Monday 28 July 2014

Market Wrap 28.07.14

Investment Insightz: Market Update - as at July 2014 
Global Equities
Global equity markets broke fresh highs over the month and took returns over the past financial year to 20.4%. A feature of equities has been the rise in M&A announcements. With $1.9 trillion of activity over the first six months of 2014, that is some 90% higher than the same period last year and the highest level since 2007. Momentum in M&A activity is likely to continue in the second half and could be a further positive for equities. However equities are not cheap and the more cautious may point to historically elevated levels of M&A and IPO activity as signs of market tops. 
USA: The final revision to Q1 GDP data in the US was rather dismal, with growth down 2.9% QoQ annualised, a huge downward revision of 1.9%. The first quarter was blighted by singular factors such as extreme weather conditions, distorting the underlying state of the US economy. Of more importance, the growth trajectory in Q2 has been clearly positive. Both the ISM manufacturing and non-manufacturing series are robust, with the former rising to 55.4 and the latter even stronger, at 56.3. Industrial production and capacity utilisation are picking up and the unemployment rate has continued to fall though the underemployment gauge remains elevated at 12.1% Overall, the economy appears to be growing at a satisfactory pace and Fed policy is expected to remain accommodative. 
With upcoming earnings expectations muted by the weak GDP print, positive profit announcements over the next reporting season could lift equities further. 
China: The Chinese economy is regaining momentum after the lull at the beginning of the year, with the HSBC manufacturing PMI rising to 50.8 in June. Retail sales were up by 12.5% over the year to May and exports have also risen. The Chinese authorities have reiterated that the growth target for this year is 7.5% and we think growth will come in above 7%, avoiding a hard landing. 
One area which looks less rosy is the housing market as home prices fell in May for the first time in two years. In Hong Kong, tensions rose as the pro-democracy movement 'Occupy Central' organised a sit-in in Hong Kong's Central district.  
Japan: The Abe government in Japan released the draft of its new growth strategy. Areas such as corporate taxation, the labour market and public pensions are being tackled. Macro data have been mixed but the manufacturing PMI rose to 51.1 in June. Capex plans for this fiscal year have been revised upwards substantially to +7.4%, driven by the manufacturing sector. Inflation is also higher, though the effects of the VAT hike have to be considered. Employment conditions remain tight, particularly in the non-manufacturing segments of the economy, which should help to raise wages. 
The Japanese market has risen recently and without the help of further Yen depreciation while the Japanese Government Pension Investment Fund has been selling bonds. Any move into domestic stocks could be positive for the Japanese stock market. 
Europe: The ECB has outlined the functioning of the Targeted Longer-Term Refinancing Operations. The conditions that need to be met for banks to access the portion of funds available in 2015 are not very onerous. However, concern remains that despite these measures, inflation will not reach the target easily or quickly, particularly as there are such large output gaps in the periphery. It is likely that further credit easing will be forthcoming with ABS purchases the ECB's preferred vehicle. 
Australian Equities
Despite falling over June the Australian equity market turned in another strong financial year, finishing up over 17%. 
There was some rebound in iron ore, gold and coal prices, however resources once again dragged the market lower over June. In the consumer discretionary space, media and retail were also weak on a number of profit downgrades. In mining services, Downer shares came under pressure following the termination of its BMA Goonyella contract. 
Ongoing positive earnings expectations for the year ahead still provides some scope for further appreciation in the domestic equity market. However we remain neutral on local equities for the time being as domestic valuations look stretched and will look for opportunities to buy on any dips. 
Cash and Fixed Interest
In Australia the cash rate remains at an all time low of 2.5%. Consumer sentiment remains subdued following the May budget though the RBA is yet to show any concern and recently noted the economy is responding to low interest rates. But with the transition from the mining boom still taking place, Governor Stevens has emphasised a “period of stability” on policy settings. 
Property – AREITs
The AREIT market was up 3.3% in June outperforming the broader equity market by 4.8%. For the year to June, AREITs turned in a solid 11.1%.
Weekly Indices: 
The Australian All Ordinaries Index has moved up increasing by +0.9% since closing last Friday to 3:55 pm today. 
The rest of the world as measured by the MSCI index increased +1.8% in A$ from closing last Friday to end of trade Thursday.
We hope you enjoyed your weekend,
The Team at IPS

Thursday 8 May 2014

ATO releases Super thresholds for 2014/15


The ATO has just released the Super thresholds which will apply in respect of the 2014/15 financial year.

