Last week's sell off in share markets, prompts many investors to ask ..... what next?

History has a habit of repeating itself so it is with this in mind that we sourced a table from Bloomberg recently that shows the market movements following a 5% weekly fall.

It's interesting that 7 out of ten times, the market has been higher, 3 months after a weekly fall of 5%.

The occasions when the market was not higher 3 months after a sharp weekly fall, was during times of a systemic market problem (such as Lehmann Brothers bankruptcy in 2008).  So investors need to ask themselves whether or not current events are likely to result in systemic failure in the financial system.  If not, then history suggests that in the majority of occasions, markets will be higher in 3 months.

The table below refers to the US share market.


Mark Draper (GEM Capital) spoke recently with Andrew Clifford (Chief Investment Officer - Platinum Asset Management) about the recent volatility in the Chinese share market.

Andrew provides some perspective on what is going on at the moment, and why he continues to believe in the medium term benefit of investing in China.


















China’s Share Market, Dangers Signs or Opportunity?

Mark Draper: Andrew, the Chinese Share Market has had a pretty interesting run over the last, really 5 years. It has come up from a low base and then we have had a pretty significant correction in recent times. Is this the beginning of the 1929 saga as it been regularly put forward the media or are you able to put some perspective for us?

Andrew Clifford: I think you just need to step back a bit and see where the run-up in this market began. If you go back 18 months ago the market was down 65% over the previous seven or so years which really makes it one of the great bear markets of history. There are not many bear markets that were going down that far for that length of time and so you know what started to happen was that there was some sense that policy was going to be eased particularly around lending restrictions over in the market, and as markets do when they sort of see that, took off on a great run. Now undoubtedly parts of the market became very speculative. They were very much driven by individual investors, lots of margin debt and it all fell apart. Now the government interferences were really not being helpful but if we step back and think about the longer term these Chinese A shares, it is very interesting that it is a market where there’s very little institutional investment . Over a longer period of time payers like pension funds and insurance companies have minimal, if any exposure to shares and it’s not likely to be the case five years down the track. There are fears the government will have to liquidate this rescue fund they put together. Indeed they should have had the rescue fund but the long history of these rescue funds and there being many in 1987 in Hong Kong and 1997 a number of countries across the region, indeed I think in 2001 we also had them and you know the governments have a very strong staying power. In the order of forty or fifty billion dollars of stock bought. Well perhaps it sounds like a big number but in the context of the Chinese government it’s not really, it’s a very large economy. So we think as investors people get too excited about these day to day moves, for us we’ve got some great companies, some of them listed in the A share market in China. The really good companies actually haven’t come off that much then, more of the order of 15 or 20 percent rather than the very dramatic falls and the more speculative parts of the market and indeed for us that just an opportunity to buy some more of these companies.

Mark Draper: So you’re really saying that normal market function, it comes off a low base and really some investment opportunity rather than something very ...

Andrew Clifford: Essentially it’s a little more wild than your average market but that’s what happens when as it is today 80 percent of investments are retail investors but through time, for the moment that’s actually the opportunity for longer term buyers and over time I think that will change.

Mark Draper: Andrew, thanks very much for your time.

Andrew Clifford: Yeah, thank you.

Monday, 24 August 2015 09:59

China's Property Market - is it about to crash?

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We recently met with Andrew Clifford (Chief Investment Officer - Platinum Asset Management) and asked him whether he thinks the Chinese property market is about to crash.

Andrew puts perspective on the Chinese property market in the video below.  A full transcript follows.

















China’s Property Market, Is It About To Crash? Transcript

Mark Draper: Andrew, a lot of talk in Australian media at the moment about the Chinese Property Market which is important to Australia as a flow on and domino effect. Are we about to see a Chinese Property Market crash or where is the property market at there?

