December Market Update

Transcription

1 December Market Update Snapshot of the month During December the ASX300 Accumulation index gained 2.0% while the MSCI AC World Index (US$) was down -1.9% On a trade-weighted basis the A$ decreased by -2.5% Within fixed income the Bloomberg AusBond Composite Index gained 1.7% Tactical asset allocation detracted from performance except for the Moderate and Conservative asset allocation model which added to performance Within Australian equities sector positioning detracted from performance but stock selection added to performance versus the index Market performances (1 Month bar LHS; 12 Month line - RHS) 5.0% In US$ 2.5% -2.5% -5.0% All Countries (ACWI) Developed Markets (DM) Emerging Markets (EM) 15% 10% 5% 0% -5% -10% -15% December ACWI DM EM 6.0% In AU$ 4.0% 2.0% -2.0% ASX 300 ACWI Property Bloomberg Ausbond 1 Month sector and security performances 30% 25% 20% 15% 10% 5% 0% -5% -10% December ASX 300 ACWI Property Bloomberg Ausbond 6.0% 3.0% -3.0% Qantas Fairfax BlueScope Sims Metal Management Recall Crown Resorts Iluka Resouurces Santos Flight Centre Metcash

2 General Market Overview Global equity markets reverse from previous gains A weaker oil price saw global equity markets struggle for most of December as the sell-off eliminated the gains made from the previous month. While US economic data was strong, the economic data from Asia and Europe continued to show weakness. The Greek market was the worst performing during the month due to the political uncertainty surrounding the country. On top of this, a drop in consumer prices in Spain and the delay in the expected announcement regarding QE until next year, saw Europe underperform (Euro Stoxx 50 down -3.2%). Surprisingly, the Chinese stock market responded positively with the Shanghai Composite Index rising 21.6% for the month. Australian equity market stronger In spite of its high commodity weighting, the Australian equity market outperformed in December with the ASX 300 Accumulation Index gaining 2.0%, after dropping -3.2% in November. The market benefitted from a falling AUD and lower bond yields which helped offset the negative impact of weaker commodity prices on the Energy and Mining sectors. Industrials, REITs and Healthcare benefitted the most from the falling currency and bond yields while Consumer Staples was the worst performing sector hit by ongoing concerns around food retailers. Bonds gain on falling yields The Australian 10 year bond yield ended the month below 3% for the first time since November 2012, with the 29bp drop in yield notable because 10 year US Treasury s were largely unchanged. The December rally saw significant gains for all three bond indices (Government, Semi-Government and Non-Government), driven by both lower yields (duration) and a contraction in credit spreads. Across the rating indices, high quality credit was the best performing as investors remain cautious. Aussie dollar continues to weaken In December, the AUD depreciated against all major world currencies down -2.5% on a trade-weighted basis and - 3.9% against a strong USD following a shift to a more hawkish monetary policy by the US Fed. The start of the month saw the AUD/USD continue its trend from the second half of last month, declining further on the basis of weaker iron ore and oil prices, unimpressive Chinese economic activity and a softer Australian economy. The latter part of the month saw the AUD continue its downward pattern with the AUD trading at its lowest level against the USD since June The RBA pointed out that a lower AUD is necessary in order to rebalance the economy. Commodities down but spot Gold gained Spot Brent crude finished the month down (-19.2%) for a sixth consecutive month. One year demand forecasts are expected to decline as the economic outlook remains grim in Russia and other oil-exporting countries. The spot iron ore price also fell to a low in mid-december of $67/t, but rebounded to end the month, down only -0.1%. Base metals were collectively lower with aluminium (-10.1%), lead (-8.9%), and nickel (-7.1%) all down for the month. A different story can be told for spot gold as it finished the month stronger, up 1.4%. Sources: CBA Global Markets Research, JP Morgan, UBS

3 Portfolio Update Top 10 Australian equity holdings relative weightings (LHS) and forecast gross yield (RHS) ASX Macquarie Woodside IAG Rio Tinto Woolworths Telstra NAB ANZ BHP -2% -1% 1% 2% 3% 4% 5% 0% 3% 5% 8% 10% Relative weights are based on the Model Portfolio - actual weightings may differ across client portfolios. Gross yield based on Bloomberg consensus estimates including franking credits and assuming nil tax rate In terms of our model portfolio the largest overweight positions versus the index at month-end were in ASX, Myer and AGL Energy. The largest underweight positions were in Commonwealth Bank, Westpac and CSL (not owned). Overall stock selection detracted from relative performance with the largest contributors to & detractors from performance being: Overweight Underweight Contributors Fairfax Amcor Orica Santos Crown Resorts BHP Billiton Detractors Myer Iluka Insurance Group Commonwealth CSL Brambles Portfolio sector allocations 50% 40% 30% 20% 10% 0% Portfolio Sector Weight Index Sector Weight Financials Materials Cons Cons Staples Industrials Energy Telecoms Health Care Utilities IT Discretionary The Financials sector exposure includes A-Reits Sector allocations detracted from performance, driven primarily by the overweight position to Materials underweight position in Financials and Industrials.

