Market Commentary

by Chris Limberg on Jun 15, 2011

Over the past year your portfolio has been changed to have exposure to investments which we believe will assist with recovery of value over the next few years.

The June quarter has seen much of the hard work eroded as a consequence of the continued volatility and debt issues from Europe and uncertainty due to the Federal Government rushing to lead the world with the introduction of the Carbon tax.

The Gillard Government was not successful with the implementation of a mining resource tax, but is using the carbon tax as a back door approach to fill the black hole in their budget.

So why is the Australian share market underperforming?

“It is the best performing developed economy during the worst financial crisis in 80 years underpinned by a robust financial system”1, plus the country is experiencing a booming export market for both minerals and agricultural commodities. The result is a strong Australian dollar which indicates that the rest of the world has a continued confidence in the performance of our economy.

Superannuation or the nation’s retirement savings are now estimated to be at $1.4 Trillion and increasing each quarter by an average of $3 to $5 Billion, which will only increase as minimum contributions rise from 9 to 12% through to 2019 / 2020.

There is a real nervousness in investing due to governments, both Federal and State, creating an impression of increased risk in Australia; some recent examples are:

  • Mining resource tax (Federal)
  • Carbon tax (Federal)
  • Solar rebate (NSW)
  • Insulation rebate (Federal)
  • School buildings (Federal)

The general incompetence and mismanagement that has occurred from the Federal sphere and the former NSW Government, I believe, significantly contribute to the conservatism and the loss in consumer confidence.

In the ASX100 there are at least 18 stocks that are trading near their lowest levels in a year and the leading banks are at or below their trading price of 5 years ago. Notwithstanding that the banks are now reporting sound and increasing profits, better than the levels of 2007.

The research indicates companies such as BHP, RIO, QBE, Mt Gibson, and Westpac are undervalued when assessed against their intrinsic value. This should mean significant performance in the future.

We are about to enter into the end of year financial reporting period and analysts from the leading brokerage companies have slightly revised their forward projections with respect to companies future profits. To date a few small companies have reported profit downgrades.

Outlook

Carbon tax

The Government has reported that it is the 500 largest polluters that will bear the tax responsibility, however the impact on growth would appear to be far less clear and controversial.

For individuals, the changes in the tax threshold from $6,000 to $18,200 will mean that a significant number of individuals will not need to lodge tax returns. The impact with respect to this is minimal as most people at this level would not have been required to lodge a tax return for several years.

For the Government the timing of the tax does not start until after the next election in 2012.

Europe

The debt crisis has spread and the financial authorities face systemic contagion unless they respond with immediate actions. The fallout from Greece is now engulfing Spain and Italy.

The monetary union of the EU has failed to date, to address the real crisis which seems to be a north south divide caused by the inherent workings of the monetary union.

China

Increasing interest rates and property prices seem to have the financial analysts of the world in a state of flux. The projections of steel production in the next five year plan, recently presented at the People’s Congress, indicated that China is not slowing.

The forward forecast is for steel production to grow from about 650 Million to 750 Million tonnes of steel by 2017. This would mean more iron ore and coal is required to meet production forecasts. Growth figures from China indicate the economy is still growing at a rate greater than 9% per annum.

Dividends

We have seen a strong recovery in dividend payments from the leading companies to their shareholders. Companies are not going to pay a dividend or increase the dividend if there is a concern about the future profits of the business. An example of this is Westpac where the current dividend return is 7.1%, and when the tax benefit is included the gross return is 10.14%. Similarly for Seven West Media the anticipated dividend is over 11% and the gross return exceeds 16%.

The volatility is ongoing and will probably continue for some time. The takeover for Macarthur Coal by Peabody (a major USA coal producer) and Arcelor Mittal (an Indian company that is probably the largest steel producer in the world) is, I believe, indicative of the continuing strength of the coal industry. In recent weeks we have become aware of another large US Coal producer establishing an office in Australia to buy / takeover Australian coal interests or assets.

If companies are reporting a downgrade of profits, then the reporting season could be very difficult, however, to date it would seem that the boards of the major companies are comfortable with the analysts’ projections of their future profits.

The final factor is that many share prices have fallen or come back on limited volume or transactions. I suspect that when we see a positive change in the local and world economies we will see a significant change in the share market.

Should you have any queries or want to discuss the above or your portfolios please do not hesitate to contact us.