June 2016 Review & Comments
Written by Tony Gray   
Monday, 15 August 2016 11:28

Portfolio Report – July 2016


Superannuation

We don’t know either! The whole country is in limbo over which budget announced superannuation measures will move through to legislation and which will be dropped. Even those that do move to legislation may not pass.

Brexit

Of itself, the UK represents something in the order of 4% of the global economy and Brexit should not be that big a deal. The wider impact of a dysfunctional Eurozone was already an ongoing issue – with keys risks revolving around financial system liquidity.

The bigger problem is the slow rate of global economic growth, coupled with rising indebtedness in key economies and exactly what the end game is from negative interest rate policies.

Investment Markets

Governments are repressing returns to savers through bonds that either lose money or pay income less than inflation. Bond pricing suggests an extended period of low returns. Now that the valuation adjustment from lower interest rates has largely occurred (there has been tremendous asset price inflation since the GFC), where to from here?

Despite the extra domestic political uncertainty, likely interest rate cuts and a negative credit rating outlook on Australia’s debt, the $A has been rising as we are seen as a safe haven.

We note active international managers are running portfolios that are very different from the indices. For the first time (in my experience) we are seeing some major local fund manager groups not holding any domestic banking exposure. That’s significant given banks represent over a quarter of our stockmarket.

Dividend returns from a sizeable number of our largest ‘blue chip’ stocks have been cut in the last 18 months and it seems to me that more cuts are likely. So far ANZ Bank is the only major bank to cut dividend payments in order to build capital reserves at a faster rate. With more capital required by all banks by January 2018, we expect that rights issues and reinvestment of dividends into new shares will continue to dilute bank stock earnings.

The $US price of gold has continued to trend higher and the hedge value was apparent when shares fell around the world on Brexit and gold jumped. Gold is stepping back the day this letter is being written, but this asset tends to move in long cycles and it was only in January of this year that the price began trending up – after a 5 year bear market.

Gold does seem to be moving in a two steps up, one step down fashion and the most responsive assets have been junior gold producers, while Newcrest Mining has doubled since January.

The opportunity cost of holding gold is relatively modest given low interest rates and the upward trend and hedge value mean a modest allocation for most portfolios is worth considering. This is not a common view amongst financial planners or fund managers.

Investments

We are finding a range of smaller companies that represent good value and a number of managed funds that bring something different to portfolios – from micro-cap stocks, to unconstrained credit funds to international shares. There are also various gold and gold related assets to consider.

We consider larger Australian shares to be on the more expensive side and listed property remains at an excessive premium to book value.

As we head into August reporting season I am endeavoring to review all portfolios – but if you have any questions, please make contact.  

Best wishes,



A.W. (Tony) Gray BCom, LLB, Dip FP, GDipAppFin, CFP, FFin

Principal, TG Financial



Please treat the above comments as General Advice or general information, with no action to occur until we have considered with reference to your financial position, needs and goals.

Last Updated on Monday, 15 August 2016 11:35
 

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