4 Portfolio Update Continued International During December there were no changes to the international allocations within the model portfolios. The effective geographic and sector exposures are detailed below: Materials 44% 29% Americas Greater Europe Greater Asia 14% 11% 12% 5% 14% 16% Cons Discretionary Fins Ex-Reits Energy Industrials IT 27% 14% 7% 7% Cons Staples Health Care Other All holdings underperformed vis-à-vis the previous month as weakness in oil prices and economic data impeded broader markets, particularly the European and Asian markets. On a relative basis however, the holdings held up well compared with the benchmark driven mostly by a weaker AUD and stronger US economic data, with the ishares Global 100 (IOO), ishares MSCI EAFE (IVE) and Macquarie Asia New Stars No1 ( MANS ) Fund returning 1.36%, 0.67% and 1.26% respectively (all in AUD), while the USD denominated international benchmark (MSCI World ex-australia) returned -1.69%. The MANS Fund delivered a modest relative outperformance this month due to the high levels of volatility in stocks in Asia. Key detractors to the Fund s performance include holdings in Dawnrays Pharmaceuticals (a Chinese Pharmaceuticals company), Ezion Holdings (a Singaporean oil services company) and Wasion Group. Following a strong quarter from Hong Kong and Chinese stocks, profits were taken on these holdings, significantly reducing the allocation to the region. A portion was reallocated into Korean stocks based on improved valuations. The Fund has also increased its allocation to cash as well as low-beta sectors such as consumer staples and utilities stocks. MANS retains its quality bias by favouring companies that are conservatively capitalised with a long-term track record. Fixed income The Macquarie Income Opportunities Fund ( MIO ), Russell Australian Select Corp Bond ETF (RCB) and Perpetual W/sale Dynamic Fixed Income Fund ( PDFI ) returned 0.20%, 1.76% and 0.81% respectively versus the benchmark (i.e. Bloomberg AusBond Composite 0-5 Yr) return of 0.88%. In line with the previous month, both RCB and PDFI which are exposed to interest rate movements have again benefitted from the fall in bond yields. In contrast, MIO which is primarily a floating rate credit focussed fund (i.e. little interest rate exposure) underperformed both RCB and PDFI as it did not benefit from falling yields. While MIO did benefit from the contraction in credit spreads domestically, holdings of offshore bonds did detract from overall returns as recent underperformance of the US credit market continued. MIO continues to have no allocation to the higher beta sectors which in effect has protected the Fund from the volatility in credit markets and weakness from high yield and energy issuers.

5 Portfolio Activity During December we sold Medibank Private (MPL) that we obtained through the recent IPO retail offer, at $2.24. We used the sale proceeds to rebalance Portfolios back to model weights to take advantage of recent extreme market volatility. The decision to sell MPL was based on the small allocation received in Portfolios due to the significant scaleback - clients only received approximately 10% of the amount requested. While we believe that the healthcare sector has strong demographic foundations and that Medibank holds a major position in this market, on a comparable basis, Medibank s expense ratio is generally higher and margins are comparably lower. There are undoubtedly improvements to be made and management will have to execute well to justify the current valuation. During the month, we also bought Downer EDI (DOW) and CSR Limited (CSR) across client portfolios, funded by the sale of Iluka Resources (ILU) and Orica (ORI). Downer is a provider of engineering and infrastructure management services with a strong balance sheet and good management. The company has shown their excellence in management during a tough operating environment, in particular, through the management of their cash flows/cash collections. The recent acquisition of Tenix provides Downer with additional operational diversity and additional growth opportunities. On the back of this, the on market buyback of 10% of outstanding shares is likely to support the share price in the short term and EPS growth in FY2015. CSR manufactures and supplies building products. Given the leverage of CSR to the construction cycle, the ongoing improvement in construction activity through higher volumes and a reduced cost base has given us reason to include CSR in Portfolios. Furthermore, the CSR and Boral joint venture is particularly advantageous based on the related cost savings and further release of properties for infill development. The profitability from the joint venture is expected to be higher for the full year. In addition, the acquisition of AFS Group will increase CSR s exposure to multi-residential. Aluminium has also benefitted from an improvement in AUD Aluminium prices and smelter performance with the physical supply side of the market in Aluminium still reasonably tight. Please note that individual client accounts may be rebalanced periodically despite no changes to the model portfolios due to client specific circumstances. Before any rebalancing is executed we do consider both the % deviation of a client s holding from the model allocation as well as the absolute dollar amount of the difference to avoid unnecessary small trades.

