Mark Draper

Mark Draper

Wednesday, 08 February 2017 05:57

Hunter Hall Global Value - Business as usual

James McDonald (interim Chief Investment Officer for Hunter Hall) recently spoke with Commsec about the resignation/departure of Peter Hall from the business.

James talks about the depth of the Hunter Hall team, the current fund positioning as well as the future dividend policy.

 

 

Wednesday, 08 February 2017 05:45

10 themes to watch in 2017

This time last year, JCB Advisory Board Economist, Saul Eslake warned of the risks of a Yuan devaluation: “A large devaluation of the Yuan would add renewed impetus to the deflationary pressures that policymakers in advanced economies are hoping will ebb this year.” This proved prescient as markets saw a sharp risk-off correction in the first months of the year. By contrast, inflation is a key theme to watch this year, as headline inflation, core inflation, and producer price inflation all begin to show signs of life. This is just one of ten themes identified in this year’s ‘What to watch.’ Livewire and Jamieson Coote Bonds are pleased to provide exclusively for readers the top themes to watch this year from one of Australia's pre-eminent economic minds, Saul Eslake. 


By Saul Eslake, Jamieson Coote Bonds Advisory Board Member & Senior Economist. Saul Eslake was Chief Economist of ANZ Bank from 1995 to 2009, Chief Economist at National Mutual Funds Management in the early 1990s, and acted in various advisory roles to the Howard, Rudd, and Gillard governments.

Saul-Eslake.png


"Over the first few weeks of the year, I’ve been thinking about the issues that I’m likely to find myself talking about at conferences and events in the coming year. Here are ten things that I think are likely to shape the global and Australian economies during 2017.

1. What Donald does (or says) next: This time last year I wrote that Donald Trump was ‘odds on’ to be the Republican nominee for President of the United States, but I also found it ‘hard to conceive’ that he could be a ‘serious contender for what used to be called Leader of the Free World’. Moreover, I thought that financial markets around the world ‘may well take fright’ if they began to think that he and Melania ‘could be moving into the White House’. Well, Melania isn’t moving (yet) – but Donald Trump is now ensconced in the White House; and although they didn’t predict his victory either, they haven’t been at all troubled by it (so far). Since the election, investors seem to have assumed that President Trump will only seek (or be allowed by Congress) to implement the items from his campaign platform which markets believe will boost economic growth (such as cutting taxes and boosting infrastructure spending), and that he will back away from (or Congress will block) items from his campaign platform which would harm growth (such as launching trade wars). However, Donald Trump’s inaugural address casts a lot of doubt on those convenient assumptions. I think his assertion that ‘protection will lead to great prosperity and strength’ is complete and utter balderdash – but it’s also a clear signal that he means to implement the protectionist agenda he repeatedly outlined during last year’s election campaign. And, as a result, we are likely to see much more volatility in market pricing of the outlook for the US and global economies – and, eventually, if the Trump Administration is able to implement this protectionist agenda, weaker growth, higher unemployment and higher inflation.

2. European voters: There are a number of important elections in Europe this year – including in the Netherlands on 15th March, in France on 23rd April and on 7th May, and in Germany sometime between late September and late October. Each of these will provide some insight into the extent to which the wave of right-wing populism which gained global attention in the ‘Brexit’ referendum and then during the US election campaign continues to appeal to voters. The Dutch Parliamentary and French Presidential elections, in particular, could add to the number of countries seeking to exit the European Union. And then of course there are the various formal steps which Britain needs to undertake in order to give effect to last year’s referendum verdict. All of these represent potential sources of market volatility.

3. The clash between demography and economic policy: Markets – and many policy-makers – seem to be paying scant regard to the constraints which demographic change has been having – and will increasingly have – on the rates of growth which can be sustained by advanced (and some emerging) economies. Across the OECD area, the growth rate of the 15-64 year old population has slowed from 0.75% pa in 2006-08 to just 0.2% pa in 2016- 18. This largely explains why OECD area real GDP growth averaging just under 2% pa since the trough of the ‘Great Recession’ in early 2009 – a rate some two-thirds of a percentage point below the average between the global recessions of the early 1990s and the onset of the financial crisis – has nonetheless been sufficient to allow the average unemployment rate across the OECD area to fall by more over the past three years than over any other three-year period, bar one, in the last five decades. That fall in unemployment is of course a Good Thing. But now that the unemployment rate in the OECD’s four largest economies is down to levels traditionally regarded as consistent with ‘full employment’ – while in those OED countries where unemployment hasn’t fallen by very much, it’s mostly ‘structural’ rather than ‘cyclical’ unemployment, which faster economic growth alone can’t help – ongoing efforts to procure a return to pre-crisis economic growth rates are more likely to trigger higher inflation than faster growth. That’s especially so if productivity growth remains as anaemic as it has, in virtually all advanced economies, since the financial crisis. And in this kind of world, protectionist policies amount to a fight over shares of a shrinking economic pie – they do nothing to make the pie bigger.

