Sunday, 23 November 2014 16:17

India - the land of opportunity

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Mark Draper (GEM Capital) caught up with Andrew Clifford (Chief Investment Officer - Platinum Asset Management) at a conference recently to discuss his recent investment research tour of India.


Platinum Asset Management are extremely bullish on India following the leadership change.


Here is a podcast of the interview, followed by the transcript.





Mark Draper: Mark Draper from Gem Capital here with Andrew Clifford, chief investment officer from Platinum Asset Management. Jet lag from India, just come in a day or so, thanks for joining us Andrew.

Andrew Clifford: Yeah, not at all.

Mark Draper: And you’re really excited about India. You think it is a very interesting investment prospect going forward. Why do you think that?

Andrew Clifford: Look India has been a place of enormous potential that we’ve all known for a while, but the big issue has been, you know the basic inability of the government to set up the right environment for investment to occur, and to a large extent that has been about the government unable to get approvals through their own system and so forth. And a lot of this comes back to ultimately bureaucracy which is incredibly inefficient but also with a fair degree of corruption within it. So, what we have in this new government is a prime minister, Mr Modi, who has won clearly has a vision that investment is required to get this country moving. He is able to sell that message to the electorate very convincingly that that is good for all Indians, it’s not just being about being pro-business and he has the experiences of a politician as the chief minister for 10 years of Gujurat to understand this system and know how to make it work, with some very interesting ideas about how you to clean the system up.

Mark Draper: And one of those ideas involves the national security card, like the I.D, not a card but the I.D system. Are you able to talk us through that?

Andrew Clifford: Yes. Well, there are probably a couple of elements which are quite interesting here. One is Modi talks about digitalising India and so if you can imagine that for any sort of thing that you want to do such as build a house, start up a business, there are a whole lot of permits, licences that you need and one comment we got from one business person was that in reality it wasn’t very different from the US or Australia, we need those but they are in formality but whereas in India each one of those things we need to do, you have got another bureaucrat to deal with or another government official. By making this an internet process, based process, you essentially, you may still need someone to look at it at the end of the day to approve it but you’re not meeting them face to face where there are time constraints put on the official dealing with it and they can either accept or reject the application based on its merits alone, there is not real opportunity then for them to sort of fleece a little bit of cash.

Mark Draper: Yes.

Andrew Clifford: So that’s one, and that’s clearly something they’re heading down in all levels of government and it’s very much one of his things, his things even the ministers or ministerial level is that a file shouldn’t be sitting on your desk for more than a certain number of days because if it is you’re not making a decision and that not making a decision often has a lot to do with saying what money making opportunities are in there for you.

Mark Draper: Yep.

Andrew Clifford: The I.D card itself is very interesting so there are now 700 million Indians with a unique identification which is simply by your 10 fingerprints and an iris scan of both your eyes and you’re given a 12 digit number.

Mark Draper: Right.

Andrew Clifford: And it has enormous possibility so…

Mark Draper: Almost sounds like something out of James Bond doesn’t it.

Andrew Clifford: Well, the interesting thing is that in our society, you would feel very wary about such an identification and what the government’s going to do with it. Here it is about protecting you from the system…

Mark Draper: From the bureaucracy.

Andrew Clifford: So, for example, a very simple thing you can walk into a bank branch now and type your 12 digit number in, give them your fingerprint and within two minutes, you’ve got a bank account. Simple as that. What does that allow you to do, well it means that rather than having to go, for example, off to a government office to get your monthly pension, if that’s what you’re doing, it can be paid directly to your account and is paid directly to your account. So, again, when you went to grab that pension, it was something that again, you may not have got the full amount of, again some of it was kept back by the guy handing out the money.

Mark Draper: Yep.

Andrew Clifford: So, that’s a simple example, but in India there’s a lot of subsides subsidised, LPG gas, subsidised kerosene, there are various effectively social security type benefits and all of these things can be tied down to your I.D number and what they are finding is that where they have done that, then again most of these things are only on an experimental basis, none of these things have been rolled out on the country yet, but where they have done it and said okay you’re not going to get your pension unless you sign up using their I.D, they have found that there’s only 70% of the people are real.

Mark Draper: Right.

Andrew Clifford: The rest are ghost accounts.  So there are massive benefits in terms of cutting down on the amount of subsides and what goes out in the system. So there are some quite clever things that can be done with this overtime.

Mark Draper: What do you think the impact on foreign investment to India of clamping down on corruption and  improving the system and as well as encouraging investment, what’s your view on where that’s likely to go?

