August 2012 Review Comments
Written by Tony Gray   
Monday, 06 August 2012 17:25

Portfolio Valuation & Comment

Australian Shares

The month was positive for portfolios, with very low weightings to the falling materials and mining stocks and high weightings to income yielding stocks - which rallied solidly.  The banking sector is now sitting at or close to 12 month highs and while we like the high income yields, we remain wary of their leveraged exposure to the economy and are keeping a close eye on the unemployment rate.

We remain positive on the potential for local shares to generate moderate capital gains and distribute relatively large income yields this year – but are not expecting a bull market in shares to develop as there is no broad based growth in company earnings occurring. 

Very few companies have reported full year 2011/12 financial results at this time and we will have a much clearer view of company profitability over the next three weeks.  Hopefully there will not be the need to exit any holdings and we are closely tracking a sizeable number of   stocks to potentially add to portfolios.

We met recently with Callum Burns, the portfolio manager for the SG Hiscock ICE Fund, and determined that the approach of this Australian share fund is in line with our view (for example, only 1% of the portfolio is presently invested in the materials sector).  As we are presently struggling to find a sufficient number of non-core stocks (85% of the ICE Fund is presently invested outside the top 100) we are considering this investment for some portfolios as a complement to direct share portfolios.

Listed Property

We see less upside potential in the medium term for listed property – most trusts have significantly narrowed their discount to asset backing and rental growth in the retail space could well fall below CPI, with implications for capital values.  This noted we are still comfortable holding existing assets with low gearing levels, moderate income and low growth generating a sufficient return premium over deposit rates.

International Shares

We continue to recommend steady accumulation of international assets as the Australian dollar remains high and as international shares are historically cheap.  International shares provide diversification away from the Australian economy and while income returns tend to be low, capital growth can be very strong on occasion.

Inflation & Gold

It seems to us that most developed world governments with high debt levels are seeking to inflate away the problem over time.  This involves printing money or creating money to buy existing debt and depress interest rates.

The short-term result has been to generate much higher capital returns from bonds than would occur without government interference - and made debt cheaper for countries that still have the confidence of investors (e.g. Germany, Australia and the US).  At the same time Basel III rules mean that banks will need to hold more sovereign debt – or cut back on lending.

The broad outcome is that investors are earning less interest on government bonds than they lose through inflation.  This will ultimately result in bubbles quickly forming in other parts of the world economy and in bond prices for countries such as Australia.  It also means we will see higher global inflation relative to economic growth than we have become accustomed to in recent decades.

We recommended exiting gold in August 2011 – as it had ceased to trade contrary to equity markets, thereby losing its role as a hedge in portfolios.  We also recommended exiting Newcrest Mining at the time (fortunately).  In the last 12 months and after a period of slow decline the gold price now appears to have formed a base and is again trending higher.

Repressive interest rates also now make the opportunity cost of holding gold much lower and lift the probability that investors hold it as a store of wealth instead of paper (fiat) money.  With gold company share prices dramatically lower, we are now prepared to re-introduce Newcrest Mining to some portfolios.  This may not be appropriate for your portfolio and is a topic for discussion.

With lower at-call interest rates and term deposit yields and higher risks from bonds, we feel an increased allocation to shares (including international) within Investment Strategy ranges is justified at this time and this frames our portfolio recommendations.

Best wishes,

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

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 Wednesday, 08 August 2012 15:44
 

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