4. The end of deflation fears: Largely because the four major advanced economies are now effectively at full employment, the fears of falling into deflation which have periodically gripped financial markets since the financial crisis should evaporate. ‘Headline’ inflation rates have picked up (in some cases out of negative territory) since the middle of last year, aided by the rebound in oil prices. ‘Core’ inflation rates also appear to be edging higher in most advanced economies, especially in the UK (as a result of the post-referendum fall in sterling) and in the US. Producer price inflation across Asia also moved back into positive territory towards the end of last year, something which will filter into advanced economy consumer prices during 2017. This should eventually see an end to negative interest rates around the world.

5. The Fed: The Fed repeatedly baulked at raising interest rates last year, eventually doing so only at the last opportunity, in December. This left the Fed open to accusations from Donald Trump that it was ‘artificially’ holding rates down in order to favour his political opponent. As President Donald Trump is now in a position to reshape the Fed, with two vacancies on the Fed’s Board of Governors able to be filled immediately, and the opportunity to appoint a new Chair and Vice-Chair early next year when Janet Yellen’s and Stanley Fischer’s terms in those offices expire (although they could complicate matters by electing to serve out some or all of their remaining terms as Governors). During last year’s election campaign Donald Trump also appeared sympathetic to proposals to water down the Fed’s independence from political interference. At its December meeting the Fed foreshadowed its intention to raise interest rates three, or possibly four, times during 2017. The Administration’s reaction to such moves, as well as the calibre of its appointees to the Fed, may have an important bearing on market perceptions of the Fed’s credibility as the year unfolds.

6. China: The ‘Chinese authorities’ succeeded in shoring up China’s growth rate, staunching the outflow of capital, and stabilizing the currency during 2016. Nonetheless, uncertainty about the future trajectory of the Chinese economy, and the response of the ‘Chinese authorities’ to the various policy dilemmas which they face, will remain throughout this year. The form taken by last year’s monetary policy stimulus – whereby banks were encouraged to borrow in wholesale money markets in order to fund purchases of local government securities and loans to non-bank financial intermediaries – has introduced a new element of risk into the Chinese financial system. For the first time, the ratio of loans to deposits of Chinese banks has dropped below 100% - and is continuing to fall – implying that the Chinese banking system is starting to become exposed to liquidity risks of the sort (albeit not yet on the same scale) that were at the heart of the Asian financial crisis of 1997-98 and the global financial crisis of 2007-09. The ‘Chinese authorities’ may be fearful of allowing the yuan to depreciate further against an appreciating US dollar for fear of further inflaming the protectionist instincts of the Trump Administration. And of course they may have to decide whether, and if so how, to retaliate to any specific protectionist measures directed at China by the Trump Administration. Outside of the purely economic sphere, tensions between China and the US over the former’s activities in the South China Sea, and the latter’s relationship with Taiwan, could also prove unsettling for financial markets.

7. Australia’s on-going economic transition: Australia’s economy is continuing its hesitant and uneven transition away from growth driven by the mining investment boom (which peaked in 2013) to growth driven by a variety of other, often less visible, sources. The upswing in dwelling construction, which has accounted for more than one-third of the non-resourcesexports-related increase in real GDP over the past two years, appears to have peaked – and although there is still plenty of work left in the residential building ‘pipeline’ this sector is unlikely to provide much further impetus to economic growth in 2017. The renewed upswing in lending to investors is potentially worrisome (since the main effect of domestic property investors is to inflate housing prices, rather than to add to housing supply), and may require further attention from APRA. There’s still not much sign of any imminent pick-up in other categories of investment. Consumer spending should continue to grow at a modest pace, given subdued growth in both wages and employment, and the on-going absence of fiscal stimuli of the type that became routine during the commodities boom years