Andrew Clifford: Well, it’s quite interesting because Modi, I think, is now perhaps the most travelled Indian prime minister already and very much the focus of all his travels have been about trade and investment and I think it is interesting because the multi-nationals are very wary of investing in India for various reasons, you know the tax offices have been quite punitive in their dealings with, and unfair, dealing with foreigners, so there’s a great deal of wariness and her is aware of this and knows that we need to get things set up so that foreigners will invest. There are a lot of rules and restrictive rules around investing in India and again, I think there’s a sense that if they want, for example, a modern retail industry they need foreigners in, to some extent.

Mark Draper: Yes.

Andrew Clifford: And so, not all of these things are going to happen overnight but bit by bit I think we will, overtime, see a different India as far as encouraging foreign investment in the country.

Mark Draper: Can you give us a feel for the size of the place? I mean living in Australia with 24 million people, just by comparison.

Andrew Clifford: Well you know, I think the population is now1.2 to 1.4 billion and it is a place of, you get outside of a city like Mumbai and Delhi, if you have visited them over the last 20 years, they have developed quite a bit, but once you get outside of that we are really talking about places, in terms of my travel remind me of going back to China 20 or more years ago in terms of simply the lack of development or very little way of modern retail or shopping malls. There’s some but nothing like what you would see in China today once you get into those second and third tier cities.

Mark Draper: Yeah.

Andrew Clifford: We talk about it, you know there’s the number of  Indians with a mobile phone but the reality is, in terms if things like 3G, they are already talking about rolling out 4G but again once we, in our recent trip outside of Mumbai and Delhi and we visited three other cities, you barely pick up or there was no 3G signal effectively, so there was an enormous opportunity for growth across a vast part of the country simply by the government letting investment occur.

Mark Draper: And investment in telecommunications would be one area, what would be some of the other areas, do you think where the government is really going to encourage investment?

Andrew Clifford: So you know what is interesting in one of the discussions that is always around subsides and prices of goods and services, but there is cry of like Indians; they want power, they want water, it’s not the price of it that worries them because one area where we visited, they were very enthusiastic saying they were quite privileged because they got electricity 12 hours a day. And this is the reality outside of most of the, outside of Delhi and Mumbai and maybe the central parts of the cities is that no electricity really is sort of a few, maybe five to ten hours a day type of proposition then you have got to go to your generator if you want it. So, it is very clear that the country needs power, it needs roads, it needs infrastructure to support industries, like rails, ports and the like and so these are all areas where there has been a real logjam in terms of getting approvals through and we’re starting to see a couple of things. One, we are starting to see approvals occur, we are seeing big issues around coal and the accessibility of coal that are now being dealt with in the country and in terms of roads where they have done a lot of private partnerships that haven’t really worked because of the way they were set up and so the government is looking at doing a much simpler sort of structure where they actually, the government is the one responsible for the acquiring the land, getting the rights and way, and then a much more simplified process for a private entity to get these types of assets built.

Mark Draper: And to round off, to what extent have investment managers like platinum and others embraced this or is it just at the early stages, do you think?

Andrew Clifford: I think if you look at the market over the last year, it has been extraordinarily strong stock market, leading into the election or post the election so there is a fair degree of understanding of what is going on here and I think that perhaps foreigners don’t have a strong a grasp of it as they might but the locals certainly have a huge or a very high level of optimism. So generally, that would be to us a bit of a signal that this isn’t the greatest opportunity, certainly if you look at emerging markets funds they have high weightings in India relative to their bench mark but if you look at the global funds they have, they just haven’t even arrived.

Mark Draper: Right.

Andrew Clifford: I think the way we will look at it is that, look it has been a great market but if we are looking in terms of ten year type time frames, we think it is probably what we’ve seen is the first leg of what will be a multi year bull market. It may well mean that we have to, you know prices need to consolidate and maybe the next year ahead may not be that exciting, you know valuations in India have never been quite as low as they have been in places like China and there certainly aren’t many gifts being handed out in that market at the moment but nevertheless in terms of a long term economic development and growth story, we don’t think there is anything like it anywhere in the world at the moment.

Mark Draper: And finally, can you give us a flavour of how you’re actually playing the India theme at the moment?