Andrew Clifford : Yeah, we’re not so concerned about the residential market in China. There are a few things we’d look at. Certainly there’s always a talk about the Ghost Cities and some of those certainly do exist but if you look at the broader context, there are reasons to be not so negative. Let’s say. So lets look at some of the numbers. So since we started private ownership of property commenced in 1999 in China, we’ve probably built about the order of one hundred million apartments since then. So if you think about it that, that represents the entire modern housing stock of China. So that leads a few hundred million households still living in communist housing, not that pleasant perhaps. Now maybe a question about affordability is indeed very significant latent demand for residential property and we expect that to be a significant part of this economy for some time to come. In terms of prices whether they’re too high or not, one of the things we’d look at is the development of the secondary market in property and in the big cities now as much as 40% of the turnover on property is the secondary market where you have individual owner selling to an individual buyer. And interestingly we’ve got a market here where there is millions of apartments turning over and prices are only down by a few percent from the highs, eighteen months ago.

Mark Draper: And the activity is actually trending up in tier one or tier two cities.

Andrew Clifford: So indeed, so when we look at the inventories and unsold inventories they’re not really that significant and those cities now, they’re going to be with the ghost cities, they’re going to tier three and four cities. Population growth is muted whereas in the big cities populations are growing at 3 or 4 percent so really again this underpins the demand here. I think also in terms of, you know, lets look at how big this market was and you know people get afraid because the numbers are big so we would probably at the peak building twelve million apartments but again what I would tell you is on a population adjusted basis is not very different to what we’re building in Australia today.

Mark Draper: Right.

Andrew Clifford: Perhaps that tells you more about Australia than China but the thing is that ,again, look there will be developers who will go bust because they’ve got bad developments there will be bad loans coming out of the industry but we don’t think it is a completely dire situation as it gets painted often in the paper.

Mark Draper: Thank you very much for your insights, Andrew. That’s really good information.

Andrew Clifford: Thank you.

Friday, 21 August 2015 00:35

$AUD - Lower for longer

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We recently met with Andrew Clifford (Chief Investment Officer - Platinum Asset Management) to ask him where he believes the $AUD is heading in the medium term.


Following the video is a transcript of the conversation.
















Mark Draper: Andrew, Aussie Dollar 74 cents, where do you think it’s going on a three to five year view?

Andrew Clifford: So we certainly think that, I guess it has become a fairly consensus view that the Australian Dollar can go a lot lower and we genuinely think that remains the case and it really just comes down to competitiveness that when we look particularly at labour cost it costs the range of industries, Australia just isn’t competitive now particularly with other develop markets, developed economies like Japan, Europe or the US. So we really think there is a lot more room for it to go lower. What I would caution though is that there are some positives remain, we are still one of the few developed economies which hasn’t seen our central bank print money with responds to housing or banking crisis so that is in our favour and it is the very fact that I said there are now many people who want to predict that the currency is going a lot lower would tend to make one cautious whenever you see that as investors we are all getting into the one position. So I suspect that at some point here we will actually shorter term not that such predictions are worth that much but I think that there is a real chance that the Aussie Dollar will go significantly higher before we actually see a further depreciation and what might cause that? I think simply any set of events that make people less concerned about, the prospects in China that the place will not have a very nasty or depression like term and it actually will come true this safely or indeed any sense that your representing a bit of this position. That general view of global growth I think will make people more comfortable owning the Australian Dollar in a short term since.

Mark Draper: And a medium term sense still comfortable ...

Andrew Clifford: And certainly we think Australian investors, while they have a little more exposure to off shore markets today then they have had, we still think that there’s are many people sitting there going oh well the Aussie Dollar’s already fallen a long way, that’s probably over and what we would think is on a medium to longer term, there is some way to go.

Mark Draper: Andrew, thanks for your thoughts. Much appreciated.

Andrew Clifford: Yeah, thank you.



Tuesday, 28 July 2015 13:30

Understanding the Chinese Sharemarket in Charts

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With the surge in volatility in the Chinese share market - we have sourced a collection of charts that puts the Chinese share market into perspective.





















































































The Chinese share market trading is dominated by retail investors, which is the opposite of Western markets, where institutions dominate trading.




































