August Review Comments
Written by Tony Gray   
Thursday, 05 August 2010 09:10

Wary probably best describes the current ‘market’ mood, despite a modest recovery from May and early July sharemarket lows.  Expectations for earnings and share price growth have been wound back by analysts and investors alike.

Our general expectation is that the local share and listed property market will range sideways.  There are and will be opportunities to add investments; but a willingness to sell some assets on modest price rises will be required to outperform in our opinion.

Dividend yields are attractive and balance sheets are generally in quite good shape.  The major issue seems to be that slowing global and Australian economic growth will restrain profit and share price increases.
In company reporting season, there is always a risk of profit downgrades leading to share price falls.  Where an earnings decline appears to be structural, rather than cyclical, or where the stock had been priced for growth (i.e. traded at a premium relative to historic earnings), then we are more inclined to sell on a profit downgrade.

There are a number of themes we hold that guide our investment recommendations at present.

Property

Slowing residential property sales, increased time to sell properties and minor price declines now make it possible that a more dangerous decline in prices occurs.  Whilst this is not likely, it is something we will be closely watching in relation to the banking sector.  On the plus side, there may be a shift to equities from real-estate underway.

We are concerned about listed property investments – as long as gearing levels are low, the trust is focused on rental income (not development) and the market price is a ‘healthy’ discount to asset backing (at least 10%).  Income yields and growth in income - not capital growth – are the major drivers of listed trust valuations in our opinion.

Mining Stocks

We hope that we’re wrong – but it does appear that global metal supply growth will overwhelm demand growth from China – especially with the rate of growth in that economy slowing and the ‘developed’ world focused on balancing budgets and debt – not building new infrastructure.  This may well lead to sharp falls in metal prices and the closure of marginal operators.  The big miners should still benefit from increased volumes over time.

We suspect the Australian economy is not as reliant on the mining sector as the media would have us believe – but all the same, falls in base metal prices would slow the economy and impact share prices.  We already have an underweight exposure to mining stocks in most portfolios.

International Shares

With a highly concentrated sharemarket in Australia and very large banking, mining and energy sectors – there are big diversification benefits in holding international shares.  We favour healthcare and IT as two sectors under-represented in Australia.  Pharmaceutical stocks will see a growing share of economic spending as populations age in most regions of the world.

The Australian dollar is also sitting at a relatively high level – making now a sensible time to apply funds to international investment.

At-Call and Term Deposits

Yields from term deposits remain quite attractive.  The real after inflation return is presently double the long-run average.  Given our more subdued growth outlook and the low risk nature of term deposit returns, we have increased allocations relative to growth assets – depending of course on the risk/return profile and goals for each portfolio.

Australian Share Valuations

The market price-earnings multiple appears cheap at 12 times compared to the 15 times long-run average.  However, we also believe that earnings expectations are overstated generally and distorted by the high contribution from the cyclical mining sector.  By comparison, the banking sector appears normally priced at around 13 times expected earnings.

On balance, we remain cautious on the outlook, with modest new investment on a case by case basis.  We also recommend being prepared to take some short-term gains on stock or market rallies.

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

Last Updated on Monday, 20 September 2010 09:16
 

Portfolio Management


Latest News

Please treat any facts or opinions on this website and associated articles as NOT representing personal advice.  Please seek personal advice relevant to your financial circumstances, needs and objectives.