Andrew Clifford: So we were fortunate to sort of up our investments in India quite significantly at the end of 2012, before the run started and a lot of those holdings are in infrastructure, companies, ports, roads, power which is an area that really was suffering and now it has a bit more promise because of the changes that we have been talking about. Also in the financial sector so private banks we hold and these really are the sort of the core of the portfolio also Bharti telecomm which is the dominant or the largest mobile provider there is another one of our holdings, but there are a lot of interesting players coming into the portfolio around, some of the changes are occurring so what I haven’t mentioned so far is the changes to the energy subsides and so there are some of the companies in India because they are government entities. How they actually had to bear the weight of that subside wasn’t just something the government paid so these companies, their profitability was pressed because of the subside schemes, not only is that changing, it is also again these are companies that have a lot of investing to do, so a lot of potential upside from there so that’s one of the newer angles in the portfolio.

Mark Draper: Okay.

Andrew Clifford: And I just want to say, what’s hard to do in India is to find what we all love to find is the consumer companies because that is clearly a big area of growth…

Mark Draper: They’re pretty expensive.

Andrew Clifford: They are very expensive stocks and there aren’t that many options but we think there will be more and from this trip we have identified a couple of smaller companies within a quite interesting but not yet prepared to talk about what they are.

Mark Draper: Fair enough. Sounds like we are at the start of the Indian journey not the…

Andrew Clifford: I think so, I think you know people say India is like China ten years ago, it’s probably more like China 15 to 20 years ago, I think.

Mark Draper: Okay. Well thanks for putting it in perspective and thanks for the insights into India and I look forward to talking to you more later down the track and I hope you recover from the jet-lag, Andrew thanks.

Andrew Clifford: Okay, thank you.



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
























Wednesday, 12 November 2014 08:29

Biggest Mistake for Australian investors

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We speak with Douglas Isles (Investment Specialist - Platinum Asset Management) about what he sees as the biggest mistake Australian investors are making.


Below is a transcript of the video for ease of reference.



















Mark: Here with Douglas Isles, investment specialist to Platinum Asset Management. And Douglas, what do you think is the biggest mistake Australian investors are making today? 


Douglas: Well Mark, I think you may not be surprised as I'm saying this as overseas equity managers. But we actually do think generally Australian investors do not have enough money invested in overseas markets today. 


Mark: Yep. 


Douglas: I know perhaps I could take you through why. 


Mark: Yeah, it'd be great. 


Douglas: I think the first thing that's most important is - and one of the things that really guides our investment process if you like, is a belief that people have a tendency to extrapolate the past into the future. So, people tend to think what has happened will always happen. 


Mark: Yep. 


Douglas: And what we notice and what we observe is things change - and people change, governments change, competitiveness changes, technology changes. 


Mark: Currencies change. 


Douglas: Currencies change, everything changes. So let's start off by acknowledging that having had a large exposure to Australia for the last decade plus has been good. 


Mark: Yes.


Douglas: People have done very well from that. We've not had a recession here, going back to the early '90's. We've had strong wage growth, we've had strong property markets. The equity markets have done well, our currency as well has risen from near 50 cents to close to a dollar. So, we've had all these things going well for us. We've had the benefit of imputation credits for equity investors, and we've obviously had China's investment boom. So, all these things have been great. 


Mark: Yep. 


Douglas: For Australian investors. But what have we got today? Where are we now? The Australian equity market is very concentrated. You've got all this 40 plus--


Mark: Banks and resources coming in. 


Douglas: Percent in banks, 20% perhaps in resources. There's quite a narrow investment universe that people are facing.


Mark: Yeah.


Douglas: So, can we think about valuations and when we look around the world, on a relative basis, Australia's not particularly attractive when it comes to where we see valuations. Our currency is no longer competitive, and you see it particularly hitting things like the manufacturing industry. But at 90 plus cents to the US dollar, Australia is struggling in certain industries from a competitiveness perspective. And finally, the home buyers that we have, the amount to which Australian's are exposed to the whole market is greater than any other market in the world that we can identify, other than US. And as you would know, the US has got a much broader range of opportunities for investors. 


Mark: Yep. 


Douglas: So I think that's where we are today. And when we invest, we have to look forward, rather than looking back. 


Mark: Yep. And just to put perspective on the - where Australia sits in terms of the Australian Share Market. How much is that as a percentage of the overall Share Market around the world? It is a very small number. 


Douglas: Probably around 3%. So you could look at Australia, and population wise, I think we're less than half of a percent of the global population. GDP, we probably sit one to something - one to two. Stock Market wise, we're probably around three. So--


Mark: So if you've got all the money in.


Douglas: Punch above our weight, which tends to tell you our market may not be cheap. 


Mark: Yes. 


