February 2014 Review Comments
Written by Tony Gray   
Friday, 21 March 2014 13:15
Reporting Season

First half corporate reports in Australia were generally sound, with a number of positive surprises.  The slowdown in China and weaker pricing and demand for commodities means we continue to avoid some parts of the mining, energy and mining & energy services sectors (e.g. engineering) and this is a long cycle – so while prices are low this does not represent a buying opportunity.

ANZ Bank and Commonwealth Bank reported very strong quarterly results although this is largely due to continued falls in bad and doubtful debt provisions.  We are somewhat nervous about the day that provisions need to be increased for the banking sector, but at this stage the income yields remain attractive and only modest growth is required to justify prices.  Unemployment is the key indicator to watch – if an upward trend forms then some difficult decisions may be required (i.e. to lighten what have been very strong contributors to portfolios).

We are seeing a diverse range of smaller or non-core companies present buying opportunities – although we would not describe them as bargains.

International Shares

This asset class performed strongly during 2013 – with the United States the key contributor.  Emerging markets and China lagged during this period.

I hold some concerns about the sustainability of the US rally and the chart below serves to illustrate market behaviour in that market (S&P500 index) over the last 20 years:

Graph

Source: Iress

To what extent does earnings growth justify the price rises since February 2009?  Allowing for the 2009 and 2010 price moves to remove the deep share price discounts arising from the Global Financial Crisis, then we find that the 65% rise in US share prices from 2011 to 2013 has been backed by only a circa 15% rise in corporate earnings!

Share prices are forward looking – focusing on future earnings and my feeling is that US future profit growth is well and truly factored into share prices already.  We may see share prices continue to trend higher, but from this point the return potential is lower and the risks are higher in my opinion.

The Morgan Stanley Capital Index (MSCI) tells a similar if less extreme story (this index is an index of world stockmarkets), although the current peak is at the same level as the 2007 pre GFC peak.

We are actively making some adjustments to portfolios where total US exposure has become too high – which depends on which managed funds or exchange traded funds are held.

Please contact me with any questions about your investment portfolio or any planning queries.

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 Friday, 21 March 2014 13:40
 

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