•    Concessional contributions cap – increased to $30,000 from $25,000

•    Special Concessional contributions cap for older Australians  – remains at $35,000 but will apply to anyone aged 49 or more on 30 June 2013

•    Non-concessional contributions cap – increased to $180,000 from $150,000

•    Bring forward of the Non-concessional contributions cap – increased to $540,000 from $450,000

•    CGT Non-concessional contributions cap – increased to $1,355,000 from $1,315,000

•    Low rate tax cap – increased to $185,000 from $180,000

•    Account-based pension drawdown rates – no change

•    Super guarantee rate – 9.5% (increased from 9.25%).
(The Federal Government has introduced legislation which, if passed by the Senate, will retain the SG rate at 9.25% for 2014/15 and 2015/16.)

•    Maximum SG contributions base – increased to $49,430 from $48,040 per quarter

•    Government Co-Contribution lower threshold – increased to $34,488 (from $33,516)
(This is the threshold above which the maximum co-contribution amount of $500 begins to taper.)

•    Government Co-Contribution higher threshold – increased to $49,488 (from $48,516)
(This is the threshold above which the co-contribution will not be paid.)

•    Low income superannuation contribution – $37,000 income threshold is not indexed.
(The Federal Government has introduced legislation which, if passed by the Senate, will abolish this co-contribution in respect of 2013/14 and subsequent financial years.)

Weekly Indices:

The Australian All Ordinaries Index has moved down decreasing by +0.2% since closing last Friday to 11:00 am today. 

The rest of the world as measured by the MSCI index increased +1.0% in A$ from closing last Friday to end of trade Thursday. 

Have a good weekend,

The team at IPS

Thursday 1 May 2014

Market Wrap

One of the features of the Australian share market in recent years has been the increase in correlation between stocks.
Basically, correlation is a measure of how two securities move in relation to each other. For example if BHP's and Rio Tinto's share prices followed each other exactly we would say that they were perfectly correlated and the correlation between the two stocks would be 1.0. If these were the only two stocks in their sector there would be no reason to take a stock-specific view as neither would perform better than the other. Rather, you would only be able to achieve excess returns in relation to the index by being overweight or underweight the sector. This is obviously very simplistic but it is the concept that is important, which is that relatively high stock correlations are not conducive to achieving excess returns through stock selection.
Average Excess Return and Average Stock Correlation
Source: Macquarie and Morningstar

This month's chart compares the increase in stock correlations over the last few years to the average one year after-fees excess return achieved by a selection of Australian equity managers (including GSAM), who have been managing a flagship wholesale Australian Equities Fund since at least mid-1997. 
Some of the key observations from this chart: 
  • Historically, stock correlations in the latter half of the last decade were materially higher than in the first half   
  • Average after-fee excess returns were 1.5% p.a. over the period July 1998 to December 2008, with stock correlations averaging 0.1
  • Since stock correlations have exceeded twice the ten-year average (i.e. 0.25, January 2009), average after-fee excess returns have dropped to be below 1%
  • Stock correlations in the past six months have fallen significantly from their peak but still remain higher than the long-term average.
What does this mean for asset managers who have a high active share score?

Falling correlations is great for active management and bottom-up stock picking, it doesn't guarantee excess returns but it does widen the opportunity set. Why is this? Less correlated stock returns means that there is a greater dispersion of returns at the stock level. This means that there is a greater opportunity to select stocks that may contribute to the excess returns.
 Have a great weekend, 
 The team at IPS

Wednesday 23 April 2014

Market Wrap

The latest health statistics prove why protection is a must
Do you know just how much of a difference death, income and trauma insurance could make in the case of an unforseen event? The latest health statistics reveal just how important the right protection is for you.