8. Domestic politics and the Budget: The Turnbull Government is in a much weaker position than seemed likely this time last year – with a wafer-thin majority in the lower house, a fractious assortment of cross-benchers holding the balance of power in the Senate, and an ill-disciplined and restless backbench, all as a result of the Government’s poor showing at last July’s election. The Government lacks any kind of strong mandate for economic reform – with its signature initiative, the ten-year staged reduction in the company tax rate, unlikely to gain legislative approval, and there being no readily apparent ‘Plan B’. Moreover, despite Malcolm Turnbull’s promise to preside over a ‘thoroughly liberal government’, his Government seems surprisingly beholden to protectionist and other right-wing influences, both from within and without. This tendency will only increase if Pauline Hanson’s One Nation party does well in the State elections to be held in Western Australia on 11th March and Queensland most likely later this year. Another key milestone will be the Budget on 9th May – where the Government will again be under pressure to re-assure credit rating agencies and others that the budget really is on a credible path back to a sustainable surplus, and not one reliant on accounting policy changes.

9. The RBA: It will take a lot to get the Reserve Bank to move Australian interest rates – in either direction – this year, although no-one should doubt their willingness and ability to do so if they think it’s warranted. Newly-installed Governor Phil Lowe’s previous writings have prompted some to think that he places more weight on financial stability considerations than his predecessors, and hence will be less inclined to cut interest rates and further – and possibly more willing to raise them. However to date he hasn’t really said or done anything to justify that conclusion. He appears to share the (sensible and pragmatic) view held by his predecessor, in his final year as Governor, that monetary policy was approaching the limits of what it could do to improve Australia’s economic growth prospects, and that fiscal policy and productivity-enhancing structural reforms should play a greater role. Global developments suggest that Australia’s inflation rate should edge higher, in line with the RBA’s own forecasts, from its late 2016 levels – in which case there shouldn’t be any need for further rate cuts. On the other hand, it’s also hard to see Australia’s economic growth performance picking up so strongly as to warrant one or more rate hikes this year.

10. Property prices: No discussion of the Australian economy, or Australian interest rates, would be complete without at least some reference to the residential property market. Actually to speak of ‘the’ residential property market as if it were a single homogeneous entity is even more misleading than usual under current circumstances, with Perth and Darwin prices down 8% and 6%, respectively, from their peaks but Sydney and Melbourne prices putting on more than 15% and nearly 14%, respectively, last year. There is, to be sure, a lot of new supply hitting the Melbourne, Sydney and Brisbane markets over the next few years, which in theory should put a lid on further price appreciation: but there is also quite strong population growth, particularly in Melbourne, to absorb at least some of that new supply. And there is absolutely no political will on the part of the present Government to do anything to restrict the scope for domestic investors to continue inflating existing property prices. The renewed upturn in lending to investors towards the end of last year will, if it continues, be of some concern to the RBA, but they’re unlikely to raise interest rates for that reason alone, and will instead likely leave that problem to APRA. A US-, Irish- or Spanish-style ‘meltdown’ in Australian property prices won’t happen without a specific trigger, and it’s hard to see one on the near-term horizon: but the more prices keep going up, the greater the risk of either some kind of ‘accident’ (which could emanate from somewhere outside of Australia, such as China) or, alternatively, a growing social and political backlash against the ongoing deterioration in housing affordability."

Saul Eslake, Jamieson Coote Bonds, Advisory Board Member & Senior Economist.

23rd January 2017

It has been rumoured in many media outlets that Amazon will commence operations in Australia next year.  Richard Goyder (CEO Wesfarmers) has often quipped that Amazon won't just 'eat our lunch, they will eat breakfast and dinner too'.  So with such a large threat to the status quo of retailing in Australia, many of whom enjoy some of the largest retailing margins in the world, we examine what this may mean for investors.

It may comes as a surprise  that online penetration is less than 15% in most developed countries - in fact many countries online presence is below 10%.

Source:  Forager Funds Management

 

Clearly when Amazon commences operations in Australia, there will be much fanfare, but investors need to ask how much market share are they likely to pick up.  the next chart shows Amazon's share of online retail sales.  While Amazon is the largest online retailer in the US and Europe, it by no means has a majority share of these markets.  Globally it tends to gain about a 15-20% share of e-commerce.  If the same mathematics was applied to the Australian market, Amazon could expect to gain around 1 - 1.5% of total retail sales.

