The Federal budget & other recent events

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May 2012

In this blog, your diarist shares some observations from recent events and meetings.

Oakeshott Questions PM Deal

The above heading in the Australian Financial Review on Friday 11 May 2012 again raises the prospect of a change in government earlier than the scheduled election date in the December quarter 2013. While Burrells would normally be somewhat apolitical, your diarist has written in previous blogs of the negative impact on the economy and markets of the current Federal government and the previous Queensland state government.

A change in Federal government should add 10% to the Australian stock market. Moreover the market will only require a reasonable probability of change, for some positive sentiment to be translated to share market prices.

The last hung parliament was in 1940 when Robert Menzies was elected as Prime Minister and held power with the support of independents. Part way through that term Curtain was elected Prime Minister and won at a landslide at the next election.

Independent MP Rob Oakeshott knows the probability of a Queensland style rout at the next Federal election is increasing and may seek the cudos of change to a winning team. Your diarist remains optimistic that a significant change in the Federal government landscape may occur well before the December quarter 2013.


Mirvac

Your diarist attended a Mirvac Board dinner in Brisbane recently. The Firm‟s independent research report (included in this month‟s Bourse) was an insightful briefing paper in advance of meeting the Board and senior management. Our property specialist, Michael Mayrseidl, has been of the view for some time that Mirvac was undervalued.

Key takeaways from the meeting were:

  • Strong and competent senior management
  • Chairman engaging and astute
  • Large quality property portfolio owned by the Mirvac Stapled Security is underrated by the market, more focused on Mirvac‟s unit and development arms
  • Major upside to Mirvac when the George Street preleasing is completed (refer research)


Crown

Blog readers may recall your diarist visited Macau last year and was impressed with the City of Dreams complex in Macau which includes the three hotels: Crown Towers, Hard Rock Hotel and Grand Hyatt Macau, connected via a circular shopping mall with the casino in the middle.

Talking to a Melco Director recently, I raised the question clients mostly raise on Macau concerning any change in Chinese government policy towards Macau. The answer was to the effect that the Chinese government is very supportive of Macau as Chinese love gambling and their population is quite enamored with the ability to go to Macau.

Burrell research has Crown valued at $10.45, with the stock having moved up $1.00 in recent months to just above $9.00. (Refer Crown research included in February Bourse)

The Packer play via Crown in Sydney is of interest. It is reminiscent of the Murdoch play for the Courier Mail in Brisbane. Murdoch purchased the Sunday Sun, set up the Sun as a stalking horse with a daily newspaper, this kept the price of the Courier Mail depressed and as soon as Murdoch was successful the Sun was closed down.

Echo Entertainment is now a separate entity from the previous merged Tabcorp that owns the Sydney Star Casino and the Queensland casinos including Jupiter‟s. Mr Packer has as his stalking horse a new casino at Barrangaroo, the Lend Lease development on the western side of the Harbour Bridge. At the same time he has taken an interest via an options play in 10% of Echo and applied to the NSW and QLD governments to increase the holding above that threshold.

Mr Packer has recently increased his interest in Crown by 2% to 48% and has placed his interest in Foxtel for sale. Such proceeds would allow him to retain his overall interest in a merged Crown/Echo takeover.


Interest Rate Cut

The RBA 0.5% interest rate cut foreshadowed in last month‟s Blog is an important move. The exchange rate almost immediately from $A:US 1.05 to 1.00. These twin moves set the seen to act as a catalyst to commence a change in the negative sentiment prevalent over the last two-three years on Australian equities markets.


Federal Budget

2,100 attendees at the PWC budget breakfast on the 8th May were asked to indicate yes/no as to whether the budget would be positive for the Australian economy. An extraordinary 78% voted “No”, in an audience which would generally be much more evenly weighted towards such matters.

John Howard indicated that this year‟s budget was almost exclusively about politics and very little about economics. The handout mentality in advance of the Carbon Tax was seen as not resonating with the electorate. Howard commented that the electorate is increasingly concerned about Australia implementing a Carbon Tax at a reasonably high level when none of the competing countries have done so and in fact the momentum for such action a couple of years ago has disappeared.

The superannuation contribution change from $50,000 to $25,000 concessional from 1 July 2012 is poor policy, ignoring the genuine needs for those over 50 to supplement their superannuation at that critical time in their lives. It is a reprehensible change.

Tim Nicholls the new Queensland Government State Treasurer revealed that the total Queensland government debt was currently $65b and had been scheduled under the former government to increase to $80b. To put this in perspective, Mr Nicholls noted that this level of debt is of the same order as the Federal government debt at the time John Howard came to power and it took over a decade to reduce this debt to nil, even with the substantial taxation powers of the Australian Federal government. In strong contrast, Queensland government revenues from the GST are forecast to fall because the GST does not apply to food and other staples and is so more dependant on discretionary expenditure which has not grown.


RIO AGM

Your diarist attended the RIO AGM in Brisbane on the 10th May. As noted in the previous blog, we are concerned that BHP and RIO have not paid sufficient dividends to shareholders and that these low dividend policies are a key reason for the share prices trading materially below valuations.

Your diarist asked the Rio Chairman Mr Jan du Plessis as to whether Rio would be prepared to adopt a more progressive dividend policy and noted the figures in the short form Financial Statements presented to the AGM as shown below:

USD Mln 2011

Net cash generated from operating activities

20,030

Equity dividends paid to owners of Rio Tinto

2,236

The Chairman noted that he personally had sympathy with the viewpoint, although noting that institutional stake holders tend to be more ambivalent.


