Quarter 3 2015 Newsletter
Three months ago the world was gripped with Grexit fever. Markets have an amazingly short term memory and this is now just a blip in the rear-view mirror compared to current China-led economic concerns.
We outlined two key investment risks in our previous mid-year newsletter:
- Fully priced US markets
- Chinese economic slowdown and restructure
The Chinese market asset bubble has now burst (something we discussed in a previous article). The Chinese pullback saw the Australian market lose two years of growth in a matter of weeks. The likelihood of further China led volatility remains high, especially for vulnerable resource stocks as China moves from being a capital investment economy to a service orientated economy. With this change will come lower but more sustainable growth.
Whilst markets continue to react to the Chinese economic adjustment, the next source of uncertainty will come from the US. Budding ornithologists have recently become experts on financial markets with a tremendous amount of discussion centred on 'hawks' & 'doves'. A 'hawk' is a policy maker who is against printing money and more inclined to tighten monetary policy via raising interest rates. In contrast, 'doves' such as Janet Yellen, the current Fed Chief, are more inclined to print money and keep interest rates low.
With US fundamentals improving, curious ornithologists will be keeping one eye on US employment and inflation data. Decreasing unemployment, leading to potential wage inflation and price increases, will provide an early warning that the Fed might undertake more hawkish policies.
As interest rates rise, capital moves out of property and equities into cash and bonds. This may trigger a bearish (downward) correction in US markets... With all the animal metaphors it is little wonder people think financiers are an odd bunch.
Closer to home, the Australian economy continues to muddle through with a less than positive outlook. The IMF has “warned that lower commodity prices may shave up to 1% off economic growth from commodity driven economies”. Canada and Norway (two commodity economies) are barely treading water and if Australia follows suit this could mean a further reduction in growth, down from its current rate of approximately 2%.
With these factors in mind there is even scope for Australian monetary policy to lower interest rates further. With the possibility of lower interest rates in Australia, and higher interest rates in the US, opportunities still exist to take advantage of an appreciating US dollar.
For too long in Australia, monetary policy has been the primary lever in managing economic cycles. The government, via its control of fiscal policy, needs to be more proactive in driving productivity improvements. Government intervention has been requested by both the RBA and the business community. Such requests include:
- A review of Australian taxation, with specifically a lowering of the corporate tax rate. This is something the business community has been for many years calling for. As shareholder income remains taxable at the recipient’s marginal tax rate, lowering the corporate tax rate encourages business’ to reinvest earnings within the company, which ultimately benefits workers. A lower corporate tax rate also makes Australia more attractive for foreign investment;
- The RBA request for long term infrastructure planning. This provides infrastructure developers the confidence to commit considerable resources with the knowledge that there is an infrastructure pipeline to provide a return on invested capital.
With the above economic messages in mind, investment opportunities do exist in the domestic bond market and short term US denominated bond market.
Within equity markets, volatility remains the main concern. However if we cut through the noise and don’t take too much notice of the doom sayers, the lesson is always the same, look for good companies at a fair price with good business fundamentals.
There are some investment themes we believe are worth considering when looking at building an equities portfolio. These themes should lead to consistent growth, although the selection of which individual companies to choose to invest in is always a challenge. These themes include:
- Move to a cashless society. With huge barriers to entry, companies such as AMEX, VISA & Ebay (PayPal) should be long term beneficiaries of the modern cashless economy;
- Longevity of life in western economies. We are living longer and requiring more health care per person than ever before. Health care providers with exposure to this demographic shift should be very well positioned to profit from the significant projected growth of this industry;
- Infrastructure providers. Many infrastructure projects are quite long term in nature and provide good long term returns which are not affected by short term market volatility.
Although the US housing market is in recovery, we remain concerned about the Australian property sector, particularly Sydney. These concerns are shared by almost all financial commentators. Sydney’s auction clearance rate has now fallen from 90% to 69.6% which could signal the beginning of a slowdown in this sector. Treasury Secretary John Fraser and RBA chief Glenn Stevens have called Sydney’s market a “bubble” and “crazy” respectively. Banks are now tightening their lending criteria for many Sydney suburbs. The graph below summarises the last 12 months of housing sector activity across state capitals.
The Latest from Snowgum
In the Media
Over the last few months, Snowgum FS has been featured a number of times in the publication Dynamic Business discussing a variety of topics from managing key person risk in your company to the importance of your business partners personal financial planning.
Snowgum Financial Services has redesigned its referral reward system, providing even greater opportunity for you to benefit from introducing Snowgum to friends, colleagues and businesses to help with their financial needs.
We are in the final stages of rolling out a client portal that can provide you with full transparency of your investment holdings. We expect to have this fully operational prior to the end of October and are excited to put together a demonstration of how this can add value to you. Please do not hesitate to contact us if you would like a demonstration of this impressive and very useful service.
We continue to build upon our client resources and information for individuals and small businesses.
Dave Vickers, dentist extraordinaire, is set to become a co-owner at Northbridge Dentists. For those without a regular dentist, Dave’s gentle hands will be in operation at 1 / 173 Sailors Bay Rd, Northbridge 2063, ph 99587530
The ‘naturally brave’ Ice Tea providers NEXBA, launched in 2010 by mates Troy and Drew, are set to add Woolworths to their range of distributors after completing a roll out of product across Coles. This is an incredible achievement for the young duo. Keep an eye out for the new NEXBA Ice Tea range in 500ml bottles hitting Woolworths shelves in the coming months. NEXBA also picked up the Telstra micro business of the year award in August 2015.
Any advice contained on this newsletter is of a general nature only and does not take into account your circumstances or needs. You must decide if this information is suitable to your personal situation or seek advice. Prior to investing in any particular product, you should read the Product Disclosure Statement.
Snowgum Financial Services Pty Ltd (ACN 603 703 859 is a Corporate Authorised Representative (Corporate ASIC AR number 001001581 ) of Peter Vickers Insurance Brokers Pty Ltd (Australian Financial Services Licensee (AFSL) No 229302 & Credit Licensee (ACL) No 229302