coalmine” during the GFC,
losing 75% of their value, with warnings that history may repeat itself. The
last few years have seen investors invest in REITs as a “defensive” move,
however Tim Hannon, Chief Investment Officer at Newgate Capital, warns
that office rents and industrial rents “are not going to grow, and in some
cases are declining” and that the fundamentals of the commercial property
market are weakening, which could flow through to the share prices of
AREITs, which Hannon believes are currently “8% to 10% overvalued”. The
Australian Prudential Regulation Authority (APRA) has also warned that the
“Big 4” banks are currently overexposed to Australian property.1
International shares fared poorly during the quarter, losing 5.81%. Japan
mostly contributed to this negative return, falling 11.95%, whilst France (5.21%) and Germany (-7.24%) led European markets down, with only the
UK market (0.07%) adding to European returns. The European Central Bank
(ECB) continues to ease monetary policy in response to downward revisions
in inflation and inflation expectations, whilst its GDP is expected to rise by
1.4% in 2016.
Special Points
of Interest:
•
•
•
Rio Tinto Limited (RIO) - Sell
Sonic Healthcare Limited
(SHL) – Accumulate
Changes to E*Trade
Australia
The Federal Open Market Committee (FOMC) of the US Federal Reserve (the
Fed) board met on March 15 and 16 and, as expected, left interest rates
unchanged in the range of 0.25% to 0.50%, as set in December 2015, whilst
also lowering its rate target forecast from 3.50% to 3.25%. The Fed has
indicated that it while it expects its process of monetary policy to “normalise”
during 2016, its own forecasts now indicate that there will only be two rate
rises this year, down from previous expectations of four.
The US
unemployment rate increased to 5.0%, despite 215,000 jobs being added in
March, above market expectations of 205,000.
The information provided has
been extracted from research
material provided by Colonial
First State and Morningstar
Australasia Pty Ltd.
This
document contains general
securities advice only. This
information does not take into
account
the
investment
objectives, financial situation
and particular needs (“financial
circumstances”)
of
any
particular person. Accordingly
before acting on any advice
contained in this document, you
should assess whether the
advice is appropriate in light of
your
own
financial
circumstances or contact your
Strategem Investment Services
adviser.
Whilst
the
information
contained in this document is
believed to be accurate, no
warranty is made as to the
accuracy or reliability of any
estimates,
opinions,
conclusions, recommendations
(which may change without
notice) or other information
contained in this document and,
to
the
maximum
extent
permitted by law, Strategem
disclaims all liability for any
direct or indirect loss or
damage which may be suffered
by any recipient through relying
on anything contained or
omitted from this document.
Disclosure of Relevant Interest
–
Strategem
Investment
Services
Pty
Ltd
and/or
associates
of
Strategem
Investment Services Pty Ltd
hold
shares/units
in
the
mentioned securities.
China, the world’s second largest economy, grew between 6.6% and 6.7% in
the March quarter, its lowest rate of quarterly growth since early 2009. After
years of high growth, the Chinese economy is cooling quickly, partly due to
government efforts to shift growth away from manufacturing and towards the
services sector, whilst it is also burdened with high levels of debt after years
of aggressive lending. At a National People’s Congress (NPC) in March (an
annual meeting of the Chinese parliament), a target of 6.5% to 7% growth for
2016 was agreed upon after growth of 6.9% in 2015, the slowest growth in 25
years.
The table below shows the performance of the major asset classes for various
periods to 31 March 2016:
Market Performance as at 31 March 2016
Asset Class
3 months
Cash
0.58%
Australian Fixed Interest^
2.05%
Australian Listed Property Trusts
6.44%
Australian Shares
-2.75%
International Shares ($A)
-5.81%
$A vs $US
5.28%
6 months
1.13%
1.80%
12.77%
3.55%
-4.19%
9.08%
12 months
2.24%
1.97%
11.26%
-9.59%
-3.90%
1.39%
^The index used for this asset class includes exposure to government and corporate bonds,
whose capital value can change, unlike traditional term deposits.