Wednesday, 08 July 2015 05:24

Do Franking Credits Matter?

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Dividend imputation has been under scrutiny. The Tax Discussion Paper raises the notion that imputation does little to encourage investment in a small, open economy like Australia, where share prices and hence the cost of capital are set in international capital markets. Imputation is thus seen as a costly tax break for domestic shareholders with minimal associated benefits for the overall economy. The idea is that the removal of imputation could fund a reduction in the corporate tax rate, perhaps to as low as 20%, leading to a surge in foreign investment.

This line of argument has some merit: lowering the corporate tax rate should indeed attract additional foreign investment at the margin. However, this stance is somewhat narrow. To be fair, the Tax Discussion Paper is only airing a view for discussion, not making a policy recommendation. Nevertheless, it is worth asking what may be overlooked in adopting this line.

Mixed evidence on whether imputation is priced

The relationship between imputation and the return on investment required to satisfy the market (which might be called ‘cost of capital’) has been extensively examined in the finance literature. Unfortunately, there is no agreement.

One problem is that investors benefit from imputation to varying degrees. There are two theoretical approaches to solving this. The first involves identifying the ‘marginal investor’ – the last investor enticed to hold a stock, so that demand equals supply. The idea that share prices are determined in international capital markets implicitly assumes a marginal overseas investor who places no value on imputation credits. The second approach views share prices as reflecting some weighted average of investor demands. Here imputation credits would be partially priced, perhaps in accord with the 60-80% held by domestic investors.

Empirical analysis is no more enlightening. Four methods have been used to estimate the market value of imputation credits: analysing ex-dividend price drop-offs; comparing securities that differ in their dividend/imputation entitlements; examining if imputation credits are associated with lower market returns; and establishing whether stocks offering imputation credits trade on higher prices relative to fundamentals like earnings. Results are mixed. The majority of drop-off and comparative pricing studies find imputation to be partially priced, with a wide range of estimates. Meanwhile, footprints from imputation are hard to detect in returns and price levels. In any event, all empirical studies suffer from significant methodological issues.

Another issue is that the pricing of imputation might vary across stocks or time, perhaps due to differing marginal investors. Of particular relevance is the smaller, domestic company segment where investors are substantially local. In this case, it is reasonable to expect that imputation might be priced.

With the finance literature failing to arrive at a consensus, the assumption that imputation does not lower the cost of capital amounts to an extreme position along the spectrum. The possibility remains that imputation credits might be priced either partially, or in certain situations.

Imputation and behaviour

Of prime importance is how imputation influences behaviour, and whether these behaviours are beneficial or otherwise. This matters more than how imputation impacts ‘numbers’ like cost of capital estimates. Many decisions are not based on formal quantitative analysis; and imputation tends to be a second-order influence in any event. Analysis may be used to support decisions, but rarely drives them.

Recognition of the value of imputation credits has influence over behaviour in three notable areas, the first being the clearest and most important:

  • Payout policy – Imputation has encouraged higher company payouts: the divergence in the payout ratio for Australia versus the world post imputation is stark (see chart). Actions taken by companies to distribute imputation credits clearly indicate they recognise their value to certain shareholders, e.g. off-market buy-backs.
  • Where taxes are paid – Imputation encourages paying Australian company tax at the margin (referred to as ‘integrity benefits’ in the Tax Discussion Paper). If the tax rate is roughly the same in Australia and overseas, why not pay locally and generate imputation credits?
  • Portfolios – Australian investors may prefer domestic companies paying high, fully-franked yields, all other things being equal. This preference is more likely to manifest as a ‘tilt’, rather than a dominating factor. There are multiple reasons for home bias, or the historical favour for bank stocks, for instance.

GW Figure1 030715

Would removing imputation matter?