Douglas: You know what I mean. But when we invest, we look forward. So, first of all, the Chinese investment boom. We think that's coming to an end, China is changing. China's trying to become more domestically focused, more consumption focused. I mentioned valuations. We can find valuations around the world that are cheaper than what's on offer in the Australia market, and particularly in Asia. But also to some extent in Europe, and certain sectors in the US.


Mark: Yep. 


Douglas: But one of the things that you know is 20 years as an investment firm. One of the big things we would point out is the growth in the opportunity set. What can you invest in an overseas market as a foreigner?


Mark: Pharmaceuticals, technology--


Douglas: Manufacturing, etc. And the big thing has been that more and more markets have opened up to foreigners. Companies are being born every day if you like. Well I mentioned earlier, we sit with a relatively narrow opportunity set here. So there's the growth in the opportunity set, but there's also the growth in - and the trends if you like. Formally, you mentioned technology, manufacturing, auto, CAPEX in the US. There's various trends that we cannot capture here in this domestic market as much as anybody else. So finally I think as well as the opportunity set, the big thing that we observe our currency. People are aware, today is a great time to buy things online. Whether you're shopping US websites - a great time to--


Mark: Go on an overseas trip.


Douglas: Go to Bali or whatever for an overseas holiday. 


Mark: Yep. 


Douglas: But people aren't applying that same logic to investment markets. And we think that people are missing the opportunity today if they are not using the solid Australian dollar to buy cheaper, and it's often better companies in overseas markets. 


Mark: Okay. Look, they're really good points, thanks for your time with that Douglas, and certainly excellent opportunities to invest outside of Australia. 


Douglas: That was great, thanks very much Mark, thanks for having me on.


Tuesday, 11 November 2014 14:25

Citigroup - bleak outlook for Iron Ore

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There is no relief in sight for struggling iron ore miners, with Citi tipping the iron price will fall below $US60 a tonne in late 2015.

In a note today, Citi downgraded its average forecast to $US74 a tonne in the first quarter of 2015, sliding even further to an average of $US60 a tonne in the third quarter. 

Citi said it expects the iron ore price will briefly dip below $US60 a tonne.

The group is eyeing an annual average price of $US65 a tonne in both 2015 and 2016. 

Benchmark iron ore for immediate delivery to the port of Tianjin in China is currently hovering around five-year lows, touching its lowest point since June 2009 last week at $US75.50 a tonne.

The iron ore price has now lost 45 per cent in 2014.

Citi said while the decline in the iron ore price in the first half of the year was due to increased supply, the current sell-off is being driven by deteriorating demand and deleveraging of traders and Chinese mills.

The group also said it expects Chinese steel demand to weaken further in early 2015.

Below is a chart showing the cost of production of the large Australian miners, who are likely to be able to weather this price downturn.  (Source Fat Prophets)

Clearly investors will not want to be exposed to iron ore producers with a cost of production greater than the current prices.

Care should also be taken investing in mining services businesses, given the pressure on mining companies to cut costs while commodity prices remain soft.

Friday, 07 November 2014 09:59

Nouriel Roubini on India, China, Japan and Europe

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Nouriel Roubini - famous for anticipating the GFC - talks here with Bloomberg TV about his views on India, China, Japan and Europe.


He is bearish on Chinese growth over the next few years.  This is likely to have major ramifications for China's major trading partners, which includes Australia, Canada and Brazil.


 Nouriel Roubini, the Chairman of Roubini Economics predicts India will fly whilst China hits a “bumpy” landing. Commenting on the state of the world economy Roubini says some countries like India are going to do better, while others “are going to have fragilities” like Japan, China and the Eurozone. “So I think you have to look at the world and see where things are going right, and where they are not. The next decade will be the first time in 30 years that India’s growing faster than China. Growth in China could go towards 5% in the next few years. While in India with the right reform it could go toward 7%. So for the first time ever the tortoise becomes the hare and the hare becomes the tortoise.” Roubini says his view is non-consensus and there’s no way commodities prices and equities are “pricing-in growth in China of 5.5% in the next two years.”



Thursday, 06 November 2014 19:35

Investing in the "Asian Century"

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This century has been labelled as the "Asian Century", as the Chinese economy seeks to become the largest in the world and other Asian economies continue to grow at a rapid clip.


We talk with Jacob Mitchell (Deputy Chief Investment Officer - Platinum Asset Management) about some of the structural changes taking place in many Asian economies that investors should be thinking about.


We have provided a transcript of the video below for ease of reference.



















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

Sunday, 26 October 2014 18:27

Medibank Private - please consider

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medibank-logo-headerSummary of the Medibank Offer


The privatisation of Medibank Private Limited (ASX: MPL), or Medibank, provides an opportunity to invest in Australia's largest private health insurer at a fair price or better, depending on the price set in the institutional bookbuild.


