Welcome to the September edition of the Burrell Blog for 2017.
Some good news on risk reduction in July
Reporting season in Australia resulted in healthy reactions to the June financial results on the Australian Stock Exchange. Companies that outperformed expectations on average improved in price whilst those that met or failed to meet expectations tended to move into negative territory. Companies that severely under performed with profit downgrades and negative commentary were hit more savagely on the downside. Overall however, there was little change in market indices during the reporting season.
This period of sensible adjustment to reported net profits in Australia contrasts to the USA stockmarket on the attached graph, where the rapid increase in prices over the past three years may be seen as somewhat of a parallel with the technology bubble in 2000. Indeed when one considers the valuation multiples for selected technology stocks such as Facebook, Amazon, Netflix, Tesla and Snapchat, the parallel with the pricing of technology stocks back in 2000 is déjà vu. In 2000 the Australian stock market did not follow the US market during the technology bubble and had only one year of correction being the last year of the tech bubble in 2004.
The catalysis for US correction is unclear, given the US economy is performing strongly with expectation for tax cuts being raised at the political level and an understanding that US infrastructure will become a long term driver in the US. Exposure to these themes maybe directly, via managed funds or Australian stocks such as Boral (BLD), which made what appears a well-timed major acquisition of a similar company, Headwaters Inc. The Boral acquisition is consistent with continuing excellent stewardship by CEO Kane and looks set to deliver Boral benefits from infrastructure spending in both Australia and the USA over the next decade.
The other major factor impacting on equity valuations are the long term bond rates around the world. While the expectation is for such rates to increase overtime, in August the ten year rates softened a little. It is anticipated that the cessation of long term bond buying by the US Fed will see slow increases in longer term bond rates over the remainder of 2017 and well into 2018. Similarly, any containment of the bond buying program by the European central bank is likely to see German long term rates jump by 1% in a short period of time. These rate rises overseas would likely be reflected in Australia. It is difficult in Queensland to gain a sense that the Australian economy is doing well, but the recent employment and GDP numbers indicate NSW and VIC are carrying the Australian economy, as well as the increased mining income from the capital expenditure during the mining boom which is resulting in higher record volumes of Iron Ore and Coking Coal, notwithstanding that prices have softened. There are many shareholders in BHP and RIO who will gain from a positive outlook on copper over the next five years.
To summarise, the news flow from the annual reporting season in Australia together with stronger Australian economic data confirms portfolio settings as follows:
ä Australian equities remain good value, with returns likely to exceed all other asset classes in 2017/18.
ä International equities are a mixed bag with the USA on average over valued, particularly some selected stocks in the technology sector, whilst Europe shows reasonable valuations and the UK should be avoided until the impact of Brexit is understood.
ä Listed property stocks have materially corrected from the previous levels of over valuation, but there may be further reaction to higher long term bond rates during 2017 and 2018. Selected holdings in higher yield property trusts are recommended as the preferred exposure.
ä Fixed interest is at its most difficult, with longer term bonds to be avoided and shorter term rates relatively unattractive when compared to listed company franked dividends. This view on fixed interest markets indicates material downside may exist for retail and industry superannuation investors. Similarly listed infrastructure funds appear overpriced on average if longer interest rates are to rise. While members in retail and industry superannuation funds may see those holdings as lower risk for balanced and moderate growth portfolios, our view is to the contrary. Burrell financial planners would be pleased to provide an independent review.
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This document contains general securities advice only. In accordance with Section 949A of the Corporations Act, in preparing this document, Burrell Stockbroking did not take into account the investment objectives, financial situation and particular needs ('relevant personal circumstances') of any particular person. Accordingly, before acting on any advice contained in this document you should assess whether the advice is appropriate in the light of your own relevant personal circumstances or contact your Burrell Stockbroking advisor. If the advice relates to the acquisition, or possible acquisition, of a particular financial product, you should obtain a Product Disclosure Statement relating to the product and consider the Statement before making any decision about whether to acquire the product.
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