Europe

Recent elections in France and Greece have again placed the issue of European stability back on the agenda. France lurched to the left with the election of a new President as did Greece.

John Howard in his address commented that the Euro was fundamentally flawed in that an elite group had imposed monetary union on their countries, with no real prospect of any fiscal unity, given the historical divergence of the strong independent countries of Europe. He commented that ultimately the Euro zone was likely to become a smaller group of countries than it currently comprises.

The austerity measures insisted upon by Germany have certainly made the point that southern Europe has been profligate with its expenditure. However the electorates in Europe understand that the USA policy of firstly restoring economic growth is a better policy as it is only economic growth which will produce the tax and other revenues to enable the debt/GDP ratios to be reduced.


Conclusion

The low valuations in Australia together with some tentative positive signs give your diarist cause for a more optimistic outlook for the Australian market, whereas the strong run in overseas markets may well be curtailed in the short term with a new focus on European sovereign debt issues.

Happy Investing…


Chris Burrell

 
If you would like to further discuss, feel free to leave a comment or email ctburrell@burrell.com.au.

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Disclaimer & Disclosure: Burrell Stockbroking Pty Ltd and its associates state that they and/or their families or companies or trusts may have an interest in the securities mentioned in this report and do receive commissions or fees from the sale or purchase of securities mentioned therein. Burrell Stockbroking and its associates also state that the comments are intended to provide information to our clients exclusively and reflects our view on the securities concerned and does not take account of the appropriateness of the recommendation for any particular client who should obtain specific professional advice from his or her Burrell Stockbroking Pty Ltd advisor on the suitability of the recommendation. Whilst we believe that the statements herein are based on accurate and reliable information, no  warranty is given to its accuracy and completeness and Burrell Stockbroking Pty Ltd, its Directors and employees do not accept any liability for any loss arising as a result of a person acting thereon.

This document contains general securities advice only. In accordance with Section 949A of the Corporations Act, in preparing this document, Burrell Stockbroking did not take into account the investment objectives, financial situation and particular needs (‘relevant personal circumstances’) of any particular person. Accordingly, before acting on any advice contained in this document you should assess whether the advice is appropriate in the light of your own relevant personal circumstances or contact your Burrell Stockbroking advisor.

Burrell Stockbroking Pty Ltd (ABN 82 088 958 481), a Participant of the ASX Group and the NSX.

WHEN will Australia stop underperforming?

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April 2012

The US  Dow Jones at 13200 is within 7% of its all time high, following ongoing US economic recovery (refer previous Blog). Just as the US led us all into the last three years of the global financial crisis (GFC)  by being myopic, the same inward focus is leading the world back to some level of economic normality. The US ship is so large in economic terms that this turnaround makes Greece irrelevant. Not that the growth is strong, but it is sustaining led by their leadership in technology (Apple >$US 600), exports eg mining equipment (Caterpillar),  and the domestic consumer spending again. Housing will lag in the US, but this happened in QLD in 1992 when the recovery was led by other sectors and housing came out last.

In contrast the market that should be doing well based on economic performance going into the GFC is Australia. But performance is disappointing with the S&PASX index at 4337 only 1000 points above the March 2009 lows & 2400 points below the 2007 highs.  At an internal presentation yesterday a senior analyst from an independent research house mused that we might regain that high in the next three years, but most would see that as beyond their current expectations. As does your diarist.

The table below shows the current market price discount to analyst expectations for the four leading resource stocks and the banks.

  Analyst Valuation Market Price
BHP 51.00 34.64
RIO 87.70 66.32
Newcrest 42.00 28.63
Woodside 66.25 35.14
ANZ 32.00 22.90
CBA 62.40 50.24
NAB 31.67 24.53
WBC 29.00 21.87

This table is critically important to the performance of most client portfolios as the banks and major resource stocks make up a material part of Australian portfolio performance. The December  2011 Half Year was one of the poorest for some years because the resources and banks did not perform. The Table reminds us to be value investors and avoid those sentiment newsrags like Eureka that opined all should exit the market in Dec2011 at exactly the wrong time.

But why are the leaders lagging? Reasons include: poor government at Federal & State – the QLD election result is one positive step; a lack of confidence in BHP & RIO management with RIO’s botched Alcan acquisition & BHP Petrohawk; the mining & carbon taxes providing overseas investors with an “AVOID AUSTRALIA” flag;  banks talking up their cost of raising funds; the Reserve Bank failing to manage the economy and exchange rate  by reducing interest rates and weak growth across the three Australian eastern seaboard capital cities. But mostly it is a lack of confidence in Australian investors berated by negative overseas news stories who are paying off mortgages and hoarding cash when they should be buying shares.

Now your diarist is confident the market will recover to the analyst valuations in Table 1 and it will happen sooner rather than latter. Sharemarkets have a reputation for climbing the wall of worry and there is no better example than the US in recent months.