All considered, we recommend investors consider applying for shares in the initial public offer, or IPO, though it is not as attractively priced as we hoped. We are disappointed retail investors are only given a broad indicative pricing range before they are required to apply (which has been a feature of private-equity-sponsored issues), rather than a fixed price.


Operating in a heavily regulated industry, Australian health insurers typically produce defensive earnings. In our opinion, Medibank is well placed to produce solid long-term earnings growth from productivity improvements and industry-wide growth.


Key Takeaways


  • ×  We recommend investors apply for stock through the IPO. Based on Medibank's proforma accounts, guidance, business assumptions and our earnings forecasts, our fair value estimate is AUD 2.10 per share with a medium fair value uncertainty rating.

  • ×  The indicative price range of the IPO of AUD $1.55 to AUD $2.00 per share represents a discount to Morningstar's $2.10 fair value estimate of between 26% and 5%. Lonsec have announced a valuation of $2.33 per share.  We consider Medibank attractively priced in the bottom half of the price range and roughly fairly valued at the top.

  • ×  Medibank looks attractive because of its strong competitive advantages, the heavily regulated industry and high entry barriers, leading to returns comfortably exceeding the firm's 10% cost of capital.

  • ×  Our positive view is underpinned by solid prospects for long-term earnings growth (averaging 10% per year during the next five years), low capital requirements, high returns on equity (growing to 24% by fiscal 2019), high dividend payouts (target range 70% to 80%) and relatively attractive fully franked dividends (4.3% yield for fiscal 2016 based on our valuation).

  • ×  Government initiatives designed to support private health insurance are the Medicare levy surcharge, the private health insurance rebate and the lifetime heath cover policy. Solid demand for private health insurance and population growth underpin our forecast 3% annual increase in policyholder numbers across the industry, with Medibank expected to lag the average for at least the medium term. 


Here are a handful of useful charts that outline the attractiveness of Medibank for long term investors.






Clients of GEM Capital will receive a complete copy of this research.  If you would like to receive a copy of the complete research paper please either ring (08) 8273 3222 or email This email address is being protected from spambots. You need JavaScript enabled to view it.This email address is being protected from spambots. You need JavaScript enabled to view it.">


You can also obtain a PDF of the prospectus by clicking the following link Download Medibank Prospectus PDF




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

Tuesday, 21 October 2014 19:23

Global Market Outlook - October 2014

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The US Federal Reserve continued to taper its bond purchases during the third quarter of 2014, amid greater-than-anticipated improvement in the US labour market (and despite lingering concerns over stagnant wage growth). Meanwhile, Eurozone inflation slowed further. In response, the ECB has recently announced its intent to increase the size of its balance sheet by around €800bn through two mechanisms. First, it will provide ultra-cheap funding to banks to then on-lend to the private sector and, second, it will purchase private sector securities. As the latter will be financed by money creation, it essentially amounts to small-scale Quantitative Easing.

There has been a massive compression in risk premia across multiple asset classes over the last 18 months. Within equity markets, one manifestation of this has been the underperformance of lower-volatility, high-quality stocks. We consider this a warning sign and believe there is an elevated probability of the risk compression unwinding over the next year or so, as investors focus on normalising US interest rates. As such, we continue to consider the unwinding of Quantitative Easing as the single most important factor that will impact markets and economies over the next few years.

Furthermore, it remains possible that China’s economy could experience a significant slowdown as a combined result of market forces and the government’s continuing efforts to address the structural oversupply inherent within its housing market. The rapid rate of credit expansion experienced by China in recent years, and its role in funding fixed asset investment and property developers, adds further risk to the situation. 

To listen in more detail from Magellan CEO, Hamish Douglas about his view of the world and how his fund is positioned, watch the video below.


This has been extracted from a recent publication from Magellan Financial Group.


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


IntroductionInvestment research globe

The impending end of the US Federal Reserve’s quantitative easing (QE) program and when it will start to raise interest rates are looming large for investors. Very easy global monetary conditions, led by the Fed, have been a constant for the last six years helping the global recovery since the GFC. But with the US economy on the mend the Fed is edging towards returning monetary policy to more “normal” conditions and this was evident in the Fed’s September meeting. After gradually tapering its QE program all year it’s on track to end next month and attention is now shifting to the first interest rate hike. What will this mean for the US and global economy and for investment markets? This note takes a Q&A approach to the main issues.

