March 2015 Review & Comments
Written by Tony Gray   
Wednesday, 08 April 2015 10:47

Portfolio values have continued to rise, with all growth asset classes adding value and international returns boosted by the weaker $A.  Income returns for portfolios are another matter though – with Australian interest rates (official cash rate or bond yields) at or close to all-time lows.  This is reflected in continuing falls in term deposit rates.

Put simply, I am nervous - as big investment price increases are often followed by a period of consolidation or falls.  Some sectors have clearly moved above ‘normal’ valuations mainly since the income looks attractive relative to fixed interest – not due to rising profitability.  The big unknown is when will interest rates normalise and how will this impact on asset prices?

Data from the United States is mixed – economic growth appears to be slowing, although jobs data is positive.  If economic growth in the US does lift, then interest rates will begin rising – with flow-on effects globally.  If instead the US economy limps along at below inflation rates of growth, then interest rates may stay low.

In Australia, the Reserve Bank have pretty much done all they can to talk down the $A and try to stimulate the economy through interest rate cuts.  The sad reality is that the lack of any positive economic reform for the last 8 to 10 years has caught up with the country (in fact we have had negative reform – which is a nonsense I realise).  Wage growth is at the lowest level in 17 years and gross debt to income levels for consumers has expanded to all-time highs and sits amongst the highest in the world (something that seems to be ignored when any discussion of government debt levels is discussed).

Cash & Fixed Interest

Avoid the temptation to put funds into longer dated hybrids;

Continue to hold some funds in deposits, despite the low income return, for the certainty of capital; and

The income return from bonds is very low – providing hardly any buffer against the negative impact on capital values of (future) interest rate increases.

Listed Property (A-Reits)

Property trusts are trading well above asset backing.  Further, asset backing has been boosted through ultra-low interest rate settings.  This will not end pleasantly but for the present the trend for prices remains positive as investors continue to pay up for income.

On the positive side, gearing levels are relatively conservative – so no GFC style impact on the sector will occur.  That’s not to say that there could not be decent falls in unit prices and my expectation is that we will need to sell down this asset class during 2015.

International Shares

I have noted before my concern about the very high valuation of US stocks relative to earnings.  This is boosted by the high $US/weak $A.  It would be quite easy for a modest pull-back in the US stockmarket and a weaker $US to impact the local value of holdings by 10% to 15%.

We prefer active funds (listed or unlisted) that are not benchmarked to the world index, are underweight the US and have the ability to avoid certain sectors or large companies and move some funds to cash.

Holding international shares is an important part of portfolios for the diversification benefit – given local economic imbalances.

Australian Shares

We remain cautious about the major banks – they are highly geared towards residential property and not well positioned if the country enters recession.  For the present income yields remain attractive and they are managing to squeeze out profit growth.  We expect at some point that lightening allocations will be prudent.

Energy stocks are a higher risk/return proposition – the more likely (return) scenario is that oil prices recover later in the year and into 2016 as shale production growth falters – but with a cap as new production can be brought on-line quite quickly if prices rise too much.  The risk is that if prices stay low, or fall even further, then we may see some major share price falls due to the inability of companies to refinance debt.

Mining companies remain in deep trouble except for the very low cost producers.  Prices for BHP Billiton and Rio Tinto need to be lower in light of continued falls in the iron ore price, but we are interested as these stocks can generate cash-flow and pay worthwhile dividends and are not held in most portfolios – or represent quite small allocations.  Service companies to the sector can expect more pain.

Utilities/Infrastructure assets are at risk – through future interest rate increases, but more imminently the risk of regulators cutting the allowable return due to the lower cost of money today (e.g. lower current interest rates saw the Australian Energy Regulator cut power prices for producers in NSW recently).

We continue to find value here and there with small to mid-cap companies and they also offer major diversification benefits.  Decent balance sheets, businesses, cash-flow and dividends with tax credits are available – plus international revenue in some cases.


Please contact me to talk through your portfolio when convenient.  We are steadily updating investment strategies and working through planning steps from now to June. 

 Best wishes


A.W. (Tony) Gray BCom, LLB, Dip FP, GDipAppFin, CFP, FFin

Principal, TG Financial

Please treat the above comments as General Advice or general information, with no action to occur until we have considered with reference to your financial position, needs and goals.

Last Updated on Monday, 27 April 2015 10:53

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