June 2011 Review Comments
Written by Tony Gray   
Thursday, 16 June 2011 15:28

Portfolio Valuation & Comment

This letter a little later than usual as there has been a great deal of uncertainty and much like the market I have been wary and at the same time looking for opportunities.

The sharemarket, including international shares and listed property, is trading at historically cheap levels – or at least what we have come to consider cheap over the past 15 years or so.  Price earnings multiples of ~12 times sit under the average of ~14 times but are still well above a multiple of 8 times – last seen in the early 1980’s when that secular bear market ended.

So one question is if the market is cyclically cheap at the moment, or in a secular down-trend to becoming cheaper?  In the first instance we are at or close to buy levels and in the latter less share exposure is desirable.

There are certainly plenty of issues to be concerned about – with US and European deficit and debt issues and an apparent investment bubble in China and high inflation in emerging markets.  Then there is a renewed focus on how expensive the housing sector is in Australia, with weakness in approvals, finance and construction.  Negative sentiment is responsible for local sharemarket weakness, but if a trigger point is reached overseas, then real economic impacts may flow and force shares lower – through lower valuations and weaker earnings.

On the positive side, there have been some improvements in the Australian economy.  Australians are saving 11% of disposable income at the rate of ~$380 million per day.  Whilst this is partly offset by the growth in federal government debt of ~$136 million per day (~$50 billion per annum) this is still a rate that over a period of 3 to 4 years will drastically improve Australia’s balance sheet.  Increased saving and reduced spending is impacting the economy, but it as an adjustment that had to happen and is a long-term positive.

Looking at individual stocks, it is not often we see 5% to 7% fully franked yields widely available (~7% to 10% gross yields) and balance sheets are in stronger shape than during the global financial crisis.

Whilst the banks are still reliant on wholesale money markets for a significant proportion of funding, it has fallen from some 50% in 2008 to around 40% presently.  The lack of credit growth coupled with a higher savings rate should see the proportion of overseas bank funding continue to fall.  All this makes the banks better placed to withstand weakness in the housing sector – as long as we do not see a major bear market in housing.

On balance, we have not been aggressively buying growth assets on weakness and maintain a moderately conservative stance.  On a 2 year trading range, the market (All ordinaries Index) is only sitting at the mid-point.  We could easily see falls or gains of 400 points or ~8% in the short-term.


A move to Australian bonds may be considered.  Generally, bonds outperform when interest rates are falling and underperform when interest rates are rising.  Whilst all the focus has been on the Reserve Bank’s lifting of the official cash rate since late 2009, it is our belief that the bank may go too far and push Australia into recession, or that an overseas event will negatively impact our economy.  In both instances the immediate reaction will be to slash interest rates – benefitting bonds.

Although we prefer direct investment, we have identified two bond fund exposures to consider:

Aberdeen Inflation Linked Bond Fund; and

Aberdeen has an allocation to government, semi-government and corporate bonds (in that order), with some 83% in either cash, AA or AAA rated securities.  The income return will be lower, as part of the return is in the form of inflation hedging of the underlying bond maturity value.

Australian Unity Vianova Strategic Fixed Interest Fund.

The AU Vianova Fund has a good track record and closely tracks the returns of the UBS Composite Bond Index.  The manager invests in a mixture of government, bank and corporate debt.

As always, please contact me if you have any investment or planning queries – especially if there are any end of financial year queries.

Best wishes,

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

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


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