December 2016 Review & Comments
Written by Tony Gray   
Thursday, 22 December 2016 08:20

Portfolio Report – December 2016


We wish you a safe and merry Christmas/New Year break.

The TG Financial office will close on the afternoon of Thursday the 22nd of December and re-open on Monday the 9th of January. If you need to contact me, please ensure you have my mobile number (it is not noted on our website) – although I will only be checking messages intermittently.

We are not circulating 31 December portfolios – by the time we reconcile we’ll almost be ready for the January update. We will circulate some commentary by email or shared file in mid-January.

From a planning perspective, we now have more clarity on the superannuation changes (e.g. we know more of the known unknowns). For some client positions this involves quite considerable adjustments and time on our part - this restricts our ability to maintain as much contact as we would like. This situation will persist for the first half of 2017.

Please contact us if you do have any questions about your portfolio and positioning.

Turning to markets, bond yields have risen substantially and yet international and local stockmarkets have risen – despite a contracting Australian economy. One explanation is that as money is being pulled out of the bond market, some of that is being directed to shares.

We continue to have deep reservations about the number of stocks reporting declining earnings and the valuation impact of rising interest rates – but we could be repeating this line in 6 months and find that growth asset classes have risen to an extent where they are expensive.

A dot-point summary of our asset class views:

Cash & Fixed Interest – Hold an above average at-call (opportunity) reserve. Avoid bonds and limit exposure to bank income securities. Maintain rolling deposits, but no more than 3 years out due to the rising cost of money.


  • Example: Commonwealth Bank is paying 3.2% on a 3 year term deposit.


Property: Listed property prices have fallen to a significant degree as bond yields have risen – with a number of assets now close to reasonable value. The risk is that if bond yields rally further we may see valuation downgrades and prices moving to a discount. Still, starting from a low exposure, it is reasonable to begin looking for opportunities in this sector.


  • Example: BWP Trust (was Bunnings Wholesale Property) has declined from a $3.91 peak earlier this year to $2.91 presently and is yielding 5.77% (unfranked) – but still sits above asset backing of $2.56 per unit (our target is $2.80 – with a yield of 6%).


International Shares: We’re looking to add to international exposure, for diversification away from Australia, but we’re wary about the concentration of index linked funds and ETFs to the US and high valuations. For example, we don’t recommend buying the world index (which we can buy via a low-cost product such as a Vanguard ETF) – as this is trading on a price-earnings multiple of 22.2 times (i.e. 22.2 years of earnings to equal the value of companies). The US market may be trending higher, but it is in the 8th year of a bull market.


  • Example: Future Generation Global Investment Company (FGG) is a listed investment company trading at asset backing and with exposure to a range of active managers.


Australian Shares: We are focusing on assets that are not as interest rate sensitive or as sensitive to the rate of economic growth. We are seeing enough worthwhile values from stocks to add. As usual, exit assets that disappoint (in an earnings sense) to maintain quality.

  • Example: APN Outdoor (APO) – This outdoor advertising company has a sound balance sheet, generates good cash-flow and pays a moderate and growing dividend. We expect earnings growth to remain faster than the broader economy (not difficult at this time) as more billboards change over to digital screens (revenue for a digital billboard is 3.5 to 4.0 times higher than a static billboard). APO is what we term a ‘non-core’ stock in in the lower $5’s is now worthwhile – compared to an excessive price above $8 earlier as recently as August.


Summary

The various examples noted above may either not suit or be available, depending upon your investment structure.

Markets do tend to ‘climb a wall of worry’, so while we do have reservations, holding too defensive a portfolio may come at the cost of lower growth and income long-term.

All the best for Christmas and the New Year.


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 Thursday, 22 December 2016 08:29
 

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