Source:  Forager Funds Management

 

Finally we consider that not all retailing is equal when approaching the idea of online sales.  The furniture division of Amazon has been a 'disaster' while apparel and electronics have shared greater success.  When we approached the subject with senior management at Perpetual, they said "Fresh Food would be almost impossible for Amazon".  The last chart is a summary from the Aust Financial Review outlining the view of Citigroup of the market share that Amazon is likely to gain in each market segment.  The chart also highlights an estimate of earnings lost by the incumbent retailers assuming these market share estimates prove correct.

 

 

 

We have nothing but respect for Amazon and their business model, and investors are encouraged to ensure that their investment strategy takes into account the likely entry of Amazon into the Australian market in 2017.

 Key points

 

Introduction

After a seemingly long and difficult campaign Donald Trump has been elected president of the United States with the Republican Party retaining control of the House, and the Senate, in Congress. Just as we saw with the Brexit vote, the combination of rising inequality, stagnant middle incomes and the disenchantment of white non-college educated males has seen a backlash against the establishment and helped deliver victory for Trump. This note looks at the implications.

 

Trump’s key policies

Taxation: Trump promises significant personal tax cuts including a cut in the top marginal tax rate to 33% from 39%, a cut in the corporate tax rate to 15% from as high as 39% and the removal of estate tax.

Infrastructure: Trump wants to increase infrastructure spending.

Government spending: Trump wants to reduce non-defence discretionary spending by 1% a year (the “penny plan”), but increase spending on defence and veterans.

Budget deficit: Trump’s policies are likely to lead to a higher budget deficit and public debt.

Trade: Trump wants to renegotiate free trade agreements and has proposed various protectionist policies, eg; a 45% tariff on Chinese goods, 35% on Mexican goods.

Regulation: Trump generally wants to reduce industry regulation, which would be good for financials and energy.

Immigration: Trump wants to build a wall with Mexico, deport 11 million illegal immigrants, put a ban on Muslims entering the US and require firms to hire Americans first.

Healthcare: Trump wants to repeal Obamacare and allow the importation of foreign drugs.

Foreign policy: Trump wants to reposition alliances to put "America first" and get allies to pay more, would confront China over the South China Sea and would bomb oil fields under IS control.

Risks and uncertainties

A problem for Donald Trump and America is that he will start his Presidency as extremely unpopular – in fact he is the least popular candidate on record and the election campaign has also highlighted a deeply divided America.


Source: Gallup, BCA Research, AMP Capital

He also faces a difficult time negotiating with his Republican colleagues in Congress given many distanced themselves from him during the election campaign.

Trump’s victory, like the Brexit vote, adds momentum to a backlash against establishment economic policies and specifically a move away from economic rationalist policies in favour of populism and a reversal of globalisation which could be a negative for long term global economic growth. The shift away from globalisation could also add to geopolitical instability (Russian President Putin was a supporter of Brexit and Trump!). More positively though, a greater focus on using fiscal stimulus could help reduce the burden on monetary policy and policies to reduce inequality could help support longer term economic growth.

Economic impact

Some of Trump’s economic policies could provide a boost to the US economy. The Reaganesque combination of big tax cuts and increased defence and infrastructure spending will provide an initial fiscal stimulus and, with reduced regulation, a bit of a supply side boost to the economy. The downside though is that this will blow out the budget deficit and the risk is that his protectionist policies will set off a trade war, and along with much higher consumer prices and immigration cut backs will boost costs. All of which could ultimately mean higher inflation and bond yields and a faster path of Fed rate hikes in the US (apart from any initial delays associated with uncertainty around his policies).

There may also be negative geopolitical and social consequences - tensions with US allies, reduced inflows into US treasuries in return, a more divided America - if Trump follows through with policies on these fronts.

Australia being more dependent on trade than the US (exports are 21% of GDP in Australia against 13% in the US) will be particularly vulnerable if Trump were to set off a global trade war.

The ultimate impact will depend on whether we get Trump the populist (determined to push ahead with his protectionist policies and steam roll Congress) or Trump the pragmatist (who backs down on his more extreme policies, eg. around protectionism) leading to a smoother period for the US and global economies. If we get Trump the pragmatist there is a good chance the US will see a sensible economic stimulus program combined with long needed reforms in areas like corporate tax.

