Written by Richard Watt - Fidelity Investments
 
Political risks subside 
Perceived political risks in Europe have detracted from European equity performance over the past year, with around US$100bn flowing out of European markets in 2016. With the election of Emmanuel Macron as the next French President, much of that risk has been reduced and investors may now focus on the performance of European companies.
 
Here we look at the key benefits that the Macron win may bring to the European economy and its equity markets.
 
Pro-reform, pro-integration 
Macron is a reformist and pro-European. He is in favour of greater integration in Europe, the strengthening of European institutions and a common Eurozone budget that would protect from future economic shocks. He has campaigned on reforms of the labour market in France, reforms of the tax system and tax cuts, and raising the retirement age, which is currently one of the lowest in Europe. 
 
Along with this, he plans to invest EUR50bn into the French economy. This would be funded by reducing the size of the French state - by far the largest of any European country.
 
All of this would be hugely beneficial to what is a relatively uncompetitive French economy, and to the future strength and stability of the Eurozone.
 
Political risks diminishing 
Sentiment towards Europe has been particularly strong since the first round of voting in France two weeks ago, seeing European and French markets up 7-8%. With either the upcoming UK or German elections representing an existential risk to Europe, much of the political risk is behind us. Investors will likely focus on corporate fundamentals and earnings. 
 
Earnings turn
Since the financial crisis, while US companies have seen margins and earnings recover, European earnings are still below their peak. The underperformance of European stocks relative to US stocks has been exclusively driven by the lack of earnings delivery of European companies. 

European earnings revisions turning positive 

Source: Fidelity, Datastream, Morgan Stanley , data as of 6 Apr 2017. N12M ERR (%) = 12-month earnings revision ratio. 3MA = 3-month moving average.

What we are now seeing is a strong recovery in European stocks, with earnings starting to come through. Margins are recovering and the most recent earnings season in Europe has been the strongest in more than 10 years. 

Particularly compelling for European equities is their valuation. As they have been out of favour for much of last year they are trading at a multi-year discount relative to the US on a price-to-book basis. And today, record high numbers of European companies have a dividend yield that exceeds their bond yield.

European P/B vs US P/B

Source: Datastream, GS Research, data as of 31 March 2017. 

Percentage of stocks with dividend yield > bond yield

Source: Datastream, Goldman Sachs Global ECS Research, December 2016. Stoxx Europe 600.  

Conclusion
Europe has been significantly out of favour for some time due to political risk. The French result today puts much of this behind us and European equities are looking attractive compared to the US and other markets and asset classes. We are now starting to see companies deliver strongly on earnings, removing another key detractor from investor sentiment. 
 
This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity International.

Investments in overseas markets can be affected by currency exchange and this may affect the value of your investment. Investments in small and emerging markets can be more volatile than investments in developed markets. 


This document is intended for use by advisers and wholesale investors. Retail investors should not rely on any information in this document without first seeking advice from their financial adviser.  You should consider these matters before acting on the information.  You should also consider the relevant Product Disclosure Statements (“PDS”) for any Fidelity Australia product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading it from our website at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise. 

Tuesday, 09 May 2017 11:25

Budget 2017 at a glance

Written by
Jenni Henderson, The Conversation and Wes Mountain, The Conversation

The Conversation








Jenni Henderson, Editor, Business and Economy, The Conversation and Wes Mountain, Deputy Multimedia Editor, The Conversation

This article was originally published on The Conversation. Read the original article.

Alan Duncan, Curtin University and Rebecca Cassells, Curtin University

Successive Australian governments are usually judged on how they balance the budget and spend taxpayers’ dollars. The stereotypes are that Liberal governments keep a tight hold on the purse strings, while Labor governments are spendthrifts. The Conversation

While total government spending has increased from around A$240 billion in 1998-99 to a predicted A$451 billion in the 2016-17 financial year, it’s also accompanied by an increase in revenue from around A$250 billion to A$417 billion over the same period.

But the pressure on the budget under a Turnbull government is more acute now than ever before, because spending is outpacing revenue. It’s now at an estimated 26.6% of GDP in 2016-17, higher than at any point since before the start of the millennium.

