February Review Comments
Written by Tony Gray   
Monday, 21 February 2011 16:35

Portfolio Valuation & Comment

Please find attached a copy of your portfolio as at the 31st of January.

We are in the midst of reporting season, with most companies providing figures for the first half of the financial year and outlook statements.  I note below some of the key themes at present.

Interest Rates

The Reserve Bank are expected to continue to increase interest rates in an attempt to prevent an outbreak of inflation – due to higher wages and shortages associated with the mining boom.  Rises are expected to be modest, with 6 month term deposits providing a reasonable premium to at-call rates.

Commodity Prices

Base metals are trading at record levels and iron ore and coal prices are also very high.  Earnings for the resource sector of the Australian market are expected to jump by over 40% in 2011.  At the same time, there is no doubt that a bust will follow the current boom – we just do not know for how long demand, earnings and share prices will continue to rise in the meantime.  Take iron ore – there are major expansions occurring with all of the major Australian operators (listed and unlisted) and Brazil (the second largest provider of seaborne iron after Australia) is doubling production between now and 2014.

Current mining ‘super’ profits will not be sustained as supply exceeds demand as it has in every other mining boom.  This will be sooner if China’s new 5 year plan (due next month) targets a lower rate of economic growth, with more of an emphasis on renewable energy and domestic consumption (as opposed to building more factories).

Australian Shares

Aside from the mining sector, earnings growth from the remainder of the market is forecast to be modest for 2011 – with a 4.5% growth estimate.  Despite this, there are decent long-term investment opportunities where the gross dividend yield requires growth of only 3% to 4% per annum to generate a double digit return.  The majority of company results are due over the next fortnight.

Aside from adding ‘value’ stocks available at current prices, we continue to recommend higher allocations to the energy sector as an inflation hedge.  Australia produces mainly gas, which has lagged the oil price rise.  All the same, gas prices are correlated and we expect will rise significantly.  If the resource boom rolls on for longer than expected, then we would expect the oil price to spike even higher as Chinese and Indian demand overwhelms new supply.

International Shares

The high Australian dollar makes now a good time to allocate more funds to international shares, although we hold some concerns about the rate of recovery in the US – that market appears to have moved too far ahead of the economic recovery.  A quasi international exposure to consider is buying a fund manager specialising in international shares – Platinum Asset Management (PTM) is an example and represents exceptional value in my opinion.

Sovereign Debt

The unwillingness of the United States government to curb spending or increase taxes is a slow train wreck in the making.  For the moment debt markets seem content to allow the US to print and borrow huge sums (the US government is now the single largest holder of their own debt, followed by China!).  Ultra low interest rates are also impossible to maintain without leading through to higher inflation – perhaps on a global level.  At least the US economy is in recovery mode and in Australia we are somewhat shielded by the Reserve Bank’s ability to sharply cut interest rates to stimulate the economy.

Portugal appears to be the next European country likely to turn to the European Central Bank to maintain funding.  How Europe copes with the contradiction of the various economies and debt servicing capacity with a single currency and central bank interest rate will be fascinating and just as in 2010 could rapidly trigger stockmarket corrections in 2011.

Reviews & Reporting

Reviews of all retained advice client positions occur on an ongoing basis.  However, if there are any specific planning or investment issues you would like to discuss in the short-term, then please make contact to arrange an appointment (either by phone or in person).

I have temporarily ceased to accept new clients in order to remain available for client queries and reviews.  We are seeking additional adviser and administrative staff.

As always, please make contact with any questions and so far this reporting season there have been few negative ‘surprises’ requiring urgent action.

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, 21 February 2011 16:40
 

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