November Market Update Snapshot of the month During November the ASX300 Accumulation index lost -3.2% while the MSCI AC World Index (US$) was up 1.5% On a trade-weighted basis the A$ decreased by 1.7% Within fixed income the Bloomberg AusBond Composite Index gained 1.3% Tactical asset allocation detracted from performance except for the Australian Equities asset allocation model Within Australian equities stock selection added to relative performance but sector positioning detracted from performance versus the index Market performances (1 Month bar LHS; 12 Month line - RHS) 2.5% In US$ 1.5% 0.5% -0.5% -1.5% -2.5% All Countries (ACWI) Developed Markets (DM) Emerging Markets (EM) 10% 5% 0% -5% -10% November ACWI DM EM 2.5% 1.5% 0.5% -0.5% -1.5% -2.5% -3.5% 1 Month sector and security performances 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% -12.0% -14.0% In AU$ ASX 300 ACWI Property Bloomberg Ausbond 25% 15% 5% -5% -15% -25% -35% November ASX 300 ACWI Property Bloomberg Ausbond 20.0% 10.0% 0.0% -10.0% -20.0% -30.0%
General Market Overview Global equity markets enjoy broad based gains Global equity markets strengthened in November with the S&P500 index ending the month 2.5% higher, on the back of strong US earnings and economic data. In Europe and Japan, gains were even stronger with the Euro Stoxx 50 up 4.4% and the Nikkei 225 up 6.4% on expectations of further easing by the European Central Bank and Japan s accommodative fiscal and monetary programs. Australian equities underperform global peers The Australian equity market (ASX 300 Accumulation Index) underperformed against its global peers closing the month down -3.2%, driven mainly by the late month fall in commodity prices. Energy and Mining & Materials were the sectors most affected by the decline in oil and iron ore prices, down -13.2% and -9.0%, respectively. Other sectors also underperformed their global counterparts. In particular, weakness in food retailers saw even the more defensive sectors like Consumer Staples feel the pinch, falling -8.3% in the month. Fixed income positive on lower yields and slightly wider spreads Following the trend from last month, bonds performed reasonably well in the month of November. The main driver of the outperformance was the greater duration (interest rate risk) of the Australian Commonwealth Government bonds. A slight widening of credit spreads also contributed to the Government bonds outperformance against Semi-Government and Corporate bonds. Bond yields fell significantly during the last week of the month as commodity prices declined, helping add to monthly returns. Aussie dollar trends lower The AUD depreciated against most major world currencies down -1.7% on a trade-weighted basis and -3.3% against a strong USD. The first half of the month saw the AUD/USD bounce up from a decline earlier in the week. However, weaker iron ore and oil prices saw declines accelerate over the second half of the month. Energy and Industrial metals weaker but precious metals rebound Spot Brent crude ended the month at its lowest level in five years falling -18.6%. The November fall in Brent crude signifies the biggest monthly drop since December 2008 slipping below $66 a barrel. The benchmark spot iron price was down -10.4% for the month. The rapid increase in supply has been the main reason for the weakness in prices coupled with lack of demand as China s steel production experiences moderating growth. Base metals weakened as measured by the LME base metals index, falling -3.2%. Spot gold regained footing from last month, dropping only a slight 0.5% on a stronger USD, and continuing physical demand. Sources: CBA Global Markets Research, JP Morgan, UBS
Portfolio Update Top 10 Australian equity holdings relative weightings (LHS) and forecast gross yield (RHS) ASX Macquarie BlueScope IAG Rio Tinto Brambles Woodside NAB ANZ BHP -1% 0% 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, Macquarie and BlueScope. The largest underweight positions were in Commonwealth Bank, Westpac and Woolworths (not owned). Overall stock selection added to relative performance, with the largest contributors to and detractors from performance being: Contributors Detractors Overweight Newcrest Perpetual Resmed Myer Faifax Woodside Petroleum Underweight Woolworths Santos Origin Energy Commonwealth Bank CSL Transurban Portfolio Sector Allocations 50% 40% 30% 20% 10% 0% Portfolio Sector Weight Index Sector Weight The Financials sector exposure includes A-Reits Sector allocations detracted from relative performance, driven almost entirely by the overweight position in Materials