When you look at the mix of government spending over the past fifteen years, you start to see some of the drivers of the growth.

To compare spending over time, we have adjusted for the effect of inflation by using real measures.

The Conversation/Emil Jeyaratnam, CC BY-ND

Social security continues to dominate government spending at A$161.4 billion, constituting around 35% of all government outlays on latest figures. This has fallen from a high of 39% during the Rudd government stimulus package in 2009-10 and is similar to levels at the beginning of the millennium.

In the graph below “other” spending includes the distribution of GST revenues to states and territories as well as spending in areas such as job seekers assistance, industrial relations, vocational training, tourism and immigration. This constitutes the second highest share of government spending, at 18% (A$83.4 billion) of the total spend. General revenue assistance to states and territories accounts for two thirds of spending in this category.

Governments spend almost as much on defence and public safety (around A$32.6 billion) as they do on education (A$34.3 billion), although the states ultimately pick up most of the education bill.

The global financial crisis saw a temporary blip in the mix of general government spending. Social security spending rose by 22% in the year to June 2009, and education expenditure jumped 60% a year later as a result of Rudd’s economic stimulus package.

Government spending on public debt interest has more than tripled in real terms to A$15.4 billion since the start of the global financial crisis, and now accounts for 3.7% of all government spending.

The Conversation/Emil Jeyaratnam, CC BY-ND

Many of the changes in real government spending between 2008 and 2010 were driven by the impact of the global financial crisis, which resulted in a slowdown in economic growth, rising unemployment and a negative hit on the sharemarket.

The Rudd government response was a stimulus package. The main spending increases came from a combination of accelerating public debt interest, increased payments to assist the unemployed, but mainly the government’s stimulus measures channelled through increased spending on education, housing and cash payments to families.

If a spending measure is truly temporary, a rise in real spending should be followed by an equivalent fall in subsequent years when the spending runs out or the program ends. This is evident to some degree for the social security and welfare and fuel and energy portfolios, but less so in other areas.

For example, the 45% rise in fuel and energy spending in 2008-09 was primarily driven by the introduction of the Energy Efficient Homes package within the Rudd stimulus suite. The scheme ended in February 2010, resulting in a 33% drop in spending.

On the other hand, spending on education rose by A$16 billion as part of the Rudd stimulus package, but remained A$10 billion higher than pre-global financial crisis levels in subsequent years.

Overall government spending has continued to grow since 2010-11, but less dramatically than during the heart of the global financial crisis, by around 8% in real terms over the five years to 2015-16.

The Conversation/Emil Jeyaratnam

Social security and welfare spending constitutes the largest spending commitment of any government budget. It has risen by 70% in real terms over the past fifteen years, from A$91 billion at the turn of the millennium in 1999-00 to A$155 billion in 2015-16.

The biggest welfare spending is for assistance to the aged, families with children and people with a disability. Together, these three items make up almost 85% of all welfare spending.

The 2008-09 Rudd stimulus package had a substantial yet temporary effect on welfare spend, with “bonus” cash payments to families in the 2009 calendar year increasing assistance to families by around A$10 billion. Additional cash payments were also made to students, pensioners and farmers under the stimulus program. And 8.7 million Australian workers earning $100,000 or less also received a cash payment.

Australia’s ageing population and increases in both disability prevalence and disability support are the main driving forces behind welfare spending growth. These factors will continue to exert pressure on future government budgets, especially with the full rollout of the National Disability Insurance Scheme (NDIS).

The Conversation/Emil Jeyaratnam, CC BY-ND

More than 40% of the government’s 2015-16 health budget of around A$71.2 billion was committed to community health services spending. At A$28.7 billion, spending in this sector has nearly doubled since the start of the millennium and by a quarter since the start of the global financial crisis in 2008-09.

This stems from the need to deliver medical services to a growing – and ageing – population, and the increased prevalence of chronic disease. In this respect, Australia is little different to most countries around the world.

Specific measures contributing to this growth included the expansion of health infrastructure, the costs of enhanced primary care attracting higher Medicare rebates, and indexation of health related payments to states and territories. Pharmaceutical spending increased by 12%, from A$1.4 billion year-on-year to A$12.1 billion in 2015-16.