6 Stock News Company Amcor CSR Downer Dexus Fairfax Insurance Group National Bank Tabcorp Telstra Announcement Amcor agreed to acquire Zhongshan Tian Cai Packaging Company, a Chinese flexible packaging business for RMB211 million which represents an EBITDA of 7.1x for the company. The ACCC will not stand against the proposed clay brick joint venture between CSR and Boral Limited as the authority believes the joint venture will not substantially lessen competition. Downer has received two Letters of Award from Adani Mining Pty Ltd advising of its intention to enter into contracts for the Carmichael Coal Mine. The combined contract value is expected to exceed $2b over seven years. The company announced that is has acquired Lakes Business Park in Botany for $153.5m to be funded by existing debt facilities. Lake Business Park has more than 50 tenants, is about 96% occupied and has a weighted average lease expiry of 3.2 years. Fairfax Radio Network (FRN) will merge with Macquarie Radio Network (MRN). The merger will see Fairfax receive about $18m in cash and a 54.5% shareholding in MRN. The company also announced that they reached an agreement with APN News & Media to sell Perth radio station 96FM for cash consideration of around $78m. The total cash received by Fairfax after the completion of the two transactions will therefore amount to about $96m. A new partnership was announced between Insurance Australia Group and Cover-More Group Limited. Cover-More Group will provide additional specialised travel insurance and assistance services for IAG brands. In addition, final claim amounts reassessed for earthquake losses affecting the Canterbury region in 2010 and 2011 are expected to increase by between NZ$750m and NZ$1b. The company also completed its catastrophe reinsurance programme which provides protection of up to $7b for the calendar year, effective 1 January An additional 1.2b parcel of higher risk loans will be sold from the company s UK Commercial Real Estate (CRE) portfolio. A small gain is expected to be recognised in the March 2015 half year. Current short-term agreement between the company s subsidiary, Sky Racing, and TVN for NSW and Victorian broadcast and digital media rights has expired. No agreement has been reached on a new long-term contract but the company has announced that the resumption of these licences is the key priority for Sky Racing at present. Telstra has signed revised agreements with NBN Co and the Government to allow the rollout of the multi-technology mix NBN. The main change relates to Telstra s copper and Hybrid Fibre Coaxial (HFC) networks. The company also signed an estimated $390m 4-year contract with NBN Co to provide planning and design services to support the revised NBN rollout. Telstra further announced its plan to acquire Pacnet Limited, an Asian telecommunications and services provider, for US$697m expected to be completed by mid Woodside The company has entered into a binding transaction with Apache Corporation for US$2.75b to acquire Apache s Australian Wheatstone LNG (13%) and Balnaves oil interests (65%) and Kitimat LNG project interests in Canada (50%). Woodside also finalised a farm-in agreement with BP to acquire 20% participating interest in exploration licences, to farm-in the offshore blocks of Scotian Basin in Canada. Sources: Company announcements, J.P. Morgan, Macquarie Wealth Management, Morgan Stanley, UBS

7 Disclaimer This material has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained in this material is General Advice and does not take into account any person s individual investment objectives, financial situation or needs. Before making an investment decision based on this advice you should consider whether it is appropriate to your particular circumstances, alternatively seek professional advice. Where the General Advice relates to the acquisition or possible acquisition of a financial product, you should obtain a Product Disclosure Statement ( PDS ) relating to the product and consider the PDS before making any decision about whether to acquire the product. You will find further details of the service we provide and any cost to you within the Financial Services Guide. Any references to past investment performance are not an indication of future investment returns. Prepared by EP Financial Services Pty Ltd (Elston Partners) ABN AFSL Although every effort has been made to verify the accuracy of the information contained in this material, EP Financial Services Pty Ltd, its officers, representatives, employees and agents ( Elston Partners ) disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this material or any loss or damage suffered by any person directly or indirectly through relying on this information.