Likely market reaction

The last few weeks – with shares and other risk assets falling when developments favoured Trump and rallying when developments favoured Clinton – indicates Trump’s victory will not go down well with markets. In fact we have already seen this with the initial reaction in Asian markets:

  • Trump’s victory is seeing a resumption of “risk off” with shares likely to fall 5% or so (both in the US and globally – although Asian and Australian shares have already reacted to some degree) and safe havens like bonds and gold rallying as investors fret particularly about his protectionist trade policies triggering a global trade war. Australian shares are particularly vulnerable to this given our high trade exposure. The “global shock” of a Trump victory will likely see the Yen and the Euro rally further against the $US but the $US rise further against the Mexican peso and trade exposed countries in Asia.
  • While the Fed will be a bit less likely to hike in December with a Trump victory, the $A will likely suffer from the threat to trade and the initial “risk-off” environment. A Trump victory to the extent that it leads to falls in investment markets and worries about a global trade war, may also increase the chance of another RBA rate cut in Australia – but not until next year.
  • Beyond the initial reaction, share markets are likely to settle down and get a boost to the extent that Trump’s stimulatory economic policies look like being supported by Congress, but much will ultimately depend on whether we get Trump the pragmatist or Trump the populist. Congress, along with economic and political reality, can probably be relied on to take some of the edge off Trump’s policies to some degree, but this would take time. But a more pragmatic approach by Trump to economic policy would probably see the initial market reaction present investors with a buying opportunity.

Historically since 1927 US total share returns have been weakest when Republicans controlled the presidency and Congress with an average return of 8.9% p.a.


Source: Bloomberg, AMP Capital

Concluding comments

While Trump’s victory will come as a bit of a shock to many, there is a good chance that economic realities and the checks and balances provided by Congress will see his policies become more pragmatic. A good initial guide to this will be what sort of advisers Trump appoints around him. And remember there was much concern a Yes Brexit vote would be a disaster for shares and the global economy. What actually happened was an initial knee jerk sell off but after a few days global markets moved on to focus on other things and shares rallied. So there is a danger in making too much of the US election. It’s also worth noting that recent global growth indicators have been improving – both business conditions PMIs and profit indicators – and this along with continuing ultra-easy global monetary policy provides support for investment markets in the face of short term political uncertainties. 

Finally, while the Presidential election is an important political event, investors should remain focused on adhering to their financial objectives, ensuring that their portfolios are well diversified across asset classes and geographies, and continuing to take a long-term view.

Monday, 31 October 2016 21:31

Should investors participate in IPO's

This article was written for SMSF Adviser online magazine.

 

With the avalanche of new listings coming to market, we consider the issue should investors participate in IPO’s (Initial Public Offers)?

When it comes to investing we all aspire to Warren Buffett, and yet at times investors act more like Gordon Ghecko, the fictional character portrayed by Michael Douglas in the 1987 film “Wall Street”. This is how it seems with the love affair investors have with IPO’s.

Every investors dream of course is to buy into a float, and then sell day one for a handsome profit, otherwise known as a ‘stag’.

We acknowledge how easy it is to fall in love with a new IPO, after all the prospectuses produced usually come complete with stunning pictures of celebrities such as Jennifer Hawkins who made the Myer prospectus worth flicking through. When Pacific Brands pitched to investors the images of Pat Rafter and others in their underwear may have been visually appealing, but certainly not instructive.

Aside from the pictures though, the prospectus almost always outlines a rosy outlook for the business.

The first question we would suggest investors ask themselves is – would they want to have this in their portfolio in 5 years time? If the answer is a clear no – then we suggest extreme caution.

Other than the normal set of investment considerations that investors think about when investing, such as price, management, gearing etc here are a series of additional points when thinking about investing in an IPO.