The Conversation/Emil Jeyaratnam, CC BY-ND

Education spending rose dramatically during the global financial crisis, with spending on primary and secondary education increasing 81% to A$24.7 billion in the year to 2009-10 as part of the economic stimulus package.

Rudd’s “education revolution” led to a 12% growth in education spending in the 2008-09 budget, quickly followed by a further 61% spending increase in 2009-10 as part of the economic stimulus package. Spending in the following year fell as the temporary stimulus measures came to an end, but overall, education spending has remained significantly higher in real terms than pre-global financial crisis levels.

Spending on the university sector rose to around A$10.9 billion over the same period, but has remained relatively stable since.

The Conversation/Emil Jeyaratnam, CC BY-ND

Federal government money given to the states and territories

The federal government committed A$60.8 billion in general revenue assistance to states and territories in 2015-16, almost all of which came through the distribution of GST revenue. General revenue assistance spending rose A$3.8 billion in real terms in 2014-15, up 7% on the previous year, but has since stabilised.

Spending on superannuation interest has grown by a quarter since the end of the Howard years, reflecting the increase in the government’s superannuation liability. Lower public sector wages and employment have led to superannuation interest payments stabilising over the last two budgets to around A$9.4 billion in 2015-16.

Immigration spending rose between the Gillard and Abbott governments to a peak of A$4.7 billion in 2013-14, but has since fallen back to around A$3.8billion in 2016 dollars.

Much of the growth in immigration spending occurred during the Rudd and Gillard governments, by an average of 23% annually. This compares to an average of 7% during the previous Howard years. Additional government spending on detention facilities for irregular arrivals was the principal reason for this spending growth.

Natural disaster relief spending spiked between 2009 and 20-11 to assist with the damage and recovery costs from the Black Saturday bushfires in Victoria in 2009, and the 2010 Queensland floods.

The Conversation/Emil Jeyaratnam, CC BY-ND

Government approaches to supporting various industries has typically been applied on an ad hoc basis. Budget spending on specific industries has risen from A$3.2 to A$5.6 billion in real terms. Agriculture, forestry and fishing typically received a greater share of industry spending during the Howard budgets, reaching a high of A$4.8 billion in Swan’s final 2007-08 budget.

Growth in industry spend slowed during the Rudd years, picking up again with the Gillard and Abbott governments, with a greater preference towards spending in mining, manufacturing and construction projects.

The Conversation/Emil Jeyaratnam, CC BY-ND

Spending on housing and community amenities has increased from A$2.7 billion to A$7.6 billion, reaching a high of almost A$12 billion in the Rudd years. Spending in this portfolio increased with the Rudd stimulus package, incorporating a number of housing affordability measures including the First Home Buyers Grant Scheme and a boost in investment in social housing.

Spending on sanitation and protection of the environment also expanded rapidly during the Rudd/Gillard government, relative to the Howard years. The establishment of the Climate Change Action fund introduced by Rudd in 2009-10 and the Clean Energy Futures package in 2010-11 have been the main drivers behind this increase. Spending in each has been pared back since the Liberals came to power with Abbott at the helm.

The Conversation/Emil Jeyaratnam, CC BY-ND

Commonwealth spending on transport and communications projects has more than doubled from A$3.1 to A$7.5 billion over the last 15 years. Spending remained relatively stable under Howard’s government, and then got a further injection on roads in the last two Swan budgets. The Rudd government continued this trend, with Gillard following suit with increases in both road and rail projects.

Spending in this portfolio has been clawed back since the Abbott government, falling from A$9.2 billion to A$7.8 billion between the final Labor government budget (2013-14 financial year) and the first Liberal government budget (2014-15 financial year). The most recent Turnbull/Morrison budget has reaffirmed spending commitments under this portfolio, committing to more than A$11 billion in 2016-17.