Whether and how removing imputation would make a difference depends on what else happens, especially any concurrent corporate tax rate reduction. For instance, this could dictate the tenor of share price reactions, as effects from loss of imputation are pitted against higher earnings. Rather than delve into a multitude of possibilities, I offer two substantial comments.

First, removing imputation would do away with a major driving force for higher payouts. Higher payouts have contributed to more disciplined use of capital, through reducing the ‘cash burning a hole in company’s pockets’, and creating more situations where justification is required to secure funding. This is a MAJOR benefit of the imputation system: a view also expressed by many fund managers. Hence dismantling imputation could be detrimental to both shareholders and the Australian economy through less efficient deployment of capital.

Second, imputation probably matters most for small, domestic companies, many of which are unlisted. In this sector, it is more likely that local investors who value imputation credits are the ones setting prices and providing the funding. Any adverse impacts from removing imputation may be concentrated in this (economically important) segment.

Imputation removes the double-taxation of corporate earnings, but only for resident shareholders. The concept of reintroducing double-taxation for domestic investors in order to fund a revenue-neutral switch that provides a net benefit to overseas investors doesn’t seem quite right. The notion that the outcome will be substantially greater foreign investment with limited losses elsewhere appears questionable, especially once the implications for domestically-focused companies and potential behavioural responses are taken into account.



Geoff Warren is Research Director at the Centre for International Finance and Regulation (CIFR). This article draws on a paper titled “Do Franking Credits Matter? Exploring the Financial Implications of Dividend Imputation”, written with Andrew Ainsworth and Graham Partington from the University of Sydney. The paper can be found at:

Sunday, 05 July 2015 05:06

The Greek Conundrum

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Here is an article sourced from Platinum Asset Management, one of the better macro economic fund managers in the country.  It was written by Philip Ingram, analyst on 1st July 2015.

The starting point is that the Greek government has too much debt and it has neither the ability, nor the willingness to repay it after almost seven years of economic contraction.  At the end of 2014, the Greek government owed €317 billion and during the year it took in €81 billion of tax and other revenues and had €78 billion of expenses before interest costs.  The remaining €3 billion primary surplus wasn’t enough to cover its €7.6 billion interest bill, let alone start paying back debt.

Excessive spending doesn’t appear to be the problem.  Stories abound in the press of generous pensions and government wastrels, but the cost cutting has been savage.  During 2009-2013, government expenditure dropped by 31% from €113 billion to €78 billion.  For example, despite unemployment surging from 7.5% to 28%, welfare payments fell by 22% to €38 billion.  Nor does tax collection appear to be the issue.  There are surely loop holes, but tax revenues jumped from 37% of GDP in 2009 to 45% in 2014.  This is higher than Germany at 44% or the UK at 37%.  Greece is only paying a paltry 2.4% interest rate so that’s not the problem either.

The issue is that Greece has too much debt and its economy has already shrunk by 23% since 2009, similar to America’s contraction during the Great Depression.  This is why government revenues dropped from €89 billion in 2009 to €81 billion in 2014, despite the government taking a bigger share of output.

The immediate impacts on Greece of leaving the Euro, which is not tantamount to leaving the EU, will be a much weaker currency and a miss-match between Greek banks’ loans, which will be denominated in New Drachma, and their Euro denominated funding from the European Central Bank.   The European Central Bank funding arose because it has been propping the Greek banks up by replacing money withdrawn by Greek depositors.  For the Greek people, the proximate impacts of a new currency will probably be a significant reduction of their living standards and a period of political turmoil. 

All of this is important, but the immediate impacts on stock and bond markets beyond Athens should be contained.  Europe can contain a Greek default because Greek government debt is only 3% of Euro area GDP and almost €300 billion of the €317 billion is owed to European entities like the European Financial Stability Facility and the European Central Bank, which can print Euros.  Another €14 billion is owed to the Greek banking system and a mere €2 billion to foreign banks.  A Greek default would not surprise Europe or investors.

