While the 2019 financial year got off to a reasonably good start for the Australian share market, domestic political events and a lacklustre company reporting season have tempered returns over the past few weeks. Increased media attention focussed on the weakening housing market has also weighed on local sentiment. Internationally however developed country share markets have continued to post gains, as the US S&P500 continues its march upwards. Negative global political headlines masking what are actually quite strong conditions for the global economy, namely cheap interest rates and low inflation. This of course assumes Trump’s tariff’s don’t derail things. Australian dollar weakness has also helped the returns on the international share component of Libero’s multi-asset discretionary portfolios, given we recently reduced the level of currency hedging to zero at the last rebalance (meaning that a falling AUD is good for returns on international stocks). Fixed Income (Bonds) have largely remained steady over recent months after declines early in the 2018 calendar year.
Australian Company Reporting Season
The Aug 2018 Reporting Season was a little disappointing compared to market expectations, with a balance of “misses” vs “beats”. This being the market jargon used to describe actual reported company earnings vs the consensus of market analyst expectations going into reporting season. Overall there were with 28 upgrades and 53 downgrades. Domestic Cyclical and Defensive stocks (those that tend to pay high dividends) were particularly disappointing, with a strong tilt to downgrades. Financials were also unsurprisingly weak, given the domestic macro backdrop of weaker house prices, slowing credit growth, and the Royal Commission. However growth stocks (those in industries/sectors that are expanding and using their capital to re-invest rather than pay out dividends) had a few bright spots, as did the Resources sector. Also the ratio of “misses vs beats” is more likely attributable to analyst over-optimism, rather than any major underlying slowdown in the domestic economy.
The graph below summarises the reporting season results across the different company sectors:
House prices are an area of potential concern for Aussie investors. Libero expects more of a gradual weakening/stagnation, rather than major falls, given reasonable population growth and a lack of supply in urban areas in particular. However weakening sentiment, low rental yields and higher bank regulation and funding costs are likely to continue to weigh on prices. We think the chance of a fast turnaround is unlikely, at least in the short to mid-term, with some further weakness the most likely scenario.
As a result, Libero’s multi-asset discretionary portfolios have been positioned to help limit (as much as possible) the impact from weaker house prices. Steps include being underweight financials stocks (eg Banks), being internationally diversified, and also having no currency hedging in place. Any major weakening in house prices is likely to result in further weakness to the AUD, which would be a net benefit to the international component of Libero’s MDA portfolios.
If you have any queries, please do not hesitate to call.
Glen Holder, BCom, DipFP, MAppFin, CA
Director – Investment Management