  1. Investors need to understand who is the vendor of the IPO. Private Equity funds have established a poor reputation for taking over businesses, loading them up with debt after stripping the company of other assets before selling back to unsuspecting investors via an IPO. Dick Smith comes to mind as a perfect example. We are not opposed to buying from Private Equity funds as such, but investors must understand that the vendors in an IPO have a far greater understanding of the business than the investor can gather from reading the prospectus, which puts the vendor at a significant advantage. Conversely the history of Government IPO’s has been a little friendlier for investors, other than of course Telstra II, which is still significantly underwater from its $7 plus offer price.
  2. Once investors have established who is the vendor, it is important to also understand whether the vendor is retaining any part of the company or if it is a full sale. If the vendor is retaining part of the business, investors need to understand if there are any time limitations around this ownership. We also believe that it is also crucial to understand what the IPO proceeds are being used for. Is the IPO simply to reduce debt, or for the vendor to sell out? Or are the proceeds being used to grow the business?
  3. Brokers are remunerated for selling the IPO. While this may sound obvious, it reminds us of the phrase “never ask a barber whether you need a haircut”. Brokers have to sell their services to the IPO vendor, which results in a research blackout on the IPO company. This simply means that it is virtually impossible to obtain unbiased investment research from the broking firm that is handling the IPO. And of course as the experienced brokers will tell you – “the best IPO’s you can never get enough of, and the IPO that you receive your full allocation for is generally the one you don’t want”
  4. One of the best pages of the prospectus is the “Investment Risks” section. In our experience, very few investors read much in a prospectus at all, and in particular do not read or understand the investment risks section. If it is one section of a prospectus that investors read, it should be this section.

So, should you invest in IPO’s? Our view is that while some IPO’s offer good opportunity, greater caution should be exercised by investors when considering IPO’s due to the lower level of information usually available.

 

This article provides a handy reference guide for the assets test changes effective 1 January 2017.

The quick reference tables allow you to look up the rate of annual Age Pension payable for various levels of assets under the current asset test rules (as at 20 September 2016) and the new asset test rules (as at 1 January 2017).

Singles

ASSETS TEST THRESHOLDS AS AT 1 JANUARY 2017

 

Lower threshold1

Upper threshold2

Homeowner

$250,000

$545,600

Non-homeowner

$450,000

$745,600

Assets test taper rate: $3pf for every $1,000 over the lower threshold.

 SINGLE HOMEOWNERS

Assessable assets3

Age pension: Current assets test4

Age pension:

New assets test as at 1 Jan 2017

Annual difference

$200,000

$22,313

$22,313

$0

$250,000

$21,463

$21,501

$38

$300,000

$19,513

$19,162

-$351

$350,000

$17,563

$15,262

-$2,301

$400,000

$15,613

$11,362

-$4,251

$450,000

$13,663

$7,462

-$6,201

$500,000

$11,713

$3,562

-$8,151

$550,000

$9,763

$0

-$9,763

$600,000

$7,813

$0

-$7,813

$650,000

$5,863

$0

-$5,863

$700,000

$3,913

$0

-$3,913

$750,000

$1,963

$0

-$1,963

$800,000

$13

$0

-$13

$850,000

$0

$0

$0

 

 

Couples

ASSETS TEST THRESHOLDS AS AT 1 JANUARY 2017

 

Lower threshold1

Upper threshold2

Homeowner

$375,000

$820,600

Non-Homeowner

$575,000

$1,020,600

Illness separated Homeowner

$375,000

$966,200

Illness separated Non-Homeowner

$575,000

$1,166,200

Assets test taper rate: $3pf for every $1,000 over the lower threshold.

COUPLE HOMEOWNERS

Assessable assets3

Age pension: Current assets test4

Age pension:

New assets test as at 1 Jan 2017

Annual difference

$200,000

$34,766

$34,766

$0

$250,000

$34,766

$34,766

$0

$300,000

$34,299

$34,299

$0

$350,000

$32,680

$33,487

$807

$400,000

$30,730

$32,674

$1,945

$450,000

$28,780

$28,916

$137

$500,000

$26,830

$25,016

-$1,814

$550,000

$24,880

$21,116

-$3,764

$600,000

$22,930

$17,216

-$5,714

$650,000

$20,980

$13,316

-$7,664

$700,000

$19,030

$9,416

-$9,614

$750,000

$17,080

$5,516

-$11,564

$800,000

$15,130

$1,616

-$13,514

$850,000

$13,180

$0

-$13,180

$900,000

$11,230

$0

-$11,230

$950,000

$9,280

$0

-$9,280

$1,000,000

$7,330

$0

-$7,330

$1,050,000

$5,380

$0

-$5,380

$1,100,000

$3,430

$0

-$3,430

$1,150,000

$1,480

$0

-$1,480

$1,200,000

$0

$0

$0

 

Note:

  1. Lower threshold as at 1 January 2017 as per Social Services Legislation Amendment (Fair and Sustainable Pensions) Act 2015

  2. Upper threshold is a calculated value assuming maximum pension at 1 July 2016 is indexed by 1.5% to 1 January 2017. The actual upper thresholds on 1 January 2017 may be different to those shown here.

