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.
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.
If you would like to further discuss, feel free to leave a comment or email firstname.lastname@example.org.
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.