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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.