How did we get here?

It’s worth putting things in context and recalling how we got to this period of extraordinary easy monetary conditions. At its simplest it was just part of the cycle: growth weakened and so monetary conditions were eased. But the GFC related slump was deeper than normal leaving households and businesses far more cautious. So once interest rates hit zero and it was apparent the recovery was still sub-par, the focus shifted to measures to boost the supply of money. This became known as quantitative easing and involved the Fed printing money and using this to buy government bonds and mortgage backed debt. It helped growth by cutting borrowing costs, injecting cash into the economy, forcing investors to take on more risks, and to the extent it drives shares higher, it helped build wealth that helped spending.

Has ultra-easy US money worked?

The short answer is yes. A range of indicators suggest the US economy is now on a sounder footing: bank lending is strengthening; the housing construction recovery is continuing; consumer spending growth is reasonable; business investment looks stronger; business conditions indicators are strong; employment is back above its early 2008 high and unemployment has fallen to 6.1%. In particular, after a contraction in GDP in the March quarter, US growth bounced back strongly in the June quarter and solid growth looks to be continuing in the current quarter.


US payroll employment above 2008 high

Source: Bloomberg, AMP Capital

How will the Fed tighten?

Reflecting the success of extraordinary monetary easing its little wonder the Fed is edging towards starting to return monetary conditions to “normal”. In the past doing this was easy as the Fed would just start raising interest rates. Now it’s more complicated. The first step was the tapering of its QE program. QE3 started at $US85bn a month in bond purchases in 2012 and following the start of tapering in December last year has now been cut to $US15bn a month. It’s now on track to end at the Fed’s late October meeting.

The second will be to actually tighten. This will come in the form of raising interest rates and reversing its QE program (ie unwinding the bonds it holds). Raising interest rates is simple, but unwinding its bond holding is a bit more complicated. At this stage it looks like it will primarily aim to do this by not replacing bonds as they mature.

How long till the first hike & what's "normal"?

For some time the Fed has said that it expects a “considerable time” between the end of QE and the first rate hike. This has been taken to mean around six months or more and so if QE ends in October this means the first hike will occur around the June quarter next year. While the Fed is still retaining the “considerable time” language its clear from Fed Chair Yellen’s comments that the timing of the first rate hike is conditional on how the economy is performing. Our best guess though remains that the first hike will come in the June quarter. While the economy is on the mend, there remain several reasons why the Fed is not in a great hurry:


US labour market slack

Source: Bloomberg, AMP Capital

Reflecting this, the Fed can afford to take its time and when it does start to hike next year the process is likely to be gradual. In the past the “normal” or neutral level for the Fed Funds rate was thought to be around 4.5%, but Fed officials now put it at around 3.75% reflecting a more constrained growth environment due to more cautious attitudes towards debt and slowing labour force growth. So the Fed Funds rate may not rise that much above 3.75% in the upcoming tightening cycle, but it will take several years to get there.

What about the impact on the US economy?

Just remember that the Fed is only edging towards rate hikes because the US economy is stronger and so it can now start to be taken off life support. After the efforts of the last few years the last thing the Fed wants to do is to knock the economy back down again. Historically, it is only when interest rates rise above neutral and above the level of long term bond yields (which are now 2.6%) that the US economy starts to slow. At present we are still a long way from that.

What about the impact on the end of QE?

The more immediate issue is the end of QE next month. A concern for investors is that when QE1 ended in March 2010 and when QE2 ended in June 2011 they were associated with 15 to 20% share market falls. See the next chart.


Fed quantitative easing and US shares

Source: Bloomberg, AMP Capital

However, while the ending of QE3 may add to volatility it’s very different to the abrupt and arbitrary ending of QE1 and QE2. Back then the US economy was much weaker and global confidence was hit by the Eurozone crisis. Now the US economy is on a sounder footing.

What about the impact of rate hikes?

Shares – just as talk of tapering upset shares around the middle of last year (with a 5-10% correction), so too talk and then the initial reality of rising US interest rates could cause a similar upset. However, the historical experience tells us that the start of a monetary tightening cycle is not necessarily bad for shares. The next table shows US shares around past Fed tightening cycles. The initial reaction after three months is mixed with shares up half the time and down half the time. But after 12 and 24 months a positive response dominates. The reason is because in the early phases of a tightening cycle higher interest rates reflect better economic and profit growth. It’s only as rates rise to onerous levels to quell inflation that it becomes a problem. But that’s a fair way off.