Here is a list of factors that are positive for market recovery:

  • Sentiment has improved since the December 4056 level with the market up 300 points and many portfolios now up for the year from 1july 2011. Before Xmas most just wanted to go on holidays. March Qtr 2012 has seen clients wanting to reengage and understand where the value is in the market. Some stocks with clear value propositions such as Computershare and Crown moved up ~$1.00 during March, after positive news flows.
  • US economic news is positive  and debt issues in Italy have stabilised . There is no Armageddon although the failure by Europe to follow the US and stimulate the economy first so countries have  the ability to deal with the debt issues will see southern Europe close to recession for sometime. Once this view is generally accepted, the negative sentiment on Europe should continue to wane. The US shows how quickly some good news flows can recapture the agenda. Southern Europe will give some further incidents from time to time.
  • Woodside Petroleum has commenced introducing gas into the Pluto lng facility. Woodside under Voelte has built and completed Pluto ahead of the new wave of lng plants eg Gladstone and in advance of future  capital cost inflation. The new managing director is formerly from Exxon, the world’s largest oil co and the best at allocating capital to achieve higher rates of return.
  • Bank dividends are 6.5-7% fully franked. Grossed up for franking credits, these rates can only fall as the market price of bank shares recover on better confidence. Wow how spoilt are we in Australia! Many banks overseas are just beginning to commence paying dividends again after the GFC. The Telstra dividend also looks assured for many years to come at 28cps, being 8.4%ff.
  • A major misconception from overseas is that our residential property market is likely to collapse. With the shortage of housing, this is simply not going to occur and the overseas broker visiting fact finder tours are coming to this realisation. The likely resurgence in the $US as that economy recovers does mean the $US carry trade is probably no longer going to provide liquidity to our market.
  • BHP and RIO have failed to share the spoils of the resources boom with shareholders. The BHP board in particular have seen their shareholders as growth shareholders who don’t require dividends. In a world that is aging, these comments by the former chief financial officer show a lack of understanding. Newmont gold has adopted a progressive dividend policy paying 40% of free cashflow to shareholders and their stock price has responded accordingly. What mining company cannot grow with 60% of free cashflow – and  they might avoid some of their poor acquisition decisions. The RIO agm is in Brisbane on 10May. You might consider writing to the chairman in advance of this meeting asking for a progressive dividend policy. Your diarist intends to ask a question. Some of the cash has been used for on-market buybacks. At current low prices, buybacks of BHP & RIO are positive for continuing shareholders.
  • Newcrest, while also suffering from a low dividend payout and production issues in the last period, the Wafi -Golpu discovery in Papua New Guinea is spectacular,  the production issues likely to prove temporary and the Toronto Stock Exchange dual listing will assist liquidity and price discovery.
  • The cash rate is below the dividend yield and likely to fall further. The cash rate has also crossed below the yield on property trusts as the property sector has largely completed the reduction in debt. As the retention of capital to buy cheap buildings reduces, property trust yields should recover from 5% towards 6 and 7% over the next two years. These changes indicate  the growth risk assets of equities and property trusts are likely to appreciate.
  • Listed property is likely to out perform physical property because the listed property trust index fell by 75% during the GFC.  It is an over sold sector trading at a discount to net assets and should recover over time.

With portfolios up financial year to date, it will take little positive news to provide a satisfactory return for the June 2012 year end. A 6-8% return in a year we saw the sovereign debt crisis in Europe as a result of the GFC would be a satisfactory result and repeat the return for the 2011 financial year, which on average was of a similar order.

Remember buy when stocks are cheap – now – and don’t let negative sentiment cloud the decision making. Table 1 will be much closer to valuation over the balance of this year.

Happy Investing…

Chris Burrell

If you would like to further discuss, feel free to leave a comment or email ctburrell@burrell.com.au.

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Disclaimer & Disclosure: Burrell Stockbroking Pty Ltd and its associates state that they and/or their families or companies or trusts may have an interest in the securities mentioned in this report and do receive commissions or fees from the sale or purchase of securities mentioned therein. Burrell Stockbroking and its associates also state that the comments are intended to provide information to our clients exclusively and reflects our view on the securities concerned and does not take account of the appropriateness of the recommendation for any particular client who should obtain specific professional advice from his or her Burrell Stockbroking Pty Ltd advisor on the suitability of the recommendation. Whilst we believe that the statements herein are based on accurate and reliable information, no  warranty is given to its accuracy and completeness and Burrell Stockbroking Pty Ltd, its Directors and employees do not accept any liability for any loss arising as a result of a person acting thereon.

This document contains general securities advice only. In accordance with Section 949A of the Corporations Act, in preparing this document, Burrell Stockbroking did not take into account the investment objectives, financial situation and particular needs (‘relevant personal circumstances’) of any particular person. Accordingly, before acting on any advice contained in this document you should assess whether the advice is appropriate in the light of your own relevant personal circumstances or contact your Burrell Stockbroking advisor.

Burrell Stockbroking Pty Ltd (ABN 82 088 958 481), a Participant of the ASX Group and the NSX.

Outlook for 2012

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This blog considers the 2012 Outlook by reference to the below summary of positive and negative factors:

+ Positives

  • US economy to avoid recession 
  • ECB LTRO’s game changes
  • China: Slowdown but no hard landing
  • Attractive valuations global equities
  • Equities attractive relative to Bonds
  • US$ likely to rise at last
  • Elections 2012 & 2013 
  • Property Trusts trading < nta to outperform residential

 - Negatives

  • US profit share %GDP unsustainable 
  • Systemic risk in QE by Europe 
  • China: steel losses risk iron ore and coal prices
  • EPS growth headwind
  • USA debt issues reappear 2012/13
  • High $A earnings headwind 
  • Poor Government State & Federal 
  • Property Trusts impacted by two-speed economy

The US economy to avoid recession with GDP growth of 2-3%. There have been a suite of economic reports since Christmas which generally show the US economy gaining traction after several false starts. As a counter, the high USA profit share as a % GDP is unsustainable. Historically where the USA profit share has spiked up, it has subsequently corrected. Part of this up tick is due to leading US export industries benefiting from the low dollar including technology (Apple trading at $US550), consumer export and mining services (eg. Caterpillar, Schlumberger).