DISCLAIMER: The above information is commentary only (i.e. our general thoughts).  It is not intended to be, nor should it be construed as, investment advice.  To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.  Before making any investment decision you need to consider (with your financial adviser) your particular investment needs, objectives and circumstances.


Monday, 29 June 2015 07:10

Age Pension proposals have been legislated

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One of the key messages from the 2015 Federal Budget was the need to rebalance the Assets Test to help make access to government pensions fairer.  to do this, the Government proposed to increase the Assets Test thresholds and the Assets Test taper rate from 1 January 2017.

Increase in the Assets Test thresholds

The first change to the Assets Test relates to the threshold above which a pensioner's entitlement will start to reduce.  Subject to the Income Test, the proposed increase in the Assets Test thresholds from 1 January 2017 will enable approximately 50,000 part-pensioners to qualify for hte full pension under the new rules, according to the Federal Government.

The current and proposed thresholds are as follows:

Example:  Ben is a 67 year old retiree who is single and owns his home.  he has $10,000 in personal effects, $240,000 in an allocated pension that was created several years ago and he is currently drawing the minimum income from that pension.  Based on current ruiles, he is entitled to an Age Pension of $20,943 pa under the Assets Test.  If he was subject to the proposed thresholds today, he would be entitled to the full pension (currently $22,365pa)

In fact, under the proposed changes, several classes of retirees may receive a higher pension entitlement.

Increase in the taper rate

The other main proposal, which will effectivley reverse cahnges to the taper rate introduced in 2007, increases the current taper rate from $1-50 per $1,000 to $3 per $1,000.  this means that the amount of assets a pensioner can have on top o their familiy home and still receive a part pension (Assets Test upper threshold) will be reduced.  An estimate of the new Assets Test upper thresholds can be found in Graph 1.

The Government will ensure that anyone who is affected by the scaling back of the maximum asset threshold will be guaranteed eligibility for Commonwealth Seniors Health Card for those who are above Age Pension age or Health Care Card for those under Age Pension age.  The Governmentn has not provided grandfathering for the actual Assets Test changes, so those with assets above the new Asset Test upper thresholds will lose their part-pensions and become self funded.

It is interesting to note that the higher taper rate affects homeowners more than non-homeowners and is reflected in the larger proportional drop of the Assets Test upper threshold.  For example, the Assets Test upper threshold for a single homeowner reduces by about 32% compared with a single non-homeowner which reduces by 22%.

Althought the new taper rate will affect some more than others, those affected most will be pensioners with assets around the new Assets Test upper thresholds.  The next chart is another way of highlighting the winners and losers from these changes.  The areas highlighted in red show the the asset levels where pensions will be lower, while those areas in green indicate asset levels where the pension increases.

For example, couple homeowners will be affected the most if they have assets of $823,000 on 1 January 2017.  Under the new rules, the couples pension would reduce to zero based on the Assets Test.  Under the current rules, they would be entitled to Age Pension of $14,467pa.  These retirees may need to withdraw more from their retirement capital to maintain their lifestyle.

Assets Test crossover points

The proposed rules will change the Assets Test crossover points.  The crossover point, which assumes all assets are financial assets, highlights where a retiree's pension entitlement changes from being determined by the Income Test to being determined by the Assets Test.  Graph 1 summaries the crossover points based on current and proposed rules, showing a larger change for couple retirees rather than singles.

Ways to reduce assessed assets (other than additional spending)

Those looking to reduce their assessable assets could consider the following options (in conjunction with professional advice):

1. Gifting within the allowable limits

2. Purchasing Funeral Bond

3. Superannuation contributions on behalf of a spouse under Age Pension age.

4. Capital expenditure around the home


This is a complex area and we recommend those impacted by these rule changes seek professional advice well before 1st January 2017.


Saturday, 27 June 2015 23:18

Soccer Shootout

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This video has had over 25,000,000 YouTube views.

A hilarious soccer penalty shootout.