The Conversation/Emil Jeyaratnam, CC BY-ND

The Howard/Costello years were characterised by good economic times, with an extended period of strong revenue growth, yet this prosperity wasn’t matched with any significant spending growth. In fact, overall government spending fell as a share of GDP – from 25.7% in 2000 to 23.6% in 2006-07 – the lowest share since the start of the millennium. And the combination of strong revenue and limited spending commitments under Howard drove down public debt, and public debt interest payments.

We saw some pretty dramatic increases in real spending when Rudd came into power in December 2007. Rudd’s first budget in 2008-09 saw some substantial spending commitments in the area of education but nothing exorbitant.

However, the major turning point in government spending has been driven by the response to the global financial crisis. There were significant spending commitments over the course of the crisis, some of which are still present.

Spending on public debt interest has increased to A$15.4 billion since the global financial crisis - more than the spending on transport and housing combined. And it’s projected to increase further to A$18.7 billion by 2019-20. This just emphasises how high the stakes are for Scott Morrison in delivering a credible budget repair strategy.

The spending of incumbent governments inevitably draw from the commitments of previous administrations, especially for those programs – in infrastructure, education or housing - that involve medium-term funding commitments.

The growth in real spending in areas that directly affect households – social security, NDIS, health or pensions - is an issue that no government can ignore. NDIS costs have been hugely underestimated already, and social security and health spending will inevitably increase with the ageing population.

Set against this context, it’s clear that a piecemeal approach to budget repair is unsustainable. A drop in revenue has ramped up budget pressures, and highlights the compelling need to return to a sustainable spending path and a credible budget repair strategy.

The Turnbull government cannot shy away from making the big decisions that secure a sustainable future for Australia. And the roadmap towards a sustainable future has to include revenue as well as spending as part of the recovery narrative.


The graphs in this article were created by The Conversation’s Multimedia Editor Emil Jerayatnam

Alan Duncan, Director, Bankwest Curtin Economics Centre and Bankwest Research Chair in Economic Policy, Curtin University and Rebecca Cassells, Associate Professor, Bankwest Curtin Economics Centre, Curtin University

This article was originally published on The Conversation. Read the original article.

Tuesday, 02 May 2017 23:06

French election in 3 charts

Written by

The final phase of election for President of France comes to a close on May 7th. After the first round of voting, voters are left to choose between Marine Le Pen (hard right) and Emmanuel Macron (Centre). We know that Marine Le Pen stands for France leaving the EU, which would be particularly problematic given France was a founding member of the EU.

The issue of leaving the Euro currency would be complex. In our opinion this is the last of the key elections in Europe this year given that there seems to be high quality candidates from both sides in the German elections later this year. The financial markets were relieved to see the final two candidates of Macron and Le Pen, as it was earlier feared the 'Hard Left' may get through to the final round against the 'Hard Right'. The French share market rose by over 4% the day following the election result.

That said, the final election result is still yet to be decided, so we thought it timely to bring you the latest thinking in this important election. The first round voting was close but Macron was the ultimate winner securing 24% of the vote, with Le Pen in second place.

 

There are some similarities to the Trump election in the composition of voting, where Le Pen is appealing to the 'rust belt' in France, gaining support from those negatively impacted by globalisation.

 

Finally, we finish on the voting intentions of French voters for the Final Round and note that unlike the US election and Brexit, the French polls have been very accurate.  The polls currently suggest a comfortable victory for Macron - but we are likely to be more comfortable once the final result is known.

 

 

Marc C-Scott, Victoria University

How Australians watch cricket on screens in the future could depend on what happens with the Nine Network’s current discussions with Cricket Australia over the 2018-23 media rights. The Conversation

UBS media analyst Eric Choi said the current deal costs Nine about A$100 million a year but generates only A$60 million to A$70 million in gross revenue.

Choi said the network should either ask for access to more content at no additional cost, or step away from its long association with cricket.

The ramifications of Nine’s decision could be broad, impacting not only its potential revenue and viewers, but also participation rates among Aussies playing grassroots cricket.

Cricket’s current standing

The current media rights deal for cricket includes the Nine Network and Network Ten. Nine has the rights to international tests, one-day internationals and T20 international games played in Australia, whereas Ten has the rights to the Big Bash League (BBL).

