Thursday, 02 May 2013 12:49

Term Deposits - the Great Rotation

There has been much discussion that the rally in the Australian share market has been as a result of a switch from investors with Term Deposits seeking a higher rate of income.  The chart below would seem to dispell that notion as it shows continued growth of term deposits in Australia to record levels.

Speculation continues of further interest rate cuts in Australia which would reduce term deposit rates even further.  Bill Evans (Westpac Chief Economist) is of the view that interest rates will be cut to 2% by 2014.

Term Deposit Growth chart

So it seems that there has not been a rotation out of term deposits into shares just yet.

This is further evidenced by the next chart which shows equity ownership by Australian households at 20 year lows.

Equity holdings at 20 year lows

Share prices have risen dramatically from low levels, but it would seem not as a result of a mass movement of funds from term deposits.

One can only imagine what may happen if the rotation from term deposits back into shares actually takes place.

 

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

 

 

 

 

 

Published in Investment Advice

Anton Tagliaferro (CEO Investors Mutual) talks about the Australian Share market in April 2013.

He discusses the stocks that he has been taking profit from and the stocks he is buying at the moment.

Anton's fund was one of the best performing Australian Share funds in 2012.

 

https://www.youtube.com/watch?v=aAf4ZHhl2qc&feature=player_embedded

Published in Investment Advice

Should investors be concerned that the Australian share market has run too far, too fast?

Mark Draper (GEM Capital Adviser) talks with Paul Xiradis (CEO Ausbil) to answer this question.

 

http://www.youtube.com/watch?v=tP9C0truzng

 

Paul believes that the share market response is in reaction to the belief that the worst from the Euro Debt Crisis is now behind us (from a financial market perspective).

Published in Investment Advice

There are many ways of measuring value in the share market, but today we will concentrate on two.

1. Price Earnings Ratio

The Price Earnings ratio (PE) measures the share price divided by the earnings of a company.  If Company A had a share price of $1-00 and had earnings per share of $0-10, then the PE multiple would be 10.  If the share price however doubled to $2-00 while the earnings remained the same, then the PE multiple would be 20.

There is no hard and fast rule about PE ratios, but clearly the higher the PE ratio, the more expensive the company.  Of course a company that is growing its earnings quickly may look expensive today but as earnings grow the PE multiple reduces assuming the share price remains unchanged.  For example Company A with a share price of $1-00 and earnings of $0-10 per share, doubles its earnings to $0-20 per share now has a PE multiple of 5.

Below is  a chart showing the forecast PE multiples for the Australian share market as at today and compares the ratio historically.

Forward PE ratios

You can see that the forecast PE ratios are at the low end of where they have been since the 1980's, which implies that based on this measure, the Australian share market is not expensive.

2. Dividend Yield

The dividend yield is simply a percentage of income that is paid to investors from a share in a company.  It is calculated by dividing the dividend paid by the share price x 100.  For example Telstra pays a 28 cent dividend and assuming a share price of $4.50 represents a dividend yield of 6.22% (0.28/4.50 X 100).  When the Telstra share price was around $3 it was still paying a dividend of 28 cents per share, which equated to a dividend yield of 9.33%.  This does not include the benefit of imputation which is discussed elsewhere.  A simple way of looking initially at dividend yield is that the higher the yield the better the value.

Investors need to determine whether a dividend is sustainable by looking at what percentage of company profits is paid out as a dividend as well as the sustainability of profit levels.  For example a company that pays out 90% of its profits as a dividend may not be able to sustain its dividend, particularly if profit falls, versus a company paying out 70% of its profits as a dividend.

Dividend alone is not a determinant of value as many companies reinvest heavily back into their business rather than pay higher dividends to investors.  That said when considered across an entire market, dividend yield provides some clue as to whether a market is cheap or expensive (ie a higher dividend yield implies the share price is cheaper, while a lower dividend yield across a market implies share prices are more expensive)

Here is a chart showing the dividend yield of the Australian share market as well as its history.

Dividend Yields

Australian dividend yields are materially higher than their global counterparts (measured as MSCI World in red).  You would also notice that Australian dividend yields are relatively high compared to where they have been over the past 25 years, which implies that the Australian share market is relatively inexpensive.

We caution investors in attempting to value shares using only one method as there are many other aspects that should be considered.  However on two of the more commonly used valuation methods, the Australian share market appears attractively priced for investors.

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

Published in Shares

We recently celebrated the 5th anniversary of the high point for the Australian share market that occurred in November 2007.  The value of the market remains 30-40% below this peak.

History tends to repeat itself so lets compare the last 5 years to other large market downturns in history.

The chart below shows the value of the Australian share market many years after a large drop such as the 2008 drop.  The blue line is the journey investors have witnessed over the last 5 years and plots that journey against other times in history when the market fell heavily.

The question on most investors lips is when will the market recover to new highs?

The chart above shows that it took around 4 years for the market to reach new highs after the 1980 downturn (purple line) and around 5 years after the great 1929 crash (green line). This makes the current downturn one of the most severe in history.

The 1973 and 1987 downturns took 6 - 7 years to recover the previous high.  From the current level the Australian share market would need to rise by around 50% to move back to the previous high.

Bear markets do end and can move quickly when they do.

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.


Published in Investment Advice
Thursday, 23 August 2012 10:06

Don't trip up when Chasing Income Yield

With official interest rates hovering at 3.5% and residential property income yields typically running at between 4-5%, investors are clamouring for investments that pay a higher rate of income.

Is it as simple as running a ruler over the dividend yield column in the Financial Review to select your investments?

The table below highlights the top 20 dividend payers from the Australian share markets based on forecast dividend payments for the current financial year.

What are some of the questions investors should ask themselves when considering high income investments?

What is the likely profit growth trend that can support future dividends?

What proportion of company profits are being paid out as dividends?  A high proportion doesn't leave the company much room to maintain dividends if profit drops.

Is the dividend being artificially inflated by asset sales, debt or financial engineering?

What is the outlook for the sector in which the company operates within?

These points are best illustrated comparing the highest ranking dividend payer in the chart above, Metcash with its larger rival Woolworths.  Woolworths dividend is not as high as Metcash but the share price chart below shows that Woolworths has been a better performing investment despite paying a slightly lower dividend.  (Woolworths is the blue line and Metcash the red line)

Woolworths vs Metcash Share Price Performance

There is no doubt there are some juicy dividends to be enjoyed by investors in the current market, but care must be taken to avoid what is referred to as a value trap.  (where an investment appears good value - but performs as a dog)  We encourage investors to look beyond the headline dividend yield when considering an investment.

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

Published in Investment Advice