In Europe, the ECB Long Term Refinancing Operations (LTRO’s) were a game changer. The European Central Bank (ECB) has engaged in quantitive easing (QE) similarly to the US Federal Reserve during the Global Financial Crisis and last year during the European Sovereign Debt Crisis. The ECB has loaned funds to the European banks for up to three years at an interest rate of 1%. This liquidity has allowed the European banks to buy sovereign debt of European nations and to use that as qualifying security to lodge with the ECB as security for the borrowings. Prior to this move before Christmas, there were strong statements from Germany, France and the previous Governor of the ECB that Europe would not engage in such loans to the banking system, so as to fund sovereign debt purchases. In effect the new ECB Governor, dubbed as Super Mario has freed up liquidity and this in turn has resulted in falls in European interest rates on debt issued by the southern sovereign nations such as Italy, Portugal and Spain. As a counter, there is systematic risk in QE by Europe. The concern here is that by facilitating the purchase by the banking system of sovereign debt, that if Greece was to be followed by say Portugal or Spain in default on its government debt, then because the Europe banks have now purchased more of that debt with loans from the ECB, the contagion effect becomes worse than had no action been taken.

Slow down, but no hard landing for China is the consensus view of economists. There is some downside risk to the 8.3% consensus GDP growth forecast for 2012, but robust Chinese growth is anticipated in the near term. As a counter, the reduction in growth which has already occurred means that steel producers are incurring losses. This is unsustainable and is likely to result in falls iron ore and coal prices over the next few years.

Attractive valuations for global equities are confirmed by the consensus that global valuations are 1-2 standard deviations away from fair value. The counter is that the period of double-digit EPS growth is over globally and single digit EPS growth is likely to apply on average. This was certainly the case in an Australia context in the reporting season just concluded. The EPS growth headwind means that some of the upside previously seen on stock prices will not be realised.

Attractive valuations for global equities means that equities are attractive relative to bonds. Long term yields on government bonds in both Australia and the USA are so low that one can only think there will be a collapse in these bond prices in the next 12-18 months. This in turn raises the counter that if longer term bonds are increasingly becoming unattractive, then that together with the continually increasing debt levels means that USA debt issues reappear in 2012/13. A further exacerbating factor is that the US government has agreed to automatic reductions in the Bush tax cuts and other fiscal cuts if the Congress and Senate are unable to agree on alternative measures.

The USD is likely to rise at last in response to the improving economy. Many other countries have acted to keep their exchange rates low including the USA on the basis that China had pegged its’ exchange rate at artificially low levels to the dollar, so that the Americans see the Chinese as not only making what they should be making but also what the Americans should be making. Other strong currencies which have taken action include Germany hiding in the Euro, Swiss pegging the Swiss Franc to the Euro, the Japanese central bank intervening to reduce the value of the Yen and China’s peg. In contrast, the Australia government and Reserve Bank appear oblivious to the high Australian Dollar and that high $A is creating earnings headwind for exports and many others.

Poor government at the State and Federal levels has compounded the uncertainty caused to the economy and participants in the economy, as a result of the global financial crisis in 2009 and then the follow-up European sovereign debt crisis in 2011. Markets hate uncertainty and electoral uncertainty is no exception. As a counter, elections in 2012 and 2013 should assist to alleviate these Australian government concerns.

Globally, property trusts are trading at a discount to net assets, whereas residential property, particularly in Australia, is trading at a premium in terms of affordability. This means that listed property trusts are set to outperform residential property over the next few years. As a counter, property trusts are impacted by the two-speed economy and the weaker finance sector in Sydney will impact on office trusts and to a lesser extent in Melbourne. However on balance we continue to view the listed property trust sector as having a positive bias, particularly as it has not retraced most of its 75% fall during the GFC.

Happy Investing…

Chris Burrell

 

If you would like to further discuss, feel free to leave a comment or email ctburrell@burrell.com.au.

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Disclaimer & Disclosure: Burrell Stockbroking Pty Ltd and its associates state that they and/or their families or companies or trusts may have an interest in the securities mentioned in this report and do receive commissions or fees from the sale or purchase of securities mentioned therein. Burrell Stockbroking and its associates also state that the comments are intended to provide information to our clients exclusively and reflects our view on the securities concerned and does not take account of the appropriateness of the recommendation for any particular client who should obtain specific professional advice from his or her Burrell Stockbroking Pty Ltd advisor on the suitability of the recommendation. Whilst we believe that the statements herein are based on accurate and reliable information, no  warranty is given to its accuracy and completeness and Burrell Stockbroking Pty Ltd, its Directors and employees do not accept any liability for any loss arising as a result of a person acting thereon.

This document contains general securities advice only. In accordance with Section 949A of the Corporations Act, in preparing this document, Burrell Stockbroking did not take into account the investment objectives, financial situation and particular needs (‘relevant personal circumstances’) of any particular person. Accordingly, before acting on any advice contained in this document you should assess whether the advice is appropriate in the light of your own relevant personal circumstances or contact your Burrell Stockbroking advisor.

Burrell Stockbroking Pty Ltd (ABN 82 088 958 481), a Participant of the ASX Group and the NSX.

Stocks best start since 94 on US rebound

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Equities around the world are off to the best start in 18 years, handing investors January’s best returns, as US economic growth shows signs of accelerating and European leaders move closer to a solution on the region’s debt crisis.

The MSCI All Country – World Index rose 5.8% including dividends as banks and mining companies rallied 9.3%.

Almost $3trillion has been added to stock values in European shares ending a 5 months’ bear market as economists lifted forecasts for US gross domestic product. Reports showed American unemployment and Chinese inflation declined, while German confidence jumped, pushing up equities as the US Federal Reserve pledged to keep interest rates near 0% through 2014.