The BBL has become a crucial cricketing brand, continuing to gain high ratings and listed in Australia’s Top 20 engaging programs for 2016.

The league also has excellent crowd attendance, having recently ranked 9th in the world’s top-attended sports leagues.

Based on the BBL’s success and the increases seen in the new media rights for the Australian Football League (AFL) and National Rugby League (NRL), Cricket Australia will want to see an increase in the bidding for its rights.

This is particularly relevant if Cricket Australia still relies as heavily on these rights as in 2012, when it said the rights accounted for 60%-80% of the total annual income.

But can the media rights continue to increase with the current unstable media landscape?

The current media landscape

According to Arnhem Investment Management, the era of advertising-supported premium sport on Australian television is “drawing to a close”.

The free-to-air (FTA) broadcasters are also currently requesting that the government reduce license fees and reconsider plans to further restrict gambling ads during the broadcast of sports.

Ten has said it expects its revenue to be “above the 1.2% increase” it outlined in February this year. Yet it will still need to undertake a “significant focus” on a corporate cost-cutting program and profitability as a priority.

New stakeholders

With FTA broadcasters under financial pressures, any increase in new rights will require new stakeholders.

Foxtel currently shows international cricket matches played overseas, but does not have local coverage rights. If it could gain local cricket rights, this would further strengthen Foxtel’s sports offering of AFL, NRL, A-league, V8 Supercars, and many international sports.

Australia’s anti-siphoning regulation could prevent Foxtel completely dominating the cricket media rights. But this list is expected to be trimmed further by the government this year, furthering opening up the sports media battleground for pay television in future rights deals.

The future for digital rights

Digital rights will also be a major consideration with the new cricket media rights. While most would be looking at Telstra and Optus, there have been new players in this area who may also wish to place a bid.

Currently Cricket Australia has the Cricket Australia Live app which allows users to pay a subscription (A$30 per year or A$5.99 a day) to gain access to live streaming of games, but the new rights could also see this change.

Optus may continue its affiliation with cricket. It recently become the official mobile media partner of Cricket Australia, and principal sponsor of the Melbourne Stars Big Bash League team. Customers can access cricket content via the Optus Sports app, which also includes Optus’ recently acquired English Premier League.

Twitter has had success with broadcasting the US National Football League (NFL) and the Melbourne cup last year. This year it signed a two-year deal with the US National Lacrosse League. Twitter may consider its interest in a global sport like cricket.

Amazon, which recently launched its Prime Video service in Australia, could also be a contender. This year Amazon won the rights for NFL Thursday night matches. It paid US$50 million for ten games, five times the price paid by Twitter last year. Amazon may look at the cricket as another potential global sport to add to its catalogue.

Another consideration is if Nine or Ten were to obtain the digital rights and use the free and subscription approach that the Seven Network used as part of their Rio Games coverage last year.

The impact on the viewing experience

Can you “slice and dice” too much? This is a question being asked in the US by CBS chief executive Les Moonves with regard to the NFL.

Adding another stakeholder to cricket will impact the viewers’ experience. This year the new AFL media rights created some frustration linked with the way the rights had been negotiated, particularly the digital rights.

Telstra, the digital rights holder, is restricted by its agreement to limit live match videos to a 7-inch screen size. Highlights and replays are available in full-screen size 12 hours after the match ends. (Foxtel, meanwhile, can stream the games full-screen.)

This change has outraged some fans who paid the A$89 subscription fee for the AFL Live app. Because of the screen size restrictions, Telstra users with a large phone or tablet have a large amount of black space on their screen.

Some Australians are being creative in working around the restrictions.

Media coverage and participation

The media rights for sport can be looked at far more broadly than solely the coverage of the game itself.

In the United Kingdom there has been ongoing debate associated with cricket’s coverage. Since the sport moved to pay-TV, there has been a decline in participation levels, which many argued is primarily due to the game no longer being broadcast free to air.

Reports of a Sport England Active People survey show a 32% drop in participation levels in people aged over 16 since coverage of cricket moved to satellite and cable TV.

