May 2015 Review & Comments
Written by Tony Gray   
Tuesday, 16 June 2015 10:20

There has certainly been plenty of news flow and corporate activity in the past month.

The takeover of Toll Holdings was approved and payment has occurred in the current financial year (which may or may not have tax implications).  A major takeover such as has occurred for Toll can be associated with major market turning points – another indicator is the quality (low) and quantity (high) of new floats (IPOs).

Dexus Property Group has a security purchase plan operating to raise capital and reduce gearing – although they may well spend this on an acquisition.

National Australia Bank announced a $5.5 billion rights issue – to support the split of UK banking assets later in the year, but also to boost Australian shareholder capital by $1.5 billion.  National Bank did at least report some profit growth for the first half.

Commonwealth Bank followed Westpac’s half-year position – with 3rd quarter earnings for CBA flat due to a small rise in bad and doubtful debt provisions.  Given 65% of last year’s profit growth for the banks came from falling provisions, it’s not difficult to see lower earnings if provisions merely recover to what were very low provision levels 15 months ago.  The loan in arrears figures are also rising – another change of trend signal perhaps?

The Basel Committee (international bank regulators) are meeting and one focus is on internal risk weightings for the banks – which ties in with the Murray enquiry recommendation last year.  APRA have indicated that within 2 weeks of the Basel Committee report they will be announcing decisions on bank capital levels.  I have made my view quite clear – our big four banks are massively over-leveraged to housing and our household debt to income is the highest in the world – which equals major risk if/when something goes wrong.  Notice my caveat ‘if/when’ – that’s the rub, nobody knows.

What is clear is that the regulators have been knocking on the doors of the big banks and making it known they need to tighten lending standards for investor housing loans.

Since our May letter, bond yields in the US and Australian have see-sawed but are higher -  just last night we saw a 15 basis point (0.15%) rise in Commonwealth 10 year bond yields.  Still not confirmed, but my feeling is that the interest rate cycle has turned.

At the risk of repeating myself (no surprise to you I’m sure), here is my call on markets:


At risk – especially banks, financials and property trusts.  Generally lower than normal allocations at this time.  Smaller companies, which have performed well, are now relatively expensive.


The US has had a massive bull run over the past 7 years – and yet corporate earnings are no longer rising and US interest rates hit their lows in July 2012.  China has had a very sharp upward move – which have some calling that market a bubble – and yet the move has really only recovered the 5 year bear market in shares running until April 2014.

We agree with the consensus view that there is more downside for the $A and generally adding to non-US international share exposure.

Fixed Interest

We have seen a few ‘specials’ emerge in recent months – so in fact we have been able to get better deposit rates than existed before the RBA interest rate cuts this year – which is a bit odd but suggests to me that wholesale funding costs for the banks (imported money) may be rising?

Definitely avoid bonds of all types (with the proviso that this is impossible for a fund of fund approach – relevant to a small minority of clients).  What is nice to see is an increasing range of bond choices listed on the market (e.g. baskets of Commonwealth Government bonds, baskets of top 50 Australian corporate bonds).  The time is not right, but at a different point in the cycle there will be some reasonable fixed interest choices to complement deposits.

Apart from shorter dated (i.e. 2016 expiry) bank notes/hybrids, steer clear of any offers from the banks.  The return is not good enough to compensate for what might become an equity style risk/loss.  My prediction is that this will be the next source of adviser bashing when things go wrong down the track (even if the majority of investors act directly on the regular offers from the banks).  There’s a reason the institutions hold very little of these notes…


I apologise now if I have not been as timely in replying to queries, calls, emails – but for whatever reason we have been absolutely inundated this season with planning changes, regulatory changes and also corporate/market changes.  It does not help that I am not available from the 5th to the 12th of June (inclusive).

For the balance of the month our focus is on defensive portfolio action and ensuring the necessary planning steps have occurred.  This will then shift to researching (hunting) for new growth linked investment opportunities.  In the meantime, holding a higher than normal at-call reserve is a prudent course of action.

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 Tuesday, 16 June 2015 10:33

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