The Reserve Bank of Australia (RBA) left interest rates steady at 2% at its
April meeting, citing:
•
•
•
•
low inflation;
subdued labour costs;
an economy “rebalancing” after the mining investment boom, and;
Australia’s low terms of trade.
The RBA noted that the recent appreciation in the Australian dollar could
complicate adjustments already underway in the economy. They also noted
that funding costs continue to remain low (as monetary policy continues to be
very accommodative) and that the global economy is continuing to grow (at a
slower pace than expected), and that, despite sentiment in financial markets
improving, uncertainty about the global economic outlook and policy settings
among major jurisdictions continues.
Whilst global and local sharemarkets continue to display signs of volatility, we
believe that sharemarkets will continue to provide investors with opportunities
for capital growth and income, whilst cash and fixed interest investments
continue to provide low returns on investment. The globalisation of the world
economy means that we are now more aware of the risks on a daily basis,
however for those that can navigate through the constant stream of
information, the maintenance of a diversified portfolio, in line with investment
goals and objectives, are likely to achieve reasonable investment returns.
STOCKS TO CONSIDER
The information provided has
been extracted from research
material provided by Colonial
First State and Morningstar
Australasia Pty Ltd.
This
document contains general
securities advice only. This
information does not take into
account
the
investment
objectives, financial situation
and particular needs (“financial
circumstances”)
of
any
particular person. Accordingly
before acting on any advice
contained in this document, you
should assess whether the
advice is appropriate in light of
your
own
financial
circumstances or contact your
Strategem Investment Services
adviser.
Rio Tinto Limited (RIO) – Sell
Like its peer BHP Billiton, Rio Tinto has ridden the commodity super-cycle since the
early 1990s. Rio Tinto's asset portfolio is less diversified, with iron ore and aluminium
generating 85% of its value. Unlike BHP Billiton, it lacks a petroleum division. Its
metallurgical coal exposure is also comparatively smaller, and energy coal is more
important.
Aluminium should constitute a substantially larger share of the company’s operations,
given the USD 40 billion that Rio Tinto controversially paid for Alcan in 2007, but much
of that investment has now been lost in write-downs. Rio has the lowest operating costs
of all the iron ore players, but despite this being the bulk of company earnings, excess
returns have been destroyed through pro-cyclical overinvestment during the Chinadriven boom.
Closing price as at 14 April 2016 is $48.60
Sonic Healthcare Limited (SHL) – Accumulate
Whilst
the
information
contained in this document is
believed to be accurate, no
warranty is made as to the
accuracy or reliability of any
estimates,
opinions,
conclusions, recommendations
(which may change without
notice) or other information
contained in this document and,
to
the
maximum
extent
permitted by law, Strategem
disclaims all liability for any
direct or indirect loss or
damage which may be suffered
by any recipient through relying
on anything contained or
omitted from this document.
Disclosure of Relevant Interest
–
Strategem
Investment
Services
Pty
Ltd
and/or
associates
of
Strategem
Investment Services Pty Ltd
hold
shares/units
in
the
mentioned securities.
During the past two decades, Sonic has built a dominant position in the Australian
medical diagnostics market; it is now the largest Australian pathology laboratory
operator. This scale gives it a significant cost advantage.
Sonic invested heavily throughout the six years to 2011 to establish critical mass in the
US and European pathology markets. The firm is now generating synergies from
acquired businesses, the same strategy it implemented so successfully in Australia.
Several dynamics underpin pathology test volumes globally, including ageing
populations, the economic benefits of preventative medicine and ongoing innovation in
pathology testing technology.
Closing price as at 14 April 2016 is $18.92
Changes to E*Trade Australia
As many of our clients would already be aware, Strategem Investment Services has a
commercial agreement with E*Trade Australia for order processing, sponsorship,
clearing and settlement of our client’s share trades.
E*Trade Australia have recently announced that it will be changing its name to “Share
Investing Limited”. This will not affect our clients or the way in which we transact in
shares. The only difference will be the name of the CHESS sponsor is now “Share
Investing Limited” rather than E*Trade. Share Investing Limited remains a fully owned
subsidiary of the ANZ Bank.