September 2014 Review & Comments
Written by Tony Gray   
Friday, 17 October 2014 10:45

Having returned from leave today, I am feeling somewhat out of touch with respect to stock matters.  There is a benefit in looking at the bigger picture with fresh eyes - so here goes with my first impressions:

  1. Expected global growth is slowing and asset prices generally are falling - commodities (iron ore, metals, agricultural prices, gold and oil) are all lower.  The Australian dollar has also fallen to relatively fresh lows for the post GFC period.
  2. US long bond yields have fallen more than Australian rates, but term deposit rates in Australia continue to weaken.  Term deposits still represent better value than bonds on a risk/return basis if under the government guarantee thresholds ($250,000 per institution).
  3. Equity markets globally are falling.  The S&P500 in the US has clearly broken trend, as has the Morgan Stanley Capital Index (MSCI) – an index measuring world stock markets.  This looks different from the smaller pull-backs experienced since 2012.
  4. The weaker $A has sheltered international share returns to a degree.  Should we see a significantly lower $A and international markets, then we would be looking to change to a currency hedged exposure (since the $A and MSCI are positively correlated).
  5. The Australian share market has suffered a correction (i.e. a fall of more than 10%) – the first in 15 months.  It is not clear at all that the market will bounce higher in the short-term or weaken further?  The mining and energy sectors and supporting services are understandably weak and there are also concerns about potential regulatory changes and leverage for the banking sector.  Falls have occurred across all sectors and whilst values appear more attractive, they are certainly not compelling.  For the moment we are not adding to the sector generally.
  6. One market that appears to be negatively correlated to the Australian and other international share markets is China.  The Shanghai index broke a long running bear market trend a few months ago, just when other markets began to come off a post GFC peak (or in the case of the US, from all-time highs).  My feeling is that some exposure to this market is warranted and there are a number of assets to consider.  One example is the AMP Capital China Growth Fund (AGF) – a listed investment company trading at an appreciable discount to asset backing but that has the advantage of being able to invest directly into mainland China shares.

Over the page I have attached two charts illustrating the US S&P500 index and the Shanghai index for the past 10 years.  A picture is worth a thousand words (so those 2 charts have saved a few pages)…

Charts

Source: Iress

The GFC fall for Shanghai looks a lot worse than occurred in the US (or Australia), but in fact the circa 65% Chinese fall compares to a circa 55% US fall – the main reason relates to scale – with the US market subsequently moving to all-time highs while the Chinse market, after a 2009 bounce, then declined around 45% from the 2010 to 2014 period.  Company profits rose for both markets.

Kerr Neilsen from Platinum Asset Management stated in September that the bear market in China had ended and felt the US bull market was mature, with smaller companies in that market expensive.

As always, please contact me with any questions about your portfolio or planning queries.

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 Monday, 20 October 2014 09:06
 

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