Australia

The Australian stock market gained some 200 points net during the month of January 2012, having been up over 250 points at times during the month. The ASX – S & P 200 Index gained from 4056, closing at 4315.

Fixed interest rates continue to decline and this looks set to continue in 2012. Fixed interest funds invested continue to grow, including those of Burrell clients. It is interesting that at a time when some money should probably be transferring back from Fixed Interest to Australian equities, the press continue to run stories of leading personalities such as Paul Keating and David Murray suggesting equities allocations are too high in Australia. Time will show that the Australian Future Fund, charged with covering the unfunded gap in Commonwealth Government Superannuation Fund liabilities, sold almost all its’ Telstra shares at the bottom of the market.

Our property analyst, Michael Mayrseidl continues to see good value in the listed Australian Property sector. His comment to me is that the gap between market values and net asset value continues to decrease slowly which means investors are receiving a yield equal or above the Fixed Interest yields now, but with capital gains potentially providing several years of 15% returns from listed property investments.

Will the Australian Market Climb the Wall of Worry?

The Australian equities market continues to trade at market prices which are a material discount to analyst valuations. In the case of some of the leading stocks such as BHP, RIO and WPL, the analyst valuations are $20-$40 above the current market prices. Bank stocks are trading at a discount to analyst valuations of $6-$12.

Equities markets have a history of climbing the wall of worry when investors and market conditions become overly pessimistic and the markets are trading at significant discounts to valuation. So the answer to the question as to whether the Australian Equities Market will climb the wall of worry currently induced by the negative sentiment and European sovereign debt crisis is: Yes. The question is: When?

The January performance occurred at a time when the majority of Australian investors were totally disengaged from the Australian Equities Market. This was shown by the low volumes, with many Australians taking an extra week of leave in January and being far more focused on anything but the Australian Equities and Property Markets. The majority of Australians following the normal home-grown Wealth Management Plan: Most have jobs, pay down the mortgage a little, enjoy restaurants and movies, cover the education expenses for the children, buy an Ipad or a new phone, save for a new car and let the superannuation take care of itself. What Australians have not been doing is engaging in the Australian Equities or Property Markets.

This lack of interest provides a buying opportunity for Burrell clients to selectively top up on portfolios and take advantage of oversold situations. QBE is a current oversold situation with the market reacting adversely to a one-off event, being the floods in Thailand which pushed the QBE catastrophe reserve over the provision given all of the catastrophes that occurred last year included the Japanese Tsunami and New Zealand earthquakes. These high value situations often do not last long. During January Newcrest Mining fell to under $30, but it only lasted for a short while and the stock was back at $34 at the time of writing. That was good value.

Europe has taken some sensible steps towards a solution. In particular the European Central Bank (ECB) has provided large amounts of liquidity to the European Banking system, which in turn has helped the rollover of the sovereign debt in Europe in the last few months. The part of the puzzle which Europe has wrong is that they moved too early to austerity measures and focused on government debt levels. The fact is that in order to pay off sovereign debt, the economies need to be growing, whereas the austerity measures are heading Europe for a further mild recession. This means that there will continue to be some issues during 2012 in respect of European sovereign debt.

On balance however, the underlying value in the Australian Equities Market together with falling Fixed Interest Rates means that we are likely to see the Australian Equities Market close higher overtime. Burrell remain of the view that it is quite likely that the Australian Equities Market will close up again for the June 2012 year, as it did for the June 2011 year when the market return was 11.7% (including dividends).

We encourage investors to review their portfolios and engage in the market by reviewing the research to determine the value of stocks, rather than being caught up in press sentiment or listen to those looking for a headline in the newspapers.         

Happy Investing…

Chris Burrell

 

If you would like to further discuss, feel free to leave a comment or email ctburrell@burrell.com.au.

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Disclaimer & Disclosure: Burrell Stockbroking Pty Ltd and its associates state that they and/or their families or companies or trusts may have an interest in the securities mentioned in this report and do receive commissions or fees from the sale or purchase of securities mentioned therein. Burrell Stockbroking and its associates also state that the comments are intended to provide information to our clients exclusively and reflects our view on the securities concerned and does not take account of the appropriateness of the recommendation for any particular client who should obtain specific professional advice from his or her Burrell Stockbroking Pty Ltd advisor on the suitability of the recommendation. Whilst we believe that the statements herein are based on accurate and reliable information, no  warranty is given to its accuracy and completeness and Burrell Stockbroking Pty Ltd, its Directors and employees do not accept any liability for any loss arising as a result of a person acting thereon.

This document contains general securities advice only. In accordance with Section 949A of the Corporations Act, in preparing this document, Burrell Stockbroking did not take into account the investment objectives, financial situation and particular needs (‘relevant personal circumstances’) of any particular person. Accordingly, before acting on any advice contained in this document you should assess whether the advice is appropriate in the light of your own relevant personal circumstances or contact your Burrell Stockbroking advisor.

Burrell Stockbroking Pty Ltd (ABN 82 088 958 481), a Participant of the ASX Group and the NSX.

2012 and Europe in review

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2012 and Europe in review

The past month has seen a modest flow of better overseas news. USA economic data has continued to be better than expectations as the world‟s largest economy slowly responds to expansionary monetary and fiscal policy initiatives over recent years. In Europe, the new head of the European Central Bank (ECB) has reduced interest rates and increased liquidity to the European banking system. In turn, the European banks have used this liquidity to refinance their own maturing deposits, to reduce inter-bank transactions, to purchase mainly short term sovereign debt and to redeposit balances with the ECB. All bond auctions by European governments were successfully concluded, including auctions by Italy, Spain and in recent days, France.