US shares after first Fed monetary tightening moves

Source: Thomson Reuters, AMP Capital

It’s also worth noting that the rally in shares over the last five years is not just due to easy money. It has helped, but the rally has been underpinned by record profit levels in the US.

Bonds – the commencement of a monetary tightening cycle in the US is expected to put upwards pressure on US and hence global bond yields in response to uncertainty as to how high rates will ultimately go and as to how quickly the Fed will reduce its bond holdings. A 1994 style bond crash is a risk, but unlikely as the US/global economy is not as strong as back then. What’s more the monetary tightening will not be synchronised with Europe, Japan and China possibly easing further. As such the back up in bond yields is likely to be gradual and the broad environment will remain one of low interest rates and bond yields for some time yet.

US dollar – the combination of anticipated then actual tightening of US monetary policy at a time of easy/easing monetary policy in many other parts of the world will likely put further upwards pressure on the value of the US dollar.

Emerging market assets – tightening US monetary conditions could weigh on some emerging countries that are dependent on foreign capital inflows. It remains a time to be selective when investing in emerging market shares.

What about the impact on Australia?

The gradual move towards US monetary tightening has taken pressure off the $A allowing it to resume its downtrend which is likely to take it down to $US0.80 over the next year or two. This is necessary to deal with Australia’s high cost base and weakening export prices. While the Australian share market could underperform as the $A heads down as foreigners stay away, ultimately it will provide a huge boost as it helps trade exposed sectors become more competitive and boosts the value of foreign sourced earnings. Roughly speaking each 10% fall in the $A adds about 3% to earnings.

Concluding comments

With the US economy on a sounder footing, the Fed is getting closer to a tightening cycle. While this could contribute to short term share market volatility, the tightening is likely to be gradual given the constrained global economic recovery & we are a long way from tight monetary conditions that will seriously threaten the cyclical rally in shares.


Shane Oliver

AMP Chief Economist


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


Wednesday, 10 September 2014 08:18

QV Equities Update - Sept 2014 (podcast)

Written by

Simon Conn (Portfolio Manager, Investors Mutual) talks with Mark Draper (Adviser, GEM Capital) about how the recently listed investment company QV Equities is currently invested.


They also talk about the investment strategy for the listed investment company and how they are dealing with a share market that is at a relatively high point at the moment.


Simon outlines the key criteria for stocks that make the grade to become an investment in QV Equities.


Click on the white arrow contained in the orange circle to play the podcast.





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

Wednesday, 27 August 2014 16:41

Global Economic Outlook - August 2014

Written by

Key pointsInvestment research globe

  • The global economy is still on the mend, but it’s still a two steps forward, one step back affair. Of the major regions the US is doing the best, but Europe is lagging.
  • This means occasional bouts of uncertainty, but it’s not such a bad thing if it keeps central banks supportive.
  • The main implications are: we are still in the sweet spot of the global economic cycle, which is good for growth assets; the lack of global synchronisation means that fundamentals for individual regions, assets and stocks matter; constrained global growth will mean constrained returns; and the big event to watch for is when the Fed starts to hike rates – but it still looks a way off at present.


We are having yet another year where investors started off optimistic about the global economic outlook with talk of synchronised growth only to find that the global growth story remains patchy. In fact, so much so that it’s possible to paint wildly different pictures as to the outlook – some are worried about growth and inflation taking off, whereas others warn of imminent collapse. The truth is likely to remain somewhere in between these extremes. But, in a way, this is not a bad thing as it keeps central banks supportive.
This note looks at the major regions in terms of growth, inflation and interest rates and what it means for investors.

The US – looking good but not booming
After a contraction in the March quarter driven by mostly temporary factors, the US economy rebounded in the June quarter and looks on track for growth of around 3% in the current quarter. The jobs market and business investment are improving and the shale oil boom is providing a long term boost both directly and indirectly via cheap electricity costs for business. However, while the US is looking a lot stronger it’s a long way from booming, let alone overheating, with growth seemingly stuck in a 2-3% range as the housing recovery and consumer spending have slowed a bit of late. 

Source: Bloomberg, AMP Capital

Which brings us to what the Federal Reserve will do. On the one hand US growth has improved enough to allow the Fed to continue “tapering” its quantitative easing program which means it’s on track to end probably in October. On the other hand it’s unclear that conditions are strong enough to warrant interest rate hikes just yet. This is something the Fed is grappling with, but the conclusion seems to be that - with inflation remaining low at just 1.5% on the Fed’s preferred measure, wages/labour cost growth stuck around 2% and broad measures of labour market slack (ie allowing for the unemployed, underemployed and discouraged workers) remaining high - its unlikely to rush into raising rates.