It can be a challenge to understand the need for additional protection, whether it involves enhancing your existing cover or taking on an additional type of cover. The latest health statistics prove the importance of ensuring you have the right type of cover in place.

Heart disease and stroke still the biggest causes of death in Australia
According to the latest figures from the Australian Bureau of Statistics (ABS), there were 146,932 deaths in Australia in 2011, which was 3,459 (2.4%) more than the number registered in 2010 (143,473). Since 2001 this number has increased by around 1.2% per year on average for males and 1.5% per year for females.

The Australian Bureau of Statistics 2012 report revealed that heart disease and stroke have continued to remain the biggest causes of death in Australia from 2001 to 2010, accounting for almost 34,000 fatalities in 2010. The third biggest cause of death is Dementia and Alzheimer disease with 9,000 fatalities in 2010, which has basically doubled from 2005 and increased its ranking from 5th.

The Bureau of Infrastructure, Transport and Regional Economics, 2011 also released a report showing that in the 12 months to December 2011 there were 1,292 deaths linked with fatal car accidents.

So with the number of deaths in Australia continuing to increase, most of which are caused by heart disease and stroke which occur quite suddenly, life cover is a critical component of the protection equation.

Accidents do happen - 420,000 injury cases requiring hospitalisation in 2010
The 2009-10 report Hospital separations due to injury and poisoning released by the Australian Institute of Health and Welfare, revealed that there were approximately 420,000 injury cases requiring hospitalisation in Australia during 2009-10.

The leading cause of hospitalised injury was falls (38 per cent), followed by unintentional transport-related incidents (13 per cent). 32 per cent of falls were experienced by adults aged 45 to 64, with the Mean Length of Stay (MLOS) at 5.8 days.

The ABS Work-Related Injuries 2009/2010 report revealed that of the 640,700 people who experienced a work-related injury in the same period, only 61 per cent received some sort of financial assistance in the form of workers compensation. And 69 per cent of employees with paid leave entitlements received financial assistance compared to just 50 per cent of those employees with no paid leave entitlements.

Number of Cancer cases up but so are survival rates
Medical advances have meant that our chances of surviving traumatic events are much better than they were in the past.

You may recall in one of our articles late last year we referred to research from the AIHW that showed cancer survival rates were on the rise from 47 per cent in 1982-1987 to 66 per cent in 2006-2010.
Their latest report, Cancer in Australia: an overview, 2012 shows that the number of new cancer cases diagnosed in Australia each year almost doubled between 1991 and 2009, from 66,000 to 114,000. This number was expected to rise to around 121,000 in 2012.

However the report also revealed that when looking at all cancers combined, the age-standardised mortality rate decreased by 17 per cent from 210 per 100,000 people to 174 per 100,000 people between 1991 and 2010.

Insurers are paying more claims than even before
A common objection from prospective clients is that ‘insurers never pay claims’. The truth is of course that Australian insurers continue to payout hundreds of millions of dollars in claims every year.
According to the Risk Store reports (2009-2011), there has been an increase across the last three years, in lump sum claims and the total dollar amount paid. In fact a total of $443,736,522 (2,531 claims) was paid out in trauma claims in 2010 which increased to $538,720,039 (3,169 claims) in 2011.

Death claims increased from 16,173 ($1,629,150,468) to 18,197 ($1,806,688,603). And IP claims has remained steady with 37,093 claims in 2010 ($1,033,831,983) and 34,056 claims ($1,000,457,827) in 2011.

The message is clear, Insurance is a must.
The types of events that insurance covers are often unforeseeable and the statistics speak for themselves. So what value would you place on having access to the best available treatment and to take the time off you need to recover? And what value would you place on knowing that in the event of death, your family and loved ones would not have any financial concerns?