The German economy is performing better than expected and may well fight off the forces of recession. Leading German companies such as Volkswagen with VW, Audi and Man brands have provided support to German confidence. Taking all of these factors together, the most likely outcome is that Europe will avoid any catastrophic events in the first quarter of 2012. However the press continues to be negative and commentators divided. Those commentators writing highly negative views appear eagerly publicised by the general press, whereas those with more moderate views such as your diarist are less publicised. One well publicised Australian report recommended investors sell all of their stocks a week before Christmas and said he had followed this advice himself. The reality is that predicting the future based on sentiment is a fool‟s game. It is highly irresponsible to stampede uninformed investors into selling stocks at what is likely to be close to the bottom of the Australian market.

Your diarist has just completed a review of all portfolios on our Premium Portfolio Service, which is around $400M of portfolios. The portfolio returns ended 30 June 2011 were up on average by around 10%, even after the 6% fall in May/June 2011. In contrast, the first six months of the current financial year till December 2011 saw the market fall 11.6% or 9.7% for portfolios which are accumulating dividends.

On average, Burrell portfolios faired around 2% better than this average. The main reason for this better performance in that six months was asset allocation where investment strategies allowing for a portion in Fixed Interest, Property and International performing better. Stock selection was not overly helpful in this six month period, because of the falls in share market prices of the major resources stocks including BHP, RIO, NCM and WPL. Burrell client portfolios on average have a full weighting of resource stocks and this has assisted portfolio returns over the last five years. We would anticipate the positive effect from the resources sector will reassert itself in the forthcoming period and remain hopeful that the market will finish the financial year to 30 June 2011 having recouped the falls to 31 December last.

The forecast of a positive financial year in 2012 draws comfort from the large discounts that leading stocks are trading as compared to the intrinsic values calculated by analysts. There is so much negative news in current market prices that if Europe can be removed from the daily negative news cycle, the market should be able to see its way forward to focus on value.

This is not to say that your diarist sees this as a smooth process. The austerity program imposed by Germany and France on the profligate European states is likely to result in recessions in some of those countries. The press will make much of that, even though it is not uncommon for parts of the world to be in recession while other parts show mild growth. In the USA, the election cycle has tended to reduce growth in the past. It is a little surprising but welcome that the US consumer has returned to the fore albeit in a modest way. China‟s property bubble is also a source of negative press, but again China has shown itself adept at handling the management of its economy. In 2009 those in London and New York became overly concerned about China and there has been a rerun of this in the performance of resource stocks during the last quarter. We suspect as in 2009, the sell down of resources may well be reversed.

Lastly your diarist would refer readers back to the December Bourse. This was a high quality document and readers would be well advised to more carefully consider some of the research and comments in the December Burrell Bourse. The Computershare US acquisition for example is outstanding and should transform Computershare over time to one of those few Australian companies that succeeds internationally.

The list of stocks showing extraordinary yields of over 7%, in many cases fully franked deserves careful study as these yields are unlikely to last once a modest level of confidence returns. Richard Herring, Dealing Director in his “Seven Stocks Are Singing” raises several good value added ideas (VAIs) for consideration.

We stand ready to assist clients with their portfolios in 2012 in what will continue to be a challenging environment.

Happy Investing…

Chris Burrell

 

If you would like to further discuss, feel free to leave a comment or email ctburrell@burrell.com.au.

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Disclaimer & Disclosure: Burrell Stockbroking Pty Ltd and its associates state that they and/or their families or companies or trusts may have an interest in the securities mentioned in this report and do receive commissions or fees from the sale or purchase of securities mentioned therein. Burrell Stockbroking and its associates also state that the comments are intended to provide information to our clients exclusively and reflects our view on the securities concerned and does not take account of the appropriateness of the recommendation for any particular client who should obtain specific professional advice from his or her Burrell Stockbroking Pty Ltd advisor on the suitability of the recommendation. Whilst we believe that the statements herein are based on accurate and reliable information, no  warranty is given to its accuracy and completeness and Burrell Stockbroking Pty Ltd, its Directors and employees do not accept any liability for any loss arising as a result of a person acting thereon.

This document contains general securities advice only. In accordance with Section 949A of the Corporations Act, in preparing this document, Burrell Stockbroking did not take into account the investment objectives, financial situation and particular needs (‘relevant personal circumstances’) of any particular person. Accordingly, before acting on any advice contained in this document you should assess whether the advice is appropriate in the light of your own relevant personal circumstances or contact your Burrell Stockbroking advisor.

Burrell Stockbroking Pty Ltd (ABN 82 088 958 481), a Participant of the ASX Group and the NSX.

Q400 Event & European Debt Crisis

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Last Friday evening was the annual Q400 function recognizing 400 of Queensland’s leading private companies.  Burrell Stockbroking Superannuation was again included, rating 163.  Part of the reason for this rating is that Burrell Stockbroking Pty Ltd carries no debt and has a relatively strong balance sheet.

As the firm looks towards its 75th year in 2012, we were a sponsor for the Q400 event.  My short address to the assembled 500 strong crowd considered the theme:  

Be a value investor, not a sentiment investor

The graph below shows the large amount of funds transferred to term deposits since the global financial crisis.  Little has flowed into Managed Funds, nor we venture to the stock market.  The uncertain overseas situation since the global financial crisis (GFC) is exacerbated by the daily press headlines taking an almost gleeful position to the potential demise of one major government or the other in the USA or Europe.  When our forbears were on the Savanna in Africa and there was a shout ‘Lion!’ everyone headed for the exits.  The result of the relentless negative press every day is the same – investors generally have shunned both investment and spending, with retail sales falling and the savings ratio in Australia at unprecedented high levels.