There are now steps being taken to introduce a new Twenty20 tournament in the UK, built around the success of the Indian Premier League and Australia’s BBL, which had some games live broadcast in the UK during the last season.

This is an interesting case study for Cricket Australia, which only last year announced cricket as “No 1 as the current top participation sport in Australia”.

Any changes to the rights that impact the percentage of Australians with access to the coverage, could also see a decline in participation based on the UK experience.

Marc C-Scott, Lecturer in Screen Media, Victoria University

This article was originally published on The Conversation. Read the original article.

Hugh Giddy and Anton Tagliaferro (Investors Mutual senior management) recently wrote about the Trump induced rally in share markets.  The title of their publication is "Trump's election as President - has it changed the world that much?

The article covers their views of the US and China in particular, written in an easy to follow manner, and littered with some amusing quotes.

You can download your copy of this article by clicking on the icon below.

 

download button 1

Monday, 01 May 2017 01:25

Will Amazon destroy retail as we know it?

Written by

Mark Draper (GEM Capital) recently spoke with Clay Smolinski (Platinum Asset Management) about the threat to retailers of Amazon.  Clay talks about how investors should be thinking about Amazon.

 

Mark Draper and Shannon Corcoran (GEM Capital) recently met with Dom Guiliano (Chief Investment Officer - Magellan Financial Group) to talk about Donald Trump's agenda and how investors should be thinking about it.

We also covered the risks with European politics, particularly in France and Germany, with so many elections coming up in 2017.

 

Sunday, 02 April 2017 22:28

Why we don't like Telstra

Written by

Telstra is a favoured stock among many retail investors, assumingly for the current high franked dividend.

While Telstra's balance sheet is in pristine condition, which would allow it the flexibility to borrow in order to support this dividend, we remain concerned about Telstra's earnings outlook.  Not only have earnings virtually gone nowhere over the past decade, the NBN is likely to pressure Telstra's future earnings in the absence of a new growth stragegy.

NBN is a game changer for all Australian telecommunications companies as it results in them becoming a reseller of the NBN service, rather than selling their own data networks which attracted a higher margin.  This is likely to leave a 'black hole' in earnings for Telstra in coming years once the NBN is rolled out.  This is clear in the table below.

While the above table is forward looking, there is not much joy in earnings in the rear vision mirror for Telstra share holders.  This graph shows earnings per share, which have virtually 'flat-lined' over the past decade.  Source of this data is Skaffold software.

We conclude this article with a 3 minute video from Michael Glennon (Small Cap Investor) who outlines the reasons he does not wish to invest in Telstra.

Over the last few years, there has been a significant increase in the interest in Environmental, Social and Governance (ESG) investing. According to a paper released recently, over $8trn of the $40trn of money managed in the USA is now under some form of Sustainable and Responsible Investing (SRI) or ESG, up 33% since 2014 and up fivefold from $1.4trn in 2012 for money run by fund managers.

In many respects Australian fund managers have been caught unready for this change. If we look at the Mercer survey data for January 2017, the Global Equities strategy section contains 127 global funds that are sold in Australia. Of this, only 5 are classed as SRI funds. It is somewhat better for Australian equities with 157 funds in the survey, of which 13 are SRI. If we were to use the ratio of assets in the USA, the number of SRI funds should be 27 and 34 respectively.

One reason could be that there is a view amongst many people (and particularly fund managers) that “you can’t have your cake and eat it too”: that SRI results in lower returns for investors and the investors have to pay a price to be responsible.

In some ways this misconception, of accepting lower returns for being ethical, goes against another tenant of conventional investing wisdom: buy good businesses. The grandfather of long term investing, Warren Buffett, discusses a lot in his letters to shareholders the importance of ethics and the quality of the character of the people running the businesses he owns.

Implicitly he is saying that businesses that have an ethos and focus on ‘doing the right thing’ by staff and customers, should generate higher returns. Now admittedly he is discussing the character of the people rather than the nature of the business, and some people would find owning Coca Cola unethical.

And it is this differentiation between good people and bad unethical businesses that opens an interesting next line of inquiry.  Download the complete 4 page report from Morphic Asset Management by clicking on the link below.

Page 1 of 37