Source: Bloomberg, AMP Capital

Our assessment is that the Fed is gradually inching towards an interest rate hike, but it’s probably not going to occur until sometime in the June quarter next year.

The Eurozone – better but not great
The Eurozone returned to growth about a year ago but it is far from robust and stalled in the June quarter with weakness in Germany, Italy and France. Uncertainty regarding Russian sanctions and Ukraine are not helping. What’s more bank lending growth has remained negative and inflation has fallen to just 0.4% year on year. This has all led to concerns that Europe is sliding into Japanese style stagnation and that the ECB needs to do more. 

Source: Bloomberg, AMP Capital

Our assessment though is that Europe is gradually mending: growth has returned to Spain, Ireland, Portugal and Greece; these countries have all made significant structural reforms to their economies and France and Italy look to be gradually heading down that path; the troubled countries have all seen their bond yields collapse, eg Spain’s 10 year bond yield is now just 2.17%; the ECB announced further stimulus in June, but looks to be ready to launch into quantitative easing involving the purchase of private debt in the next few months; and bank lending should improve once the ECB’s bank stress tests are out of the way in a few months.

Japan – Abenomics on track
Japan’s growth was hit in the June quarter by the pull- forward effect of the April sales tax hike. However, a range of indicators suggest that despite the volatility the Japanese economy has weathered the sales tax hike well with ultra-easy monetary policy and economic reforms providing confidence growth will bounce back from the current quarter.

Source: Bloomberg, AMP Capital

However, given the uncertainty, the Bank of Japan will either have to maintain its very easy monetary conditions or possibly have to ease further.

China running hot and cold
For the last three years now Chinese economic data has been running hot and cold every six months leading to periodic worries about growth. Another slowdown in the Chinese property market is adding to these concerns. 

Source: Bloomberg, AMP Capital

With the Chinese Government repeatedly indicating that there is a floor to growth of around 7%, and supporting this by mini-stimulus measures as they have done this year, our assessment remains that the Chinese economy is on track for growth of around 7.5%. But don’t count on more.

Emerging world
The emerging world more generally is a lot messier than it used to be. Of the major’s, China and Mexico look ok and the election of reform oriented governments in India and Indonesia is positive, but Brazil looks to have lost the plot under the current Government, and Russia already weakened looks to have shot itself in the foot over Ukraine. A lack of structural reforms over the last decade has led to lower growth potential in the emerging world. That said it’s still on track for growth around 4.5% this year and next. 

Global growth – two steps forward, one back 
Bringing this together, global business conditions indicators are consistent with good but not booming growth.

Source: Bloomberg, AMP Capital 

Although global growth is likely to pick up, it's hard to describe global conditions as synchronised and the global economic expansion remains very much a process of two steps forward, one step back. This was clearly evident in the first half of the year with the US and Japan both having negative quarters, China slowing in the first quarter and Europe stalling in the June quarter. And of course geopolitical events continue to wax and wane and the threat from Ebola remains in the background – all of which impart a deflationary impact in terms of their dampening impact on confidence and spending. Against this backdrop it is hard to see the Fed wanting to rock the boat prematurely with talk of interest rate hikes, let alone actual hikes, and the ECB, Bank of Japan and People’s Bank of China are likely to maintain ultra-easy policy or ease further.

Investment implications
There are several implications for investors. First, gradually improving global growth, still benign inflation and easy monetary conditions tell us we are still in the sweet spot of the economic cycle which augurs well for growth assets.

Second, the desynchronised global economic and monetary cycles confirm that the “risk off, risk on” phenomenon of a few years ago where all growth assets move up and down together has faded. This should make it easier for fund managers and investors to benefit from opportunities in individual regions, assets or stocks. Eg we think there is currently good value in Chinese shares, European shares and commodities. The divergence in monetary cycles is also likely to mean upwards pressure on the $US but downwards pressure on the Yen and Euro.

Thirdly, the constrained global growth cycle provides a reminder not to expect double digit gains from growth assets year after year. It will still be a relatively constrained world in terms of sustainable returns. 

Finally, the big thing globally to keep an eye out for will be when the Fed will start to raise interest rates. This, or rather its anticipation, will likely cause a few bumps (just like last year's taper tantrum did), but it's still a fair way off and when it does come its unlikely to spell the end of the cyclical bull market in shares as it will be a long while before monetary conditions actually become tight. 

Dr Shane Oliver
Head of Investment Strategy and Chief Economist
AMP Capital


Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.