November 2012 Review Comments
Written by Tony Gray   
Wednesday, 14 November 2012 09:33

Portfolio Valuation & Comment

Following the US election and as the AGM season continues, it does seem we are entering a ‘risk-off’ period.  If following previous patterns this may well represent a short-term opportunity to top-up growth assets for portfolios still sitting below neutral allocations.

Term deposit rates remain low and bond markets are pricing in additional cuts into 2013.  We believe this will see continued interest in shares and property as investors chase yield even without any growth in earnings or dividends across the broad sharemarket.

The high Australian dollar and some pull-back in international share prices represents a continued opportunity to add international shares to portfolios – the area that is still generally underweight in most portfolios.  This has historically been due to (1) lower returns as the $A has risen, and (2) unreliable income payments – especially by comparison with local shares and deposits.

The $A does seem to have fallen out of the upward trend (now moving sideways) and lower international share prices and lower local interest rates have reduced the income disadvantage.  We generally advocate continued regular addition of international assets to portfolios to build exposure at this time – although with a reduced emphasis for income focused portfolios.

I recall the very strong outperformance of international sharemarkets in the mid to late 1990’s – as markets rose faster than Australia and as the $A fell – producing 35%+ per annum compounding returns.  With term deposit rates now below 5%, the total potential return from an international exposure suggests a higher allocation will not be too detrimental to portfolio income and may pay off strongly when international economies and markets recover and funds flow out of Australia.

There are clear improvements occurring in the United States, with the banking system recapitalised and individual and corporate debt levels falling.  The deficit and debt remains large at the government level but as spending cuts and tax rises take hold the deficit should close sharply – even if this slows or temporarily halts the recovery.  The key message is that the US is addressing its problems.  Further, house prices are now rising as is building activity –with strong multiplier benefits through the economy.

In Europe there has been strong progress in cutting deficits in Greece and Italy, although Spain still needs to take plenty of action.  The banking system remains highly geared but authorities recognise this and are flooding the system with liquidity.

Exports from China are on the rise again and I am now more inclined to include a stock such as BHP Billiton in portfolios, although I do hold out hope of a short-term sell-off to ~$32 per share to lift the grossed up dividend yield to 5% per annum.

SCA Property Group

As noted last month, Woolworths are distributing 69 existing supermarkets or shopping centres via a new trust to shareholders on a 1 unit 5 share basis.

There has not been detail released on the turnover rent clauses in the leases, but our understanding is that as the centres are less than two years old, then it will be 5 to 6 years before any rent increase due to turnover might be expected.

This means the base rent from the supermarkets may well not rise for the next 5 years and then climb by only the base amount of 5%.  The importance of this is that while the short-term income yield may be attractive, the property trust units deserve to trade at a discount as the growth in income will likely be lower.

The initial income yield may be attractive - it will range between 6.9% and 8.3% depending on the issue price (between $1.26 and $1.50).  Unfortunately you cannot set a price limit when applying for the units – the pricing is set by institutions when they participate in a book-build process.

In summary, applying for additional units may be considered on a short-term investment view - as we would exit this asset on any move above the current asset backing of $1.58 per unit. A product disclosure statement and application is available at  We are happy to arrange the application if you wish to participate (email or phone me).  Woolworths shareholders have a priority entitlement, although a scale-back may apply.  Applications close on the 20th of November.

Please contact me with any queries in relation to your portfolio, markets or planning.

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.


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