Portfolio Update Continued International During November there were no changes to the international allocations within the model portfolios. The effective geographic and sector exposures are detailed below: Materials 43% 29% Americas Greater Europe 14% 12% 5% 14% 16% Cons Discretionary Fins Ex-Reits Energy Industrials Greater Asia 11% IT 28% 14% 7% 7% Cons Staples Health Care Other The ishares Global 100 (IOO), ishares MSCI EAFE (IVE) and Macquarie Asia New Stars No1 ( MANS ) Fund returned 7.66%, 5.42% and 4.01% respectively (all in A$), outperforming the US$ denominated international benchmark (i.e. MSCI World ex-australia) which gained 2.12%. All holdings were positively impacted by the weak A$ due to being currency unhedged. IVE which seeks to track the results of an index composed of large- and mid-capitalisation developed market equities, excluding the U.S. and Canada, performed well as roughly 69% combined allocation to the outperforming Japanese, U.K. and European markets. In a region which saw smaller companies in particular sell-off during the month, the MANS Fund has continued to deliver solid relative outperformance due to strong stock selection. Key contributors to performance including holdings in China Galaxy Securities (a Chinese securities broker), China Taiping Insurance (a Chinese insurance company) and BBMG Corporation (a Chinese cement company). The portfolio continues to maintain an overweight position in Hong Kong and China. Given the stimulus announcement from the People s Bank of China and the positive outlook in Asian consumption, the Fund has decided to further increase the allocation to China within the portfolio. 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 -0.21%, 0.25% and 0.75% respectively versus the benchmark (i.e. Bloomberg AusBond Composite 0-5 Yr) return of 0.63%. Unlike both RCB and PDFI which are exposed to interest rate movements and hence benefitted from yields drifting lower during the month, MIO is primarily a credit focussed fund which was negatively impacted by the slight widening of credit spreads. Strong supply and poor performance in the energy sector also added to the result. As has been the case in recent months, MIO continues to have no exposure among the high yield and emerging markets given the stretched valuations in these sectors.
Portfolio Activity and Stock News Portfolio activity During November we participated in the Medibank Private IPO via the Broker retail offer, with clients receiving shares at $2.00. Given the significant scale-back we were however only allocated approximately 10% of the amount requested. While of the view that Medibank, as the largest player in the heavily regulated but government supported private health insurance sector, will offer defensive profits and cash flows longer term, we do not want to purchase more on-market at current prices believing there are more attractive opportunities available to investors. 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. Stock news Company Asciano Announcement An update was provided at the AGM. There was no material new information since 1Q15 volume update last month. AIO s underlying markets remain subdued with cost savings helping to drive margin expansion. Increased dividend yield expected from FY15 Brambles Fairfax Myer Westfield The 1Q15 trading update saw constant currency growth guidance of 7-9% (excluding the Ferguson acquisition), the same as issued at the FY14 result in August 2014. Against this target, sales growth last quarter was a touch weak primarily in Containers, but management expect a solid 2H15 based on organic growth, contract wins and a weak prior comparative period. A trading update was provided at the AGM with FY15 year-to-date overall group revenues for continuing businesses down 2% to 3%, broadly in-line with market consensus. Revenue growth in both Domain and Events is strong, but the bulk of the business (Community Media, metro publishing, NZ media & radio) still face tough operating conditions though Metro print advertising declines continue to moderate The 1Q15 trading update saw total sales increase 0.1% to $691.6m while comparable sales increased +0.7%, weaker than expected. With costs expected to rise c.3% (before the $35-50m in operating cost investment discussed by management in August), if sales growth fails to materialize in the crucial 2Q15 (management indicated this quarter accounts for c. 75% of annual profit), earnings could face pressure. The 3Q14 trading update saw no comment on earnings expectations, with the update focused on recent retail sales and the development pipeline. While specialty sales growth softened over the quarter it remains reasonable, occupancy is slightly improved and releasing spreads remain solid. Development activity is tracking to plan Sources: Company announcements, J.P. Morgan, Macquarie Wealth Management, Morgan Stanley, UBS
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