There is little doubt that Australia's property market, particularly in the eastern states is at an extreme point.  Whether this corrects sharply, or over an extended period of time remains to be seen.

What is clear though is the elevated level of Australian property prices.  The table below featured in a recent edition of the Economist and shows the level of over-valuation relative to both rents and also relative to income.  On either methodology, Australia's property market appears expensive and investors exposed to the property cycle either directly or by owning shares in building companies or property developers would be wise to exercise caution.

Wednesday, 30 September 2015 10:49

A Tale of Two Chinas

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Nike surprised the market last week with a 30% increase in Chinese sales. The resulting 8.6% weekly share price rise took the gain for 2015 so far to 30.0%. The Nike market performance (shown in yellow in chart below) has been the mirror image of the Caterpillar outcome (shown in blue). Last week, the Caterpillar share price fell another 9.6% to bring to 29.0% the fall during 2015.

The performance differential signals that the long-awaited pay-off for companies positioned to take advantage of the growth of Chinese consumption is becoming meaningful. The maturation of the Chinese economy will increasingly undermine macro-themed generalisations about Chinese exposure.

Forecasting GDP movements, which may have contributed to investment success in the past, will have lost some potency as strategic business positioning becomes a more important determinant of investment outcomes.

(Sourced from EIM Capital Managers)

Monday, 31 August 2015 08:05

Why have the banks corrected recently?

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Banks have been top performers before correcting

The banks represent a large portion of Australia’s share market. The ’big four’ banks have been top global performers (in local currency terms) and a very large driver of our stock market rally particularly since the Euro-crisis days of 2012. All four major banks have outperformed the index. For the past three years rates have been falling and are now at all-time lows, so the banks were able to grow their mortgage books at the same time as problem loans dissipated due in part to these lower rates. As a result, the profits of the ’big four’ have doubled from 2008 levels. This has led to a sustained, steady rise in stock prices, bank profits and a growing stream of dividends.

Since their recent reporting season, all our major banks have run into a volatile patch with the sector giving back much of its year-to-date gains. The market has been underwhelmed by the financial results delivered by the banks in May and now in August. With all of the banks increasing their capital by issuing shares the dilution could signal the end of their record profits and dividends.

Why have they given back gains?

Many of the drivers of that growth in profitability and earnings are now slowing and this will lead to some contraction in valuations.

One driver has been cost reduction. Banks have kept a keen eye on costs over this period by capping the growth in employees and implementing productivity and cost-out initiatives. This has led to what the banks call ’positive jaws’, which basically means an increase in profit margins. But cost pressures are re-asserting themselves, meaning this area of margin expansion may be more difficult to achieve going forward.

Another big driver of profits has been the release of balance sheet provisions for bad and doubtful debts. These are reserves the banks hold against loans that are in arrears or at risk of impairment. As interest rates plummeted to all-time lows, these problem loans started to improve to such an extent that the banks are obliged by accounting standards to release those reserves to profits. But with the provisioning for these loans now below pre-GFC levels, they represent a one-off profit driver which may reverse if the cycle weakens. So while profits should still grow this year, some of the factors that were driving these profits are starting to run their course. In the recent reports and updates in August we have seen some slight tick up in provisions, which implies that this trend is unlikely to contribute to profits going forward and may impair growth if the economy softens.

Bank shares have given back some of their large gains

Source: AMP Capital and Bloomberg

Final thoughts

While profits are at all-time highs, earnings growth is slowing and with high starting valuations the banks have come under pressure. Together with industry regulation to increase capital and reduce lending within the investment mortgage market, a more subdued outlook for bank profits is expected along with more challenging times ahead for shareholders as returns on equity moderate.

As banks make up a large part of the Australian share index, most investors will hold these stocks. While banks have recently given back some of their gains made over the past year, they still provide attractive dividends which are an important feature in a yield-starved world.

Wednesday, 26 August 2015 06:17

The rise of middle class in Asia

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Investors should pay heed to changing demographic trends as a clue for future potential growth opportunities.   There would seem no greater demographic shift taking place right now, than the rising of the Asian middle class.  The chart below (sourced from the Financial Review) shows the growth in Asian middle class between now and 2030.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investors should ask themselves what changes take place in a person's life as they earn more and build wealth?  How does their diet change?  Once basic needs such as food and shelter are provided for, what do people with more disposable income spend money on? 

We have sourced some interesting statistics from a presentation we hosted with Platinum Asset Management that highlight some interesting spending habits taking place in China in 2014.

 

1. 32 million passengers flying per month

2. 640 million internet users

3. 25 million motor vehicles sold

4. $5bn in box office revenue at the movies

5. 14bn e-commerce parcels delivered

 

When looking at these numbers from a place like Australia with a population of around 23 million, it is difficult to get your ahead around the sheer size of the opportunity at hand.

There are large demographic shifts taking place in middle class in Asia - how is your investment strategy positioned to profit from this?

 

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

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

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

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

The table below refers to the US share market.

 

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


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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

China’s Share Market, Dangers Signs or Opportunity?

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

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

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

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

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

Andrew Clifford: Yeah, thank you.

Monday, 24 August 2015 19:29

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

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

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

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

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

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

Mark Draper: Right.

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

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

Andrew Clifford: Thank you.

Friday, 21 August 2015 10:05

$AUD - Lower for longer

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

 

Following the video is a transcript of the conversation.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

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

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

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

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

Andrew Clifford: Yeah, thank you.

 

 

Tuesday, 28 July 2015 23:00

Understanding the Chinese Sharemarket in Charts

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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