In the USA the Dalbar Study reported that investors in Managed Funds received average returns of 3-4% over the long period, whereas the market performed at around 12%pa, just a touch under the Australian performance for the period.  The important point is that the underlying Managed Funds while not matching the market had not performed that badly.  Rather, those interpreting the study had the explanation that retail investors in the USA were sentiment investing. USA retail investors were buying Managed Funds at the top of the market and selling at the bottom.  With the globalization of the media, daily business shows and many investors seeking their own counsel, the Australian market also has become a hostage to negative sentiment.  In one article in The Australian Financial Review, the S&P ASX 200 Index was around 4000.  The article commented that retail investors would not start to invest until it reached 5000 and then not seriously invest until it reached 5500.  What an extraordinary position that people would do nothing and forgo a 40% gain go by before starting to invest. 

Bernard Rowley, the independent Chair of Burrells, quotes a study which considered the percentage of total portfolio returns from the best 10 days in the market.  In any one year those best 10 days can equal 30% of the total return.  So the naïve view that one can leave funds in fixed interest and at ones leisure move back into the markets or that one should wait until confidence returns and the index reaches 5000 again – these are surely strategies to earn suboptimal returns.

So what are the value investors doing?  Warren Buffet bought 5% of IBM in recent weeks and then a newspaper in his home town.  At a dinner hosted by the Fund Manager Perpetual last Thursday evening, Perpetual advised that their valuation indicator had reached 100.  That means that Australian equities are cheap i.e. Good value, whilst the bond market is expensive.  On that day the Australian government AAA ten year long term bond rate fell to 3.81%.  Driven largely by some overseas funds buying back into Australia, the price of bonds had been bid up and yields bid down to levels that we have not seen for many years.  The consensus view of the 15 or so people at the dinner was that this may be a replay of the bond market in 1993 when bond prices were strong only to be followed by a collapse, in the following year 1994.

Why would one buy bonds on a yield of 3.81% when one can buy good quality bank shares on a yield of 7% fully franked.  The differences between current market prices and intrinsic values according to the research are at extreme levels and so clients should be buying.  As soon as the market sees a solution to the European debt crisis, bank shares will rise and the yields will fall back to 6% and then 5% fully franked.

Update on European Debt Crisis

In the October 2011 Blog, your diarist concluded that there was:

-A 66% probability that a major package including a 50% Greek debt haircut, European bank recapitalization  and European tarp type package will see a solution to European debt issues, allowing global stock markets to recover.

Your diarist remains of this view.  What we have seen in the past eight weeks is a negotiation proceeding at what seems a glacial pace to foreign observers like ourselves.  However the reality is that if you were Germany and dealing with a number of profligate southern states, then one calls them to a meeting, suggests they require tax systems which produce reasonable taxes, to take the wastage and corruption from government spending and to put their economies on an even keel.  When they go away and do little about it, there is little choice but to call them back in again and hit them over the head until the message is understood.  When they ask for Germany to simply hand over the money, one can hardly blame the Germans to say, well what are you going to do to put your house in order first. 

The G20 heads of government was criticized for not achieving enough.  On the contrary, politicians understand when those leading other countries are unable to deliver sensible policies.  It is no coincidence that the heads of government of Greece, Italy, Spain and Portugal have all changed in recent months.  The head of the European Common Bank (ECB) has also changed.  The ECB has held interest rates too high for too long and monetary policy too tight, exacerbating tight monetary conditions in Europe.

So slowly but surely there is a realization across the governments of southern Europe that they need to put their own houses in order.  There is also an increasing realization that there will need to be a tarp style initiative to assist with the rollover of the debt and the stabilization of the monetary markets. 

Much has been made of Italy.  The Italian economy is a much deeper and more impressive economy than the Australian economy.  The broad diversity and strength of their industrial base, their larger population, their tourism to places like Venice, Florence and Rome are all great strengths.  Nor is their budget deficit particularly high and they are proposing to balance the budget in two years time.  The major issue with Italy is profligate governments over many years have allowed the debt to build too high and because they do not have control of the ECB, they are unable to bluff the money markets by dealing in Italian bonds and printing currency. 

The press in some corners has the false view that it is necessary for the European debt to be repaid in order for the European financial crisis to be solved.  This is not so.  When the debt/GDP reached 100% in the USA after WWII, all that happened was that the USA balanced its budget.  The USA economy then grew over the ensuing 15 years to be double its size at the end of WWII.  This resulted in the debt/GDP ratio falling towards 50%. 

In conclusion your diarist remains of the view that Europe will ultimately do whatever is necessary to resolve the current financial crisis.  The first step in this was to recognize the problem.  To add a little to the October Blog, the major package necessary to resolve this matter is likely to involve the following elements:

-The 50% Greek debt haircut, European bank recapitalization, stronger fiscal set of undertakings by all members to show fiscal responsibility and a set of measures to facilitate the rolling over of debt as it matures.  This last element is likely to involve the ECB, the European Financial Stability Fund and the International Monetary Fund (IMF).  Some further steps along the path to a solution will see the markets begin to focus more on the steady recovery in the USA, the strength of the corporate sector globally and the compelling value in Australian shares.                               

Happy Investing…

Chris Burrell

 

If you would like to further discuss, feel free to leave a comment or email ctburrell@burrell.com.au.