  3. Assumes assets are financial investments subject to deeming

  4. Age Pension entitlement as at 20 September 2016 is calculated using the current taper rate of $1.50 pf for every $1,000 over the lower threshold. The Age Pension entitlement is the lower of the assets test and the income test. The maximum age pension is estimated by indexing maximum pension at 1 July 2016 by 1.5% and asset thresholds on 1 July 2016.

  5. Age Pension entitlement is calculated using the 1 January 2017 taper rate of $3 pf for every $1,000 over the lower threshold. The Age Pension entitlement is the lower of the assets test and the income test. The maximum age pension is estimated by indexing maximum pension at 1 July 2016 by 1.5% and legislated lower asset threshold as at 1 January 2017.

The information contained in this update is based on the understanding Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) has of the relevant Australian laws as at 1 July 2016. As these laws are subject to change you should refer to a professional adviser for the most up-to-date information. The information is for adviser use only and is not a substitute for investors seeking advice. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), no person, including Colonial First State or any other member of the Commonwealth Bank group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information. This update is not financial product advice and does not take into account any individual’s objectives, financial situation or needs. Any examples are for illustrative purposes only and actual risks and benefits will vary depending on each investor’s individual circumstances. You should form your own opinion and take your own legal, taxation and financial advice on the application of the information to your business and your clients.

Colonial First State is not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.

22735/FS6613/0816

 

 

Monday, 31 October 2016 04:45

Why Deutsche Bank is no Hindenburg

This article is an extract from Platinum Asset Management's September 2016 quarterly review

 

Bank's fail because they are 1) illiquid 2) insolvent or 3) both.

Deutsche Bank does not have a liquidity problem.  They hold EUR 200bn of highly liquid assets (12.5% of the balance sheet) which are enough to withstand a serious bank run.  But ultimately is doesn't matter, because the ECB can and will provide unlimited liquidity support to the bank, if needed.

The solvency question in more nuanced.  Normally banks become insolvent because they can't recover money from borrowers or counterparties, they don't have as many assets as they thought.  But the value of Deutsche bank's asset isn't being questioned.  Rather, its the value of their liabilities that has the market in a spin.

According to its latest disclosure Deutsche Bank faces 14 sets of legal actions.  These are contingent liabilities because Deutsche only has to pay if it loses a case.  Both the probability of losing those cases and the amount they would have to pay are unknown today.  Deutsche makes an estimate and has set aside EUR 5.5bn for these contingencies.  It recently emerged that the US Dept of Justice (DOJ) has offered to settle the largest of these actions for EUR 13bn.

Of the EUR 5.5bn Deutsche has provisioned for these contingent liabilties, EUR 3.5bn is thought to be ear-marked for this particular case.  This leaves Deutsche Bank EUR 9bn short.  It also raises the question of whether the EUR 2bn of reserves set aside for the remaining 13 cases is sufficient or if more will be needed.

Answsers are not forthcoming, most likely because they are unknowable.  Remember, this is a proposed settlement, not a penalty awarded by a court.  And the DOJ has a history of 'high balling' and then negotiating down.  For example Goldman Sachs was hit with a similar figure and ultimately settled for US $5bn.  EUR 9bn is therefore a worst case scenario.

Against this EUR 9bn claim and 13 other outstanding cases, Deutsche Bank has EUR 120bn of loss absorbing capital and, under basic assumptions, around EUR 4bn in annual earnings.  There is simply no reasonable chance that these litigation costs will cause a loss to the bank's depositors, clients or counterparties, let alone trigger a systemic crisis.

It is possible, however, that shareholders and the holders of some equity-like instruments may end up taking a hit.  This relates to a second problem.  While Deutsche meets its capital requirements today, the required level of capital will ratchet up each year until 2019, its a moving target.  By the end of 2019 the bank will need EUR 49bn of capital, and it currently has EUR 43.5bn.  This leaves a EUR 5.5bn shortfall that has to be progressively closed over three and a half years.

There are a lot of moving parts.  They may end up settling for well under EUR 13bn with the DOJ.  But equally, earnings are volatile in this business and may end up being significantly lower than EUR 4bn.  There is little in the way of a margin of safety, particularly where fear-driven clients choose to close accounts or cut relationships because of bad press.

However this is reflected in the stock price.  The shares are curently trading at roughly a 75% discount to book value.  This indicates that the market is pricing in a reasonably high likelihood of a dilutive capital raising.

Holders of some hybrid instruments are at risk if the bank's capital falls below a certain trigger level, which would trigger the automatic conversion of these bonds into equity.  This seems unlikely under current circumstances as it is hard to see how the issues described above would erode capital so much as to trigger a conversion.  However they are now vulnerable should the bank experience a second or third unexpected shock.

Hamish Douglass (CEO Magellan Financial Group) talks about 3 macro economic issues that investors should be thinking about at the moment.

Hamish believes that investors need to be thinking about rising long term interest rates, Italian financial system and China.

He is considered one of the best investors in Australia and his views are widely sought after.

He also talks about recent moves he has made in the fund he manages - Magellan Global Fund.

 

Monday, 31 October 2016 04:28

Global Overview - June 2017

Hamish Douglass (Magellan CEO)

Monday, 31 October 2016 03:51

Inghams IPO - we've chickened out!

GEM Capital has considered applying for stock in the soon to be listed Inghams IPO, and had the opportunity through its investment bank contacts, but have decided not to proceed after careful consideration.

This article is simply to communicate the evaluation process that is undertaken when assessing investment opportunities.

Inghams is one of the largest vertically integrated chicken manufacturers in ANZ with a #1 market share in Australia (40% share) and #2 in New Zealand (34% share). Inghams runs its own stockfeed operations and controls every aspect of chicken growing and processing. Its closest competitor has a 33% market share in Australia and 48% in NZ.

Inghams Group sells to supermarkets (53% of revenue), fast food restaurants (17% of revenue), food distributors (8% of revenue), and ‘wholesale’ providers (butchers, etc, 7% of revenue). Although Inghams has a large number of customers, the top five accounted for 55%-60% of revenue in 2016. We have seen with companies like Coca-Cola Amatil Ltd that large supermarkets like Woolworths Limited and Wesfarmers Ltd have the ability to pass on a fair amount of pricing pressure to suppliers and Inghams will not be immune.

One of the most important aspects of assessing a new listing, commonly referred to as an IPO (Initial Public Offering) is to understand who you are buying from.  In the case of Inghams, the family has previously sold to a Private Equity firm, TPG Capital.  In our experience, rarely do private equity firms pass on gifts to retail investors. (or any investors for that matter)

It is interesting to note that TPG paid the Ingham family close to $900m for the business in 2014, and have since sold all the properties and leased them back, realising around $600m.  Now, two years after acquisition, TPG are selling up to 70% of the business to investors and are hoping to raise around $1.1bn at the upper end.  That means for an outlay of $900m, TPG will receive up to $1.7bn, pocketing a tidy profit of $800m while still owning 30% of the Ingham business.  TPG's remaining 30% stake is escrowed for 6-12 months, but it is unlikely they will be a long term owner of  this business.

If investors take a look at the sensitivity analysis from the prospectus, they will see that small movements in sales and pricing can have material impacts on profitability.

 

 

 

 

 

 

 

 

 

For a company forecast to increase profit by 18.9% to $98.8m in 2017, movement in average selling prices represents a significant risk should the supermarkets wish to use chicken in a discounting war.

While the price at the upper end of the IPO pricing would appear OK at 15.5 times forecast earnings, the price is higher than its smaller rival across the Tasman, Tegel Foods.

This is a low margin, high turnover business.  We don't mind the food production sector and quite like the chicken story, particularly with it's price advantage for consumers over beef.

We just feel that the easy money here has been made by private equity.  Therefore we are not participating in the IPO and will watch Inghams in the aftermarket, in the months ahead.

 

 This information is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. We strongly suggest that no person should act specifically on the basis of the information contained herein, but should obtain appropriate professional advice based upon their own personal circumstances including personal financial advice from a licensed financial adviser and legal advice. Fortnum Private Wealth Pty Ltd ABN 54 139 889 535 AFSL 357306