Weekly Indices:

The Australian All Ordinaries Index has moved up increasing by +1.2% since closing last Thursday to 12:45 pm today.

The rest of the world as measured by the MSCI index is up by +0.5% since closing last Thursday to end of trade Wednesday.

Have a good weekend,

The team at IPS

Thursday 10 April 2014

Don’t bet against China – at least in the short term!

A common big picture theme so far this year has been the generally positive news out of the US and developed nations offset by a series of disappointing numbers and articles about China. Even our Reserve Bank Governor commented on slowing growth in China in the 1 April decision to keep rates on hold at 2.5%. The issues facing China can be broadly grouped under three headings:
  • Credit issues
o    First default in China’s corporate bond market since it began in its current form.
o    The so called “shadow” banking system (essentially loans to businesses outside of the banking system made by investment products offered to the general public) being described by some as being out of control.
o    Possible further credit tightening that could affect buoyant property prices.
  • Growth issues
o    Typically, growth is weaker around the Chinese New Year holiday, but the latest HSBC PMI (Purchasing Managers Index) released on 31 March 2014 came in at an eight-month low of 48 (figures below 50 broadly indicate slowing growth), although the official Government numbers are a bit higher.
o    Has the massive infrastructure build and urbanisation that fuelled growth reached its peak?
  • Structural issues
o    China has lost competitiveness as a low income, export led economy and must change in order to keep growing. For example, in the last six years exports have fallen from 38% to 25% of GDP. 
o    To move from an income per head that ranks below Brazil, Mexico and Botswana (and only 13% of the US) the Government recognises the need to develop its financial system, including currency liberalisation, to more developed standards, fight corruption and pollution, work on the problems caused by urbanisation and generally increase standards of living.
o    Household consumption at 36% of GDP is amongst the world’s lowest, although consumption is increasing from these lows at a healthy pace.

Why does China matter? Apart from being the second biggest economy in the world and moving forward to also becoming a financial powerhouse, it is worth recounting the trade numbers.

 Australia's main export destinations, 2012-13
Republic of Korea
United States

 Australia's main import sources, 2012-13
United States      
Source – Australian Government Department of Foreign Affairs and Trade

From China’s perspective, its biggest export destination is the US, followed by Japan. Australia only ranks 12th in terms of China’s exports and 6th in terms of imports.

So where is this giant juggernaut of an economy headed?
Talking to some of our portfolio managers just back from mainland China and our economist, and reading some of the mountain of research that pours into our office every day, really highlights just how big and complex this question is.

In terms of the credit issues described above, there will be more defaults and in many ways this is akin to China’s capital market system maturing and starting to price credit according to true risk. Importantly, and very much unlike the US sub-prime debacle, we think there are enough reserves in the banking system and Government to handle any likely problems with credit and the shadow banking system. In a negative scenario, the Government can effectively order the strong banks to assume the debt of weaker entities. 

The growth question is a big one. Continuing growth in the US, Europe and Japan will definitely help China’s exports (many are saying Chinese export growth will pick up by 1.5% due to these factors). In the short term, the Government can also easily up its infrastructure spend to ensure that they “dial in” the stated growth target of 7.5%. The longer term growth question is more related to how successful China will be in transitioning form “old China” (low value add exporter, with massive infrastructure build-out and urbanisation) to “new China” (growing middle class, appropriate legal systems, more value add production and services, growing and open financial system etc.).

From an investor’s point of view, this growing economy should lead to multi-faceted investment opportunities. The bottom line is don’t bet against China achieving its growth targets in the short term, but keep an open mind on how it will develop from here and where the real investment opportunities lie over the next several years.
Weekly Indices:

The Australian All Ordinaries Index has moved down decreasing by -0.1% since closing last Friday to 11:40 pm today.

The rest of the world as measured by the MSCI index decreased -3.7% in A$ from closing last Friday to end of trade Thursday.

Have a good weekend,

The team at IPS