Market Comments *
The June quarter held out a lot of promise at 1 April 2011, but delivered little positive news or results across the 91 day period – peaking at 5,065 for All Ords on 11th April 2011.
We draw your attention to the primary driver (75% responsible) for the last quarter’s return, the Greek Austerity Package.
Australia’s currency has run very well, and is trading very strongly against the US dollar and much of the world.
Ironically, it is both the Swiss Franc (natural currency fled to during times of risk) and the Aussie dollar (natural currency to invest in when risk is not a great concern) that topped global currencies for 2011 FY.
The Aussie dollar is unlikely to have the same stand-out performance in 2012 FY, but is unlikely to be weak either—so currency frictions are likely to reduce in magnitude, but not be eliminated altogether.
Aiming to achieve a balanced allocation focusing on diversification, sustainable business models, and quality businesses therein are all primary drivers for achieving long term growth, given volatility around short term results.
The Year Ahead – A Conservative View
While the upside prospect for equities (coming soon….) still remains a significant enticer, the following impediments are what is driving lower allocations to equities, and in turn a lowly market price level.
- Europe – credit markets are pricing in a Greek Default. What to next? The domino effect threat to Global Banks, and first other PIIGS nations is the greatest concern. The Armageddon scenario of a Euro collapse (and potentially global financial collapse mark 2) co-exists with a Greek default.
- China – will growth rates fall away, and in turn switch off the largest growth engine of the global economy, which will in turn kill sentiment, and have a crippling effect on supplier nations.
- US Debt, US unemployment, and US growth. There has not been the level of tangible improvements here anticipated.
- AUD:USD currency frictions.
- Relatively attractive cash rate of up to 6.50% that is available (but likely to decline, given the RBA’s lost its raising bias).
- Concern over the value of Australian property
- Reduced risk appetite for equities given current concerns, volatility, and the looming Greek issue.
Key questions to consider in 2012:
Are we already in the midst of the next bear market?
What event will serve to restore investor confidence given the overhang of unresolved global issues?
The Year Ahead – Are there Green Shoots Around the Corner?
No-one is looking to hard for signs of market recovery.
The current tune the market is whistling is European Sovereign Debt, and other sleeper issues that have shaken the market for last 18 months.
Concern exists around short term volatility, downside risk, and lack of investor appetite for risk.
Let's focus on Green Shoots now, before others start to change their focus (potentially moving in our direction);
- Nike helped the market by shooting the lights out with Q4 earnings of $1.24 a share versus expectations of $1.17, triggering a 10.5% jump in its stock price. Nike is seen as a global consumer bell-weather. (28 June 2011)
- BASEL changes – the 8.50% capital requirement for 2017 is below prior consensus 9.00%.
- Lack of confessions by Australian listed companies to date – suggests that earnings expectations are slightly underdone, with room for small amount of positive surprise come August.
- Balance Sheet Strength (dividends, buybacks, takeovers in the offing) – we are still waiting to see the ‘fiscal discipline dividend’ to Australian businesses that has yet to be paid for their relative conservatism both pre-GFC and during.
- Frictions in currency and their impact on equities may be soon to die down – for all those who do not view the AUD”USD as trading above $1.10.
- Interest rates next move may be down – just prior to the RBA’s decision on 5th July 2011 credit markets saw a 0% chance of a rate rise, contrary to prior months.
- End of tax selling arrives in July.
- Potential for an increased level of confidence in various support devices for the market (Bernake Put, or valuation rally should equity prices decline 5-10% more)
- Potential for new Australian government stimulus to effectively rebound growth to avert a recession – be it in response to poor June quarter GDP numbers, or Carbon Tax compensation related, or other vote-buying in the last 2 year’s of this parliament.
- Prospect of less regulatory interference within two years (given resolution of the above).
The above, all present a number of strong non stock-specific catalysts for share price ascent, when coupled with stock-specific factors and selective well-timed buying, the case for equities in 2012FY is far brighter than the current gloom would suggest.
Exciting News—from Monday 3 October 2011 Hill Capital will be broadcasting weekly webinars. These webinars will be 15 minutes in duration and will be available online.
Matthew will be the host and the idea is that the webinar will provide you with a frame of reference for opportunities and risks that are present in the market.
Shortly we will be commencing our June quarter review meetings. If you do not have a meeting already scheduled you will be receiving a phone call from Elizabeth sometime over the next week to schedule your meeting with Kieran & Matthew.
In other news Praemium has recently released an Iphone/Ipad app. This allows you to access your investment portfolio anywhere and anytime. Send an email to:
and we will send you instructions on how to access the Praemium V-Wrap Investor App.
*All comments are those of the author, and should not be construed as financial advice. You should contact one of our qualified financial advisers prior to acting on any information contained on this website.