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Disclaimer & Disclosure: Burrell Stockbroking Pty Ltd and its associates state that they and/or their families or companies or trusts may have an interest in the securities mentioned in this report and do receive commissions or fees from the sale or purchase of securities mentioned therein. Burrell Stockbroking and its associates also state that the comments are intended to provide information to our clients exclusively and reflects our view on the securities concerned and does not take account of the appropriateness of the recommendation for any particular client who should obtain specific professional advice from his or her Burrell Stockbroking Pty Ltd advisor on the suitability of the recommendation. Whilst we believe that the statements herein are based on accurate and reliable information, no  warranty is given to its accuracy and completeness and Burrell Stockbroking Pty Ltd, its Directors and employees do not accept any liability for any loss arising as a result of a person acting thereon.

This document contains general securities advice only. In accordance with Section 949A of the Corporations Act, in preparing this document, Burrell Stockbroking did not take into account the investment objectives, financial situation and particular needs (‘relevant personal circumstances’) of any particular person. Accordingly, before acting on any advice contained in this document you should assess whether the advice is appropriate in the light of your own relevant personal circumstances or contact your Burrell Stockbroking advisor.

Burrell Stockbroking Pty Ltd (ABN 82 088 958 481), a Participant of the ASX Group and the NSX.

Avoiding the bear trap

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Sentiment, preconceptions and bear traps: Burrell Stockbroking & Superannuation’s Chris Burrell offers a survival guide to the stock market

Following the Melbourne Cup interest rate cut by the Reserve Bank, Chanticleer commented in The Australian Financial Review, “Do not expect this interest rate cut to lead to any sudden renewed interest in the Australian stock market. That will not occur in a modest way until the S&P ASX Index reaches 5,000 and in a concerted way until it reaches 5,500!” From a market level of 3,850 a few weeks prior, this would indicate investors are prepared to do nothing while the market increases 45 percent.

How could this be?

Tip 1: Be a value investor, not a sentiment investor

The Chanticleer comment suggests investors have moved from being value investors to sentiment investors. Is the Australian stock market good value? The independent chair of Burrells recently commented that he could not remember when the dividend yields on Australian shares had been so high. High dividend yields, low price-earnings valuation ratios and strong balance sheets indicate the market is good value indeed. A reason for the move to sentiment investing may be a broader participation by investors who do not work in tandem with a professional advisor. Banks, industry super funds and others have spent millions of dollars in publicity campaigns proudly championing their non-advisory products.

Tip 2: Work in tandem with an advisor who is active but not recommending high turnover trading of your portfolio.

It is quite difficult to achieve satisfactory portfolio returns from a selection of shares. After all, one is selecting 20 to 30 businesses from a total population, involving analyses of those businesses and their management, business strategy, intellectual property, balance sheet, cash flows and red-flag risks. Achieving satisfactory portfolio returns is akin to making a soufflé rise — it is much harder than one thinks. For these reasons, we recommend you work in tandem with a competent advisor on your portfolio. But what should be the style of that advisor? Many have the view that trading the market is the way to fame and fortune. Analysis by our firm in 2003 showed that only a small set of client trading strategies (maybe 10 percent) consistently produce better results than portfolio returns. There are a small number of wizards who are able to trade the market and make excess returns. Those successful strategies form the basis of the trading group at Burrell, led by Richard Herring. For the most part, an active portfolio strategy supporting a medium to long-term portfolio will result in better returns than a high turnover trading strategy.

Tip 3: Spend more time avoiding bear traps

When investing, we are all interested in the winners. But the winners on average might increase 25 percent per annum rather than the market average of 13 percent over 30 or 50 years. What is more important is to avoid the bear traps – that is, those stocks that fall by 50-100 percent. How do we avoid bear traps? By relying on independent research and minimising biases. Often investors let preconceptions close their mind to good research.

Tip 4: Rely on independent research

An example at present is the property sector. In March 2009, the greatest falls were not in equities but in property trusts. Following the collapse of Centro, the sector fell 75 percent on average. Recovery since that date has been modest. Yet the physical property market is recovering with rents rising, transaction volumes returning to satisfactory levels and valuations improving. The Melbourne Cup interest rate cut will help with this trend. So the property trust sector is cheap and we expect two years of at least 15 percent returns.

It is a common reply to a discussion on property to say “I’m not interested in that”. Investors should let the research lead their decision making, not preconceptions formed some years previous.

Happy Investing…

Chris Burrell

 

If you would like to further discuss, feel free to leave a comment or email ctburrell@burrell.com.au.

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Disclaimer & Disclosure: Burrell Stockbroking Pty Ltd and its associates state that they and/or their families or companies or trusts may have an interest in the securities mentioned in this report and do receive commissions or fees from the sale or purchase of securities mentioned therein. Burrell Stockbroking and its associates also state that the comments are intended to provide information to our clients exclusively and reflects our view on the securities concerned and does not take account of the appropriateness of the recommendation for any particular client who should obtain specific professional advice from his or her Burrell Stockbroking Pty Ltd advisor on the suitability of the recommendation. Whilst we believe that the statements herein are based on accurate and reliable information, no  warranty is given to its accuracy and completeness and Burrell Stockbroking Pty Ltd, its Directors and employees do not accept any liability for any loss arising as a result of a person acting thereon.

This document contains general securities advice only. In accordance with Section 949A of the Corporations Act, in preparing this document, Burrell Stockbroking did not take into account the investment objectives, financial situation and particular needs (‘relevant personal circumstances’) of any particular person. Accordingly, before acting on any advice contained in this document you should assess whether the advice is appropriate in the light of your own relevant personal circumstances or contact your Burrell Stockbroking advisor.

Burrell Stockbroking Pty Ltd (ABN 82 088 958 481